Payless notices – Revisited!

Adjudication is not the only option for a Contractor seeking to recover monies owed by an Employer as shown in a recent High Court case[1].

The case saw a dispute arise between a Contractor and Employer who had entered into a JCT Design and Build Contract. As works progressed the Contractor issued a series of three interim applications for payment in October, November and December 2015 respectively. Following this the Employer did not serve any effective payment notices on time, neither did it serve any form of pay less notice. Subsequently it did not provide payment to the Contractor for the sums due under each of the original interim applications. As a result of the Employer’s failings the Contractor left the site in late 2015.

Smash and grab!

At this point one might have expected the Contractor to kick start the adjudication process, as the Act[2] entitles it to do.

On the face of it the Contractor could claim the amount applied for in the interim applications whether or not the Employer felt that a lesser amount should have been paid. This is due to the Employer’s failure to supply any of the notices mentioned above in response to the valid interim applications submitted by the Contractor, a classic “smash and grab” approach to adjudication.

However, the Contractor took an alternative approach.

Suspension, termination and winding-up

The Contractor’s first step was to suspend the works on site due to the Employer’s non-payment, the Act allowing it to claim reasonable costs for such suspension[3], which it would not have been able to do in an adjudication. In taking this approach to suspend the contract, costs to the Employer would have likely been higher (due to the delays on site), by comparison to the situation where the Contractor had commenced an adjudication, where the work on site would have likely continued

Due to this the Employer deemed it necessary to recruit an alternative contractor to complete the works. However, the Contractor took this action as a repudiatory (serious) breach of the Contract and validly terminated the contract.

The Contractor then took a final step and issued a winding-up petition against the Employer for the recovery of the outstanding figures due under each of the interim applications.

What should be taken away from this case?

Whilst this route may seem unconventional, the Judge saw no reason to prohibit the Contractor’s approach and dismissed the Employer’s application for an injunction to stop the winding-up petition.

The judgment reinforces the Court’s rigid approach to an Employer failing to serve a valid payment or pay less notice on time, resulting in the payment of the original figure detailed in a Contractor’s interim application becoming due.

Further, it seems that this principle is still relevant even when a Contractor does not take the more conventional route of adjudication to recover monies owed.

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[1] COD Hyde Ltd v Space Change Management Ltd [2016] EWHC 820 (Ch)

[2] Housing Grant Construction and Regeneration Act 1996

[3] Housing Grant Construction and Regeneration Act 1996, s.112.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.