Since 2013, the construction industry has been steadily climbing out of the recession, with employment in the sector reaching 2.11 million in the middle of 2015 after growth of 9.5% to £103 billion for the year 2014.
Despite the severe cuts in public spending over the last few years, expenditure on construction projects by the public sector has remained comparatively stable overall.
Public sector spending on construction accounts for just over a quarter of construction output (26% in Q2 2015), comprising £1.4 billion on housing; £1.8 billion on infrastructure; and £2.6 billion on ‘other’. Growth in infrastructure spending has risen from just £1 billion in 2012 [i].
According to Justin Mendelle, head of Construction Law at Sharpe Pritchard, ‘Since the recession, there have been two other interesting trends in the construction industry. First, the number of construction dispute adjudications has leaped by almost one third from 1,093 in 2011/12 to 1,439 in 2014/15; secondly, many of these have related to disputes about how the payment provisions now operate following their ‘updating’ pursuant to the Local Democracy, Economic, Development and Construction Act which came into force in 2011. Most worryingly for employer clients, there has been a real rise in ‘smash and grab’ adjudications’.
It is no surprise that payments and timing are the most prevalent reasons for a construction dispute heading to adjudication, accounting for three quarters of referrals, as detailed in a report by Construction Dispute Resolution for the Adjudication Society, published in April 2016 [ii]:
|Reason / subject|
|Withholding / pay less||19.7%|
|Extension of time/ loss and expense||9.9%|
|Value of work||8.2%|
A word of warning, as what follows can appear quite complicated! However, there is a very simple message to take away: if you are an employer in a construction contract, make sure that you issue a payment notice or a pay-less notice, no matter what the circumstances!
So, what does the law say? Under the updated Construction Act, every construction contract must make provision for interim payments if the duration of the contract is to be more than 45 days; and for every payment, there should be a mechanism for determining what sum becomes due; a mechanism for determining the due date; and a mechanism for determining the final date for payment.
The start of the payment cycle is triggered by the payee (often the contractor) submitting an application for payment which is submitted before the due date for payment (this being the date on which the sum becomes due, rather than payable). Not later than 5 days after the due date, the payer (often the client/employer or their specified person e.g. architect, employer’s agent or engineer) will issue a payment notice to the payee. The payment notice will detail the sum the payer considers to be due and the basis on which that sum is calculated.
However, if a payer submits an incorrect payment notice or one that is out of time, the payee can submit its own payment notice (payment notice in default), stating the sum the payee considers to be due and the basis on which that sum is calculated. This is a significant change introduced by the new Construction Act. If the payee has already submitted an application for payment, then this may be considered as the payee’s payment notice in default. The payee must submit the payment notice in default before the final date for payment.
The final stage of the payment cycle provides the payer with a second opportunity to submit a payment notice (also known as a pay-less notice). The payer can, after the payee has submitted its payment notice in default, or after the payer has submitted its own payment notice, submit a pay-less notice. This should be done no later than seven days before the final date for payment or any agreed period between both parties. The pay less notice has the effect of providing a new sum that becomes due by the final date for payment, overriding the payee’s payment notice in default and the payer’s first payment notice. Like the other notices, the pay less notice will detail the sum the payer considers to be due and the basis on which that sum is calculated.
As noted above, this is a complicated system, often made more convoluted by parties’ amendments to standard form contracts and conduct that arises on site.
In practice, the change in the Construction Act has left employers (including all public sector clients) exposed to ‘smash and grab’ adjudications. We explore this in more detail below, starting with an explanation of the adjudication process and then looking at two of the key risks for public sector clients.
When a dispute arises under a construction contract, adjudication is undoubtedly the industry’s preferred method of dispute resolution, particularly for sums under £1.5 million.
A party to a construction contract has the right to refer to adjudication any dispute arising under that contract. The process is quick – effectively 28 days from start to finish – and is cheaper than most other forms of dispute resolution. The decision of an adjudicator is expressed to be temporarily binding, which means that it is binding until it is finally determined by a judge or arbitrator or by the parties reaching agreement.
If either party is unhappy with the procedure or the outcome, they may refer the dispute to litigation or arbitration, although in practice this happens infrequently. This is attractive to all parties as it allows projects to continue even if the parties are in dispute.
The adjudicator is not bound by strict rules of evidence, although procedural rules may be imposed by the nominating body.
Another feature of adjudication is that parties must bear their own costs. The adjudicator has no power to award costs unless this is expressly provided for in the contract or the parties agree.
Unless the dispute is of public importance, there are obvious benefits in choosing a private and confidential method of dispute resolution. Like arbitration, adjudication permits parties to a dispute to maintain privacy, although details of the dispute may become public if a party seeks to enforce an adjudicator’s decision in the courts. This compares favourably to litigation where judgments are routinely reported and publicly accessible.
Risk 1 – Ambush
One of the key risks in adjudication is the risk of ambush. The referring party has freedom to prepare the notice of adjudication and referral without any time restriction. A responding party has an extremely limited timeframe (usually 7-14 days) in which to respond to the referral notice. A referring party may choose to use this tactical advantage in order to launch an adjudication with little or no warning. Some commentators claim to have seen a spate of ambushes prior to Christmas, but the Adjudication Society’s review did not support this in 2014/15.
Risk 2 – Smash and grab
It is important for authorities to recognise that they may face particular risks if their internal financial or external advisory team are not aware of the critical deadlines for dealing with applications for payment in light of the new Construction Act.
Any authority which has outsourced its accounts payable function as part of a back office function needs to be particularly watchful.
There have been a spate of cases in the last 18 months on payment notices, including ISG Construction Ltd v Seevic College  EWHC 4007 (TCC), Harding v Paice & Springall  EWHC 3824 (TCC) and Galliford Try Building v Estura  EWHC 412 (TCC).
Whilst the decisions in these cases seem to suggest slightly different answers to the same question, the overriding principle is crystal clear – do not ignore an application for payment, or you could find yourself exposed to a ‘smash and grab’ adjudication and no basis on which to defend it.
Justin Mendelle advises authorities to ensure that both they and their advisory teams (such as contract administrators and employer’s agents) are alive to the requirements of the payment cycle. If they fail in their duty to issue the appropriate notices at the right time, they run the risk of the authority being liable for what could be a very costly sum, simply because of an administrative failure to comply with the payment regime.
- [i] Chris Rhodes, Construction Industry: Statistics and Policy, House of Commons Library, Briefing paper 01432, 6 October 2015,
- [ii] JL Milligan & L H Cattanach, Adjudication Society Report No. 14, April 2016, published by Construction Dispute Resolution.