Blurring the lines of pay now/argue later regime

18 March 2015

The non-enforcement of an adjudicator's decision on the ground of fairness is considered by Daniel Wood, partner and Cathy Moore, professional support lawyer, both of Wragge Lawrence Graham & Co, in the light of a recent judgment.

Original news

Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC), [2015] All ER (D) 01 (Mar)

Following the employer's failure to serve notices challenging an application for an interim payment by the contractor, an adjudicator decided that the contractor was thus entitled to the £4 million it had claimed. The contractor applied for summary judgment to enforce that decision. The Technology and Construction Court held that the employer had no defence and gave summary judgment in favour of the contractor, but concluded it would not be fair to enforce the judgment in full. It therefore ordered the employer to pay £1.5 million and it stayed enforcement of the balance.

What were the issues addressed in this case?

The key issues raised by this case were:

  • The conclusivity, or otherwise, of the notice provisions in the Housing Grants, Construction and Regeneration Act 1996, ss 110A, 110B and 111.
  • An adjudicator's jurisdiction to reconsider the evaluation of interim applications in view of the judgment in ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC), [2014] All ER (D) 72 (Dec).
  • The ambit of the court's discretion to stay the enforcement of adjudicators' decisions under CPR 3.1(f) and when this discretion will be exercised.

Did the judgment clarify this area of law?

The judge in Galliford, Edwards-Stuart J, had also given the judgment in Seevic, in which it was stated that if an employer failed to serve the appropriate notice(s) under the Act, then it would be deemed to have accepted the valuation stated in the relevant interim application. It was not possible, he said, for the employer to bring a second adjudication to determine the actual value of that same application and effectively turn back the tables.

In Galliford, Edwards-Stuart J emphasised that his judgment in Seevic did not go any further than this, and confirmed that the value of the work certainly could be challenged as part of the next certification, even if the amount then contended for by the employer was less than had been effectively certified pursuant to the previous application.

However, despite clarifying his position, and entering summary judgment, the judge then delivered what could be seen as a hammer blow for adjudication. He declined to enforce part of the sum awarded by the adjudicator on the ground that it would not be fair to do so.

So why is this significant?

The effect of this decision is potentially far-reaching.

It means that a valid adjudicator's decision might not always be enforced, or at least not in full. Whilst there has been a long history of enforcement being refused in cases where the proposed recipient might not be able to return the money, this case was a different example in which the court may be prepared to grant a stay under CPR 3.1(f).

The basis for the partial stay was because it would not be fair to enforce the judgment in full as Estura would not be able to pay the total sum and certainly would not be able to finance litigation to get it back even if it could. The judge said that the circumstances were exceptional and rare.

Whilst one might be inclined to say that the parties had effectively agreed what was and was not to be viewed as fair when agreeing the notice provisions in the contract, the following points also seem to be relevant to the question of fairness:

  • Estura was set up in such a way that it was entirely funded by secured borrowings with limited assets; its impecuniosity was effectively by design and, significantly, was unchanged since the time the building contract was entered into.
  • The court made it clear that Estura's financial position had not been caused by anything done by Galliford.
  • Galliford had done no more than to comply with the terms of the contract, by referring disputes to adjudication in order to enforce its contractual rights.

The inability to pay a sum awarded by an adjudicator is perhaps an uncommon situation, but it is surely not exceptional - particularly with projects utilising third-party funding. Unless the genie is put back into the bottle, and quickly, one might expect a flurry of cases in which the boundaries of this new principle are tested.

The judge's decision was based largely on Estura's financial position, yet the evidence tendered in support of that appeared to be fairly sketchy. The decision does seem to be at odds with the robust approach that the courts take when asking themselves similar questions, for example in the context of security for costs where the possibility of security being provided by backers or other interested parties will be considered (e.g. see the Court of Appeal's decision in Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534).

The judge clarified his decision in Seevic by noting that it was always open to an employer to correct the position in a later certificate. Of course, the contract might not always allow a further certificate or its issue might be dependent on steps which the contractor might not, in the circumstances, be inclined to take.

This particular case arose in relation to an amended form of JCT Design and Build Contract 2011. Clause 4.12 required Galliford to submit its final statement following practical completion. If this was not issued within three months of practical completion, then it was open to Estura, in default, to give notice and issue a final statement itself.

As such, Estura could reverse the effect of an overly generous interim certificate as part of the agreed contractual regime. Despite this, the judge still found that there would be a risk of irreparable prejudice to Estura if the decision were enforced in full. In instances where there is no such default regime, that risk would be even greater.

Is there anything that lawyers will need to bear in mind when advising clients as a result of the judgment?

This case will make construction lawyers uncomfortable as it leads to greater uncertainty for clients. We can no longer advise contractor clients that if the required notices relating to payment are not served, they will definitely get their money through adjudication.

This certainly does not mean that employers can relax, however. On the contrary, the judge noted that the circumstances of this case were exceptional and we must assume that they would be treated as such by later courts. Employers should therefore ensure that they have robust processes in place to enable them to:

  • Review payment applications swiftly and accurately, while remaining alert to further applications being issued after practical completion.
  • Issue the appropriate notice(s) in good time.

One suspects that we will not have to wait long for some clarification on what this all means in practice but until we do, the pay now/argue later regime is a little less clear.

Interviewed by Robert Matthews


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.