Do you have an adequate mechanism for determining payment?


The Housing Grants Construction and Regeneration Act 1996 (HGCRA) requires that all construction contracts provide an adequate mechanism for determining what payments are due, and when – failure to do so resulting in contractual payment terms being unenforceable and the relevant paragraphs of the Scheme applying (s. 110(1)(a)). With little guidance on what constitutes an 'adequate mechanism' (the answer largely being a question of fact), this case will be of interest to contractors and clients alike, with a sub-contractor successfully obtaining declarations that parts of the agreed payment terms did not comply with s. 110(1)(a).

Bennett engaged CIMC under a JCT Design and Build Sub-Contract 2011 (with amendments) to design, supply and install pre-fabricated bedroom units in a new hotel in London. The units were to be manufactured in China, shipped to Southampton and transported to London.

The payment provisions in the Sub-Contract provided for milestone payments as follows:

  1. 20% of the contractual sum payable upon execution of the Sub-Contract;
  2. 2.30% payable on sign-off of the prototype room by the contractor, employer and hotel operator;
  3. 3.30% payable on sign-off of all snagging items by the contractor, employer and hotel operator;
  4. 4.10% payable on sign-off of units in Southampton; and
  5. 5.10% payable on completion of installation and snagging.

Unsurprisingly, a payment dispute arose and CIMC suspended work over non-payment. It referred the dispute over its payment entitlement to adjudication and sought a number of declarations, most relevantly that milestones 2, 3 and 4 did not comply with s. 110(1)(a) of the HGCRA. The adjudicator disagreed and CIMC commenced proceedings in the TCC.

The TCC considered previous authorities that had found the intention of s.110(1)(a) was to 'do away with uncertainty'. Construing the payment provisions in the context of the Sub-Contract as a whole, the TCC found that milestones 2 and 3 did not comply with s. 110(1)(a) because the criteria and date for sign-off were not clear. The TCC took the view that the term 'sign-off' (as it was used elsewhere in the Sub-Contract) was intended to signify a requirement for client approval. However, there was nothing in the Sub-Contract setting out what this approval process involved. Using the analogy of a surveyor's certificate, the TCC considered that specific criteria and timescales were required in order to provide the requisite certainty, otherwise a failure to sign-off could not be challenged.

The TCC disagreed, however, with CIMC's arguments in relation to milestone 4, finding that, in the context, the term 'sign-off' could be construed as the point at which the units were delivered from the ship at Southampton.

While Judge Wakeman QC invited the parties to make further submissions in relation to the consequences of the above findings, the (so far) unreported decision provides parties with further guidance as to what may constitute an inadequate mechanism for determining payment. Particularly in the context of milestone schedules, both parties (and especially clients) should ensure that there is a clear process setting out how the achievement of each milestone is to be certified. If an approval process is involved, there should be clear criteria against which milestone achievement is measured and deadlines for determining if such criteria have been satisfied.

While we are yet to find out the consequences for the defendant in this case, the risk with non-complying payment provisions is that they will result in the relevant paragraphs of the Scheme being implied into the relevant contract, which is unlikely to have been what the parties contracted for. We will keep readers updated as to the consequences for CIMC and Bennett, so stay tuned…

Looking to set-off sums in adjudication? Make sure your Payment or Pay Less notice anticipates this…

MI Electrical Solutions Ltd v Elements (Europe) Ltd [2018] EWHC 1472 (TCC)

A responding party was caught out when it failed to raise a set-off argument in its Pay Less notice, with the adjudicator and the TCC finding that such failure prevented it from raising set-off as a defence in the adjudication. The question then arose as to whether the set-off was permitted against the adjudicator's decision...

The courts have traditionally adopted a restrictive approach when it comes to permitting set-off against an adjudicator's decision. The rationale for this is that, pursuant to s. 108 of the HGCRA (and sans issues with jurisdiction), the decision of an adjudicator is binding until the relevant dispute is finally determined by legal proceedings, arbitration or agreement. Any provision in a construction contract that entitles a party to withhold sums against or otherwise not pay against an adjudicator's decision defeats the purpose of s. 108. Accordingly, the court's approach is to construe the relevant contract so as to give effect to the intention of Parliament or, if this cannot be done, strike out the offending clauses. The only exceptions to this (which are rarely successfully utilised) are where the set-off follows logically from the adjudicator's decision or is the natural corollary of that decision.

In this case, the claimant sub-contractor applied for summary judgment to enforce an adjudicator's decision against the defendant contractor. A dispute had arisen relating to non-payment. The adjudicator ruled that the contractor's reason for non-payment provided in the Pay Less notice (namely an allegation of delay), was insufficient to justify non-payment. The contractor then tried to rely on arguments in its Response that it was entitled to set-off the cost it incurred in rectifying the subcontractor's defective work. The Pay Less notice had not included any mention of the subcontractor's defective works or the contractor's right to set-off. The adjudicator concluded that, irrespective of the merits of the defects argument, it could not amount to a defence to a claim in the adjudication as the 'faults' were not the subject of the Pay Less Notice. The contractor subsequently challenged this decision in the TCC.

The TCC sided with the adjudicator, holding that 'The time at which to raise defective works in defence of a cross-claim to a claim for payment is in the Pay Less notice'.. Despite this finding, the contractor invited the TCC to construe the set-off clauses relied on in a manner which permitted set-off against the adjudicator's decision. The TCC declined to do so. Applying the principles discussed above, Mr Nissan QC held that 'the clauses which permit set-off as a matter of contract, have to be read as only permitting it subject to the effect of the Act or they would otherwise not be in compliance with the policy of the Act and would therefore need to be struck down'.

Mr Nissan QC was of the view that the only way the relevant set-off clauses could be construed as consistent with the HGCRA (so they could fulfil some contractual purpose) was to (i) read them simply as not applying to monies due by reason of an adjudicator's decision; or (ii) construe the implied provision that the adjudicator's decision was of binding effect to mean binding irrespective of other contractual obligations (unless there is an exception – though in this case, neither exceptions were found to apply). If Mr Nissan QC was wrong in his construction, the only other option was to treat the set-off provisions as unenforceable as a result of their inconsistency with the policy of the Act.

This decision serves as a reminder for responding parties to set out all of their potential defence and cross-claim arguments (including for set-off) in your Payment or Pay Less notices to ensure you are able to rely on these arguments in any future adjudication. Including such arguments in an adjudication Response will not save you from an earlier failure to raise them. Unless you can rely on one of the applicable exceptions (which will apply only in rare cases) and where there are no issues of jurisdiction, unsuccessful respondents will be bound to make payment in accordance with the adjudicator's decision without any allowance for set-off.

Following Grove v S&T…

DSVG Facade Ltd v Conneely Facades Ltd (2018)

Further to Coulson J's decision in Grove Developments Limited v S&T(UK) Limited, which allowed an employer to commence a second adjudication to assess the true value of sums awarded in a "smash & grab" adjudication, this case considered whether an adjudicator had gone wrong by failing to adjudicate on the true value of the works...

The case of DSVG Facade Ltd v Conneely Facades Ltd centred on whether an adjudicator had acted in breach of the principles of natural justice and failed to exhaust his jurisdiction when he did not go on to determine the true value of works after determining the substantive dispute in a "smash & grab" adjudication in favour of the claimant. The defendant argued that the value of the works ought to have been considered, as this constituted an alternate or secondary claim that was in dispute between the parties.

At enforcement, it was held that, as the adjudication documents (including the adjudication notice), only referred the issue of the claimant's entitlement to the notified sum to the adjudicator, he did not have jurisdiction to decide the true value of that claim, which was a separate issue. The value of the claim was, for Joanne Smith QC, a dispute to be resolved in separate proceedings and it was not open to the defendant to raise the valuation issue as a defence to enforcement.

The case does not challenge the decision in Grove Developments, as is it was clearly still open for the claimant to contest the value of the works in separate proceedings. However, as the case is still unreported, it remains to be seen whether there is any suggestion that a paying party could run the 'true value' argument as a defence in adjudication proceedings if the adjudication notice was sufficiently wide enough to encompass this or if they would still need to wait out the determination of the initial 'smash & grab' adjudication and pay the nominated sum before seeking to have the 'true value' determined – such payment being a pre-requisite to an entitlement to do so per Coulson J in Grove v S&T.

Regulatory Update

National Infrastructure Assessment

On 10 July 2018, the National Infrastructure Commission published the first National Infrastructure Assessment (NIA). The NIA is an assessment of the UK's infrastructure needs and will be published every 5 years. Although non-binding, the Government has committed to responding to the report within 6 months and will identify which recommendations it supports and make alternative proposals for those with which it disagrees. The NIA's recommendations include:

  • Encouraging urban growth by providing £43 billion of long-term transport funding for regional cities, while also giving cities stable five-year budgets from 2021.
  • Half the UK's power should be provided by renewables by 2030.
  • Cutting waste by introducing national rules for what can be recycled. Three quarters of plastic packaging should be recycled by 2030.
  • The Government should only develop one new nuclear power station, instead of the fleet that is currently proposed.

Revised National Planning Policy Framework Published

On 24 July 2018, the Government published the revised National Planning Policy Framework (NPPF). The document contains the economic, environmental and social planning policies for England and is a material consideration in the determination of planning applications. This is the first revision since 2012 and incorporates 85 changes which are intended to facilitate development of housing stock, whilst ensuring that new construction satisfies 21st century challenges and needs. A number of key changes are as follows:

  • Transport should be considered as part of the planning process, so that transport issues are recognised and addressed as fully as possible.
  • Plan policies should set out expectations in relation to the delivery of high quality digital infrastructure, which provides access to services from a range of providers.
  • Plans are expected to have a clear strategy for using land, making more intensive use of existing land and buildings where appropriate. LPAs should refuse applications which they consider fail to make effective use of land (in areas where there is an anticipated shortage of land for meeting identified housing needs).

The full NPPF can be accessed here.

Public Accounts Committee Report – Strategic Suppliers

Also on 24 July 2018, the House of Commons Public Accounts Committee published their report on Strategic Suppliers, the inquiry for which was announced in May this year.

Strategic Suppliers are companies designated as such by the Government and who have contracts across several Government departments worth more than £100m per year, or those deemed significant to a sector. There are currently 27 Strategic Suppliers providing services across the public sector.

The report notes that the collapse of Carillion has brought to a head concerns relating to the Government's approach in relation to contracting out public services and that outsourcing is at a significant crossroads. There are over 30 recommendations set out in the report itself and a number of conclusions. Some of these include:

  • In order to improve transparency, a standard set of contract information (to include contract value, length and KPIs plus a list of other public sector contracts held by the successful company) should be made publically available following the agreement of a contract.
  • The current procurement environment encourages Government and suppliers to place too much emphasis on price, at the expense of quality. Some companies bid at a price which would provide limited margins, expecting subsequent variations to yield reasonable returns.
  • The PAC has seen little evidence of the Government using more SMEs as direct contractors, or the measures to improve the treatment of SMEs in the supply chain.

The full report can be accessed here.