According to the UK’s Technology and Construction Court in Henry Construction Projects Ltd v Alu-Fix (UK) Ltd, valid payment claims must be paid before the underlying merits are examined, even if this is done through construction adjudication.
Aotearoa 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, it is possible that the same approach might be taken if tested in New Zealand.
Background
Henry Construction Projects Ltd (Henry) as main contractor entered into a subcontract 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.
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 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 that 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 or 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 Housing Grants, Construction and Regeneration Act 1996 (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.
- 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, Aotearoa does not appear to have either drawn a distinction between true value adjudications and other types of adjudications – for example, 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 – pay now, argue later – is the same, and the relevant statutory provisions of each piece of legislation are similar. 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 Aotearoa.
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.
NOTE This article is not intended as legal advice. For specific advice, contact your legal advisor.