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According to the UK’s Technology and Construction Court (TCC) (in Henry Construction Projects Ltd v Alu-Fix (UK) Ltd [2023] EWHC 2010) valid payment claims must be paid before the underlying merits are examined, even if this is done through construction adjudication.
New Zealand Courts do not appear to have addressed this issue. However, because of similarities between the Construction Contracts Act 2002 (CCA) and the UK equivalent[1], it is possible that the same approach might be taken if tested in New Zealand.
Background[2]
Henry Construction Projects Ltd (Henry) as main contractor entered into a sub-contract with Alu-Fix (UK) Ltd (Alu-Fix). Henry failed to issue the UK equivalent of a valid payment schedule and did not pay the amounts claimed by Alu-fix by the due date for payment under the contract. Alu-Fix therefore commenced a payment claim adjudication. While that adjudication was still ongoing, Henry issued a simultaneous “true value” adjudication.
A “true value” adjudication examines the underlying merits of a payment claim or payment schedule to determine what the “true value” of a payment claim actually is. This should be contrasted against procedural “payment claim” adjudications, which only look at whether the relevant payment claim / payment schedule complies with the CCA[3], and therefore whether there is a debt due on the basis that a valid payment claim has been submitted.
Alu-Fix won the payment claim adjudication and Henry paid the amounts due in accordance with that determination. Henry then won the “true value” adjudication, which decided that Henry had significantly overpaid Alu-Fix. Alu-Fix did not pay the amount determined in the “true value” adjudication, which saw Henry issue court proceedings to enforce that decision.
Alu-Fix resisted enforcement on grounds that Henry had brought its “true value” adjudication prematurely, meaning that the adjudicator did not have jurisdiction. This argument was based upon earlier UK case law[4] which indicated that parties had to pay outstanding amounts under a payment claim before they could commence a “true value” adjudication. This had been expressed as simply an application of the “pay now, argue later” principle.
High Court decision
The High Court agreed with Alu-Fix: Henry had brought the “true value” adjudication prematurely, and so the adjudicator did not have jurisdiction. It confirmed that an obligation to make payment in response to a payment claim arises on the date provided by the underlying contract or set out in the payment claim; not when an adjudicator subsequently decides that the payment claim is valid / there is no valid payment schedule in response.
The Court affirmed the earlier UK case law that there was a hierarchy to the provisions of the UK Act: the right to be paid had priority over the right to bring a “true value” adjudication. Any other conclusion would compromise the “pay now, argue later” principle underlying the UK Act by allowing the parties to, in effect, “argue first” and then “pay later”.
Accordingly, Henry should have paid the amounts owing to Alu-Fix under the payment claim before commencing a “true value” adjudication.
The Court went on to note, however, that parties could start a “true value” adjudication before paying the amounts claimed in a payment claim in two specific situations:
- Where a payment schedule had been provided with a zero value; and
- Where the party bringing the “true value” adjudication was sufficiently confident that the payment claim was invalid (and, of course, where this eventually was proven to be the case in any payment claim adjudication on this issue).
Comment
To our knowledge, New Zealand does not appear to have either drawn a distinction between “true value” adjudications and other types of adjudications (eg payment claim adjudications) or addressed whether there is any hierarchy within the CCA.
However, the underlying rationale of the UK Act and New Zealand’s CCA (ie “pay now, argue later”) is the same, and the relevant statutory provisions of each piece of legislation are similar.[5] With these similarities, it is possible that arguments similar to those deployed in Henry Construction Projects Ltd v Alu-Fix (UK) Ltd may be used by parties and accepted by decision makers here in New Zealand.
The best protection against these sorts of issues arising is to ensure that payment claims and payment schedules are issued on time and are substantively compliant. All too often contracting parties fail to give sufficient attention to these details, leaving them unable to take advantage of or protect against the sudden death payment regime in the CCA.
If you have any questions about payment claims, payment schedules, the CCA or construction adjudications, please get in touch with our Construction Team or your usual contact at Hesketh Henry.
Disclaimer: 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.
[1] The Housing Grants, Construction and Regeneration Act 1996 (UK Act).
[2] A note on terminology: for simplicity and ease of understanding for New Zealand readers, in this article we have used the CCA terms “payment claim” and “payment schedule” instead of the UK equivalent “payment application” and “pay less notice” when describing the UK proceedings.
[3] Or, in the UK, the UK Act.
[4] Including Grove Developments Ltd v S&T (UK) Ltd [2018] EWCA 2448 and Bexheat v Essex Services Group [2022] EWHC 936 (TCC).
[5] UK Act s 111: ‘Where a payment is provided for by a construction contract, the payer must pay the notified sum (to the extent not already paid) on or before the final date for payment …
The payer or a specified person may in accordance with this section give to the payee a notice of the payer’s intention to pay less than the notified sum”; CCA s 20: “A payer becomes liable to pay the claimed amount on the due date for the payment to which the payment claim relates if—
(a) a payee serves a payment claim on a payer; and
(b) the payer does not provide a payment schedule to the payee…”.
