Is it Time to ‘Default’ from Default Payment Notices?

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Is it Time to ‘Default’ from Default Payment Notices?

February, 2021
Dean Sayers

Not long after my last piece regarding ‘technical’ defences to payment claims was included in the Adjudication Society’s Autumn Newsletter, a judgement was handed down in the TCC which caught my eye.  The judgement was in the case RGB Plastering Limited v Tawe Drylining and Plastering Limited [2020] EWHC 3028 (TCC), and it surrounded issues connected to those discussed in my last piece.

Whilst I won’t go into any great detail as to the facts of the RGB case, for the purposes of this piece I will set out a very brief background to the dispute. 

Tawe submitted an application for payment to RGB.  RGB did not respond to the application with a payment notice or pay less notice, nor did RGB pay Tawe the sum set out in Tawe’s application.  Tawe referred the payment dispute to adjudication, seeking full payment of the sum claimed in its application for payment on the basis that RGB had not served a valid payment notice or pay less notice in response to the application therefore its application had become a payee notice in default/default payment notice.  The adjudicator agreed with Tawe and awarded it the sum claimed in its application for payment.  

Subsequently, RGB referred the matter to the Court seeking a declaration that Tawe’s application for payment was invalid because it did not comply strictly with the requirements of sub-contract in relation to the submission of applications for payment (precisely the kind of ‘technical’ defence to payment which I discussed in my last piece).  The Court agreed with RGB and granted it the declaration it had sought.

This case is yet another example of the situation we, as an industry, seem to have gotten ourselves into since the floodgates were opened by ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC).  There have been many reported cases since ISG, and undoubtedly hundreds, if not thousands, more which have been settled without coming before the courts.  The costs involved are probably eye watering.  

This, then, leads me to the following questions:

  1. what benefit does the construction industry actually receive, in reality, from the default payment provisions of the Housing Grants Construction and Regeneration Act 1996 (as amended by the Local Democracy Economic Development and Construction Act 2009); and,
  2. does that benefit (if any) outweigh the cost?

As a Trainee Quantity Surveyor with Mowlem in the mid-late 1990s, and then as an Assistant Quantity Surveyor with Wates in the late 1990s, I was taught that a payee should always provide full substantiation in support of all sums claimed in each application for payment which it submits to a payer.  This substantiation included things like marked-up drawings, marked-up specifications, photographs, copies of instructions, copies of meeting minutes, ‘take-offs’, build-ups to ‘star rates’, cross references to BOQ rates, and suchlike; all of which were to be provided with each application for payment with the sole intention being to support the payee’s right to payment of the sum claimed in the application.  If a payee had properly substantiated each of its applications for payment as aforesaid then, if the payer failed or refused to pay the sum claimed in any such application, the payee was in a position to pretty much immediately refer a dispute to adjudication without further delay because it had already prepared all of the documents/substantiation necessary to demonstrate the ‘true value’ of the work which it had completed and which it had claimed in the application.  

Then along came the Local Democracy Economic Development and Construction Act 2009, and with it some new payment provisions designed to give the previous payment provisions of the Housing Grants Construction and Regeneration Act 1996 some ‘teeth’.  It was not until 2015 that this amended legislation really showed its teeth, with the judgement in ISG v Seevic.  In essence, following ISG v Seevic a payee could now obtain full payment of the sum claimed in its application for payment without having to actually do any of the detailed work necessary to properly substantiate the sum claimed therein (provided, of course, that the payer had failed to respond to the application for payment with a payment notice or pay less notice).  This, in my experience, has encouraged payees to take short cuts when preparing applications for payment; such applications being prepared to a very basic standard and often in the hope that the payer fails to respond with the requisite notices.

So, turning to the first question I set out above.  Whilst the Construction Act (as amended) may be well intentioned in its aim of facilitating cashflow, does it really achieve this in reality?  If a payee submits an application for payment along with full substantiation in support of the sum claimed therein, then what does it matter whether or not the payer serves a payment notice or pay less notice? Surely all that is needed is a mechanism for ascertaining an application date and a final date for payment?  If the payer does not pay, by the final date for payment, the sum claimed in an application for payment then, having already prepared and submitted a fully substantiated application for payment, the payee is already in a position to pretty much immediately refer the dispute to adjudication so to have the ‘true value’ of the work declared and paid.  The payee could obtain the declaration and payment in adjudication proceedings in similar timescales (if not the same timescales) as it would in what has become commonly termed ‘smash and grab’ adjudication proceedings.  In view of the foregoing, what benefit is actually really achieved by the default payment notice provisions of the Construction Act (as amended)?  Some may perhaps suggest that the benefits are, in reality, fairly limited.

Turning to the second question I set out above.  If some were indeed correct to say that the benefits of the default payment provisions of Construction Act (as amended) are, in reality, fairly limited, then at what cost do those benefits come?  The now widespread (in my experience) practice of taking short cuts to prepare applications for payment is undoubtedly a fertile breeding ground for conflict.  With that conflict often comes an irretrievable deterioration in relationships and significant financial consequences.  Is this really what the amended legislation intended?

In view of the above, is it time to give serious consideration to repealing the default payment provisions of the Construction Act (as amended)?  Would this not encourage payees to set out their claims with fully substantiated clarity and thereby reduce both the opportunity for conflict to arise and the likelihood of conflict actually arising (or, at the very least, reduce the likelihood of conflict subsequently becoming adversarial in nature)?  The final date for payment and other relevant provisions (other than the default payment provisions) of the Construction Act could (and, I suggest, should) remain; thereby maintaining the right for a payee who is not paid by the final date for payment to immediately refer the dispute to adjudication on a ‘true value’ basis (having already prepared and submitted with its application for payment the necessary substantiation in support of the sum claimed therein) and have it decided in similar timescales (if not the same timescales), from the date the dispute crystallised, as it would in a ‘smash and grab’ adjudication. 

Some may say a repealing of the default payment provisions of the Construction Act (as amended) would lead to a reduction in the use of adjudication as a means of resolving conflict in the industry.  However, should we, as an industry, not be taking steps to avoid conflict rather than encourage it?  Further, would it not mean that adjudicators could actually get on with deciding disputes of substance, rather than technical disputes of little substance at all?

Dean Sayers, Sayers Commercial Limited 

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