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Alternative tactics to obtain payment (but only where there are no “shadowy” claims)

Back in 2011, when Jeremy Corbyn was a mere back-bencher and few of us were aware of what an emoji was, I wrote a blog on the amendments to the Construction Act 1996. The blog arose from a panel debate held by the Adjudication Society concerning the amendments to the Act’s payment provisions. Five years on, some of the questions raised and issues discussed make for interesting reading.

It is also interesting to note what wasn’t discussed. For example, nobody appears to have foreseen the ISG v Seevic point that a payer cannot refer to adjudication the merits of an interim valuation where an adjudicator has already awarded payment as a result of the payer’s failure to serve an effective payment notice and/or pay less notice.

Right to suspend for non-payment

One of the issues discussed was the amendments to the suspension provisions in section 112, and I said in my blog:

“When asked whether there is likely to be an increase in payees suspending performance of their obligations as a result of the amendments to section 112, the panel agreed that there was, although there were some differences over the extent of the increase.

Most agreed that the ability to partially suspend obligations and the right to payment of costs and expenses arising out of a suspension will give payees greater confidence to suspend, and this in turn will result in an increase in the number of suspensions.”

Personally, I have not seen a rise in the number of suspensions despite the changes to section 112, and there certainly haven’t been many reported cases dealing with this area. That is why I was interested to read the judgment in Cod Hyde v Space Change Management. This is actually a Chancery case because it concerns an insolvency matter, but it involved some interesting points, including the exercise of a contractor’s right of suspension.

COD Hyde v Space Change Management – the facts

This case is quite fact heavy, so what follows is a relatively brief outline:

  • COD Hyde employed Space Change to undertake works under a bespoke JCT Design and Building Contract, 2011 edition.
  • Space Change submitted interim applications for payment 6, 7 and 8 in October, November and December 2015 respectively. The sums claimed were not paid and COD Hyde did not serve effective payment notices and/or pay less notices. The sum outstanding to Space Change was £628,629.27.
  • Space Change appears to have walked off site on or about 22 December 2015. By 6 February 2016 (at the latest), COD Hyde had employed an alternative contractor.
  • On 29 January 2016, Space Change wrote to COD Hyde giving it notice that, if the outstanding sum was not paid then, after 7 days, it was entitled to suspend works. Space Change also referred to its right to terminate the contract as a result of the failure to pay the outstanding sum.
  • By 9 February 2016, COD Hyde had not paid the outstanding sum. Therefore, Space Change wrote confirming that it was suspending its works. Space Change also enclosed a statutory demand.
  • On 15 February 2015, Space Change wrote to COD Hyde stating that, as a result of COD Hyde employing others to complete the works, this demonstrated a clear intention for COD Hyde not to be bound by the contract. Space Change confirmed acceptance of COD Hyde’s repudiation. Space Change also sought to terminate the contract under clause 8.9 as a result of COD Hyde’s failure to pay the sums due.
  • On 29 February 2016, COD Hyde wrote to Space Change giving notice of its alleged defaults, namely suspending the works without reasonable cause and failing to proceed regularly and diligently.
  • On 7 March 2016, COD Hyde’s solicitors wrote to Space Change stating that the alleged debt to which the statutory demand related was disputed. Therefore, the threat to present a winding-up petition was misplaced.
  • On 15 March 2016, COD Hyde wrote to Space Change saying, among other things, that the contract was now terminated as a result of Space Change’s failure to rectify its defaults.
  • Space Change did not withdraw the statutory demand and, as such, COD Hyde applied for an injunction to restrain the presentation of a winding-up petition.

So we have an interesting mix of suspension, termination and determination, along with the common dispute as to which party terminated/determined the contract.

COD Hyde v Space Change Management – the judgment

When reading judgments about construction contracts that are handed-down by judges not experienced in this area, you sometimes get the impression that they haven’t necessarily grasped all of the niceties and nuances of construction law. This is certainly not the case with Warren J, who obviously has an excellent grasp. For example, he stated in regard to a contractor’s right to payment under the contract:

“…[the contractor] will have the right to the payment which it has specified in an application for interim payment unless that application is met with a Payment Notice or Pay Less Notice. If an employer fails to observe the clear contractual procedure laid down, the contractual consequences follow and it cannot be heard to say that the interim sum is not due and is excessive. Any necessary adjustments can be effected at a later stage of the contract.”

Warren J went on to make the point that, in the event that the employer fails to issue a payment notice and/or pay less notice under the contract, while the amount due might be more than the employer considers reasonable, this provides no ground on which to object to the contractor’s notice of suspension or termination.

Given COD Hyde’s failure to serve payment notices and/or pay less notices, Warren J was satisfied that there was not even a “shadowy claim” (what an excellent term!) that COD Hyde was not obliged to pay the amounts claimed in the interim applications. It is interesting that there was no detailed analysis of whether the applications for payment were valid, as we have seen in so many TCC cases recently. The judge was also clearly content that Space Change had followed the procedure set out in the contract and had validly terminated the contract before COD Hyde purported to do so.

Warren J went on to deal with COD Hyde’s contentions that a dispute existed regarding the progress of the works, which Space Change had failed to pursue diligently, and that COD Hyde had a valid counterclaim. Warren J said that, while COD Hyde might be able to demonstrate that it had a counterclaim in the future, it had not provided any details of such claims and he therefore found himself:

“…unable to accept that [COD Hyde] has even a shadowy counterclaim in any identifiable minimum amount.”

He therefore refused to grant the injunction.

Alternative tactics

I think that Space Change deployed some alternative and under-used tactics (suspension, termination and winding-up) in this case.

Suspension. First and foremost, Space Change started by suspending its works due to non-payment following COD Hyde’s failure to serve valid payment notices and/or pay less notices. That is something that contractors and sub-contractors might consider doing in the event of non-payment, rather than adjudicating. The costs of an employer running an adjudication might be considerably less than the costs to it that result from a key trade suspending all or part of its works. Therefore, a suspension might have a greater impact on the employer than an adjudication which, in turn, might increase the chances of the contractor getting paid.

Furthermore, section 112 expressly provides a contractor with a right to claim its reasonable costs of a valid suspension, whereas there is no right to recover the costs of an adjudication under the Construction Act 1996. While I acknowledge that a suspension might potentially sour a relationship, an adjudication is hardly likely to be seen as a declaration of love.

Termination. Secondly, Space Change decided to terminate the contract as a result of non-payment. That said, given that COD Hyde had evidently employed other contractors, it was not really left with any other option.

Winding-up. Finally, having terminated the contract, Space Change pursued the winding-up route to attempt to get paid, rather than adjudicating. It no doubt has its own reasons for this, and may consider that it will result in it getting its money more quickly. However, if it does have to wind-up COD Hyde then this could be a slow process.

To conclude, Warren J’s judgment is clear and concise on this matter, and I would urge you all to read it. It is clear that Warren J, rather than Warren G, has helped to “regulate” this complex area.

MCMS Ltd Jonathan Cope

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