The “pay now argue later” principle underpins the Construction Contracts Act 2002 (CCA). The recent decision of C&R Property Development Ltd v MR Civil Ltd confirms the importance of this principle in assessing the criteria that must be met in order to set aside a statutory demand for debts due under the CCA. A statutory demand issued for an amount awarded in an adjudications provides a potent remedy to the successful party.
C&R Property Development Limited (C&R), a development company, contracted MR Civil Limited (MR Civil) to undertake civil and earth works. The relationship between the parties broke down when C&R refused to pay an amount claimed in MR Civil’s payment schedule, instead transferring the claimed sum to its solicitor’s trust account. C&R then terminated the contract on the basis of MR Civil’s lack of performance claiming damages and reimbursement of wasted costs of $1.9 million against MR Civil. MR Civil disputed C&R’s termination, denying any liability and asserting its own termination a few months later.
Adjudication proceedings were commenced and the adjudicator determined that MR Civil’s later termination was the effective one. C&R was required to pay MR Civil circa $1 million for amounts due under the payment schedule, retentions, the cost of work completed that was yet to be certified and lost profit.
Instead of paying the determination sum to MR Civil within 2 working days (as specified in the determination) C&R paid the sum into its solicitor’s trust account to be held pending resolution of the dispute. C&R then took a range of steps to challenge the determination by commencing High Court proceedings (alleging breach of contract and negligence), issuing a notice of arbitration, and commencing judicial review proceedings against the adjudication determination.
MR Civil took steps to enforce payment of the determination sum by registering the determination as a District Court judgment, and obtaining charging orders over the development site. MR Civil issued a statutory demand to recover the determination sum (Demand). C&R applied to the Court to set aside the statutory demand.
The Court was asked to depart from the “pay now, argue later” principle that underpins payments due under the CCA. In order to sidestep immediate payment of the determination sum C&R was required to prove:
- There was a high degree of likelihood that MR Civil would not be able to repay the determination after a further dispute resolution procedure in C&R’s favour; and
- That C&R had a good arguable case that it will succeed in the “final” resolution of the dispute.
C&R also argued that the Demand was an abuse of process.
The Court noted there is a high bar to establishing MR Civil would be unable to repay the determination sum in the event it was later determined that C&R was entitled to payment. The Court held that it was sufficient that MR Civil’s net assets only marginally exceeded the sum in the Demand.
The Court then considered whether C&R had a good arguable case against MR Civil for liquidated damages, defective works and remediation costs. The Court held that the fact the adjudicator had already considered C&R’s case and rejected it on the basis of a lack of evidence weighed strongly against C&R having a good case. Despite claiming the adjudication process did not provide the time or opportunity to properly hear the claims and test the evidence, C&R failed to adduce any new evidence to suggest the adjudicator was wrong.
Importantly, the Court also highlighted that C&R’s claim was contrary to section 79 of the CCA, which prohibits the court from giving effect to any unliquidated and unproven counterclaim, set-off, or cross-demand in any proceedings for the recovery of debts arising from payment claims, payment schedules or adjudication determinations. In light of those factors, the Court dismissed C&R’s claim that it had a good arguable case.
In relation to the judicial review proceedings, the Court rejected C&R’s argument that the adjudicator had exceeded his jurisdiction. In doing so, the Court restated the position that judicial review should be used sparingly and reserved for instances where there has been a clear error by the adjudicator.
The Court was also not persuaded that issuing the Demand was an abuse of process, highlighting that the CCA specifically provides for sums awarded under an adjudication determination to be enforced as a debt due.
The Court has confirmed the well understood criteria for setting aside a statutory demand and the interplay of the “pay now, argue later” principle of the CCA.
Parties that succeed in an adjudication can be confident that sums awarded can be recovered by issuing a statutory demand. In order to avoid payments, parties are required to show that they have a strong case to challenge the determination, and there would be a real risk that any payment would not be able to be recovered at a later date. This is a high threshold. Adjudication and the use of a statutory demand to recover non-payment of any sum awarded provides a swift and cost effective remedy to parties seeking to recover sums owing under a construction contract.
The case also confirms that parties seeking to challenge an unfavourable adjudication determination should be mindful that unless it is clear the above test is made out, prompt payment of the adjudication sum is required before arbitration or court proceedings are commenced.
If you have any questions about the issues raised by this judgment or the law on enforcement of adjudication determinations or challenging an unfavourable determination, please get in touch with our Construction Team, or your usual contact at Hesketh Henry.
The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.