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Pay now, argue later!

20 Dec 23 Payment and adjudication procedures under the Housing Grants, Construction and Regeneration Act 1996 (the ‘Construction Act’) is often summarised as ‘pay now, argue later’ (writes Anna Dyde).

Anna Dyde is a solicitor in the Construction & Engineering team at Irwin Mitchell
Anna Dyde is a solicitor in the Construction & Engineering team at Irwin Mitchell

And over the years parties have probed and the courts have considered how far that concept goes. 

They took another look at it in November’s decision in Lidl Great Britain Ltd v Closed Circuit Cooling Ltd t/a 3CL.

At times the courts have had to draw boundaries that are not set out in the Construction Act.  In the case of S&T (UK) Limited v Grove Developments Limited, the court said that where a sum is due under a payment application (a ‘notified sum’) and is not met with a valid payment notice or pay less notice, that sum must be paid before a fresh adjudication can be started. This has become known as the Grove Principle. 

The Lidl case considered whether the Grove Principle meant that an adjudication cannot be started about the true value of the payment in question or that no adjudication can be started on any issue – or somewhere in between those positions.

Lidl and 3CL entered into a framework agreement relating to refrigeration works. The dispute arose from the first order issued under the framework.

3CL made an application for interim payment, to which Lidl responded with a payment notice stating nothing was payable, owing to incomplete/defective works and a deduction of liquidated damages. 3CL referred the matter to adjudication. The adjudicator decided that Lidl’s payment notice was invalid and Lidl was required to pay the sum applied for, with interest.

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Lidl subsequently paid the amount to 3CL but, before the payment was made, Lidl commenced two further adjudications.  One sought to recover the cost of rectifying the defects and the other sought a decision that 3CL was not entitled to an extension of time.  Lidl succeeded in both.

When Lidl sought enforcement of the award for defect rectification costs, 3CL countered that the decisions were unenforceable because they breached the Grove Principle (they were started before the notified sum had been paid).

Lidl argued that the Grove Principle only prohibited commencing an adjudication where it is a true value adjudication in respect of the same payment cycle as the unpaid notified sum.  Neither of the adjudications they had brought was a true value adjudication. 

The Court decided that whilst the Grove Principle did not prohibit the commencement of any adjudication whatsoever before the notified sum is paid, it is wider than Lidl contended.  The principle extends to attempts to adjudicate matters that could have been included in a pay-less/payment notice served in respect of the notified sum in question.  In such a case, the adjudication cannot be started until the notified sum has been paid.

The Courts continue to support the intentions of the Construction Act, including the pay now, argue later concept.  Failure to give a payment notice or pay less notice can have significant adverse consequences and that is how it is meant to be.  Attempts to mitigate those consequences by holding back payment and starting an adjudication to reverse the position look set to fail.

  • Anna Dyde is a solicitor in the Construction & Engineering team at Irwin Mitchell

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