Reinforcing the message – “pay now, argue later”

25-07-2017

The construction industry has become used to the mantra repeated in a number of cases, that the intention behind the Housing Grants Construction and Regeneration Act 1996 as amended (“the Construction Act”) is to give effect to a “pay now, argue later” regime.

The regime has been applied both in the context of the interpretation of the payment provisions under the Construction Act and also in the context of the court’s attitude to enforcement of adjudicator’s decisions.

Statements by the court to this effect can be found in numerous decisions.

The recent decision of Hutton Construction Limited v Wilson Properties (London) Limited [2017] EWHC 517 (TCC) (the Hutton Case) is a further reinforcement of that approach to the legislation.

In the context of the Hutton case, the principle of “pay now, argue later” is applied in a new context where there is a potential conflict between the commercial interest of a party who wishes to enforce an adjudicator’s decision and the commercial interest of the party who is dissatisfied with the adjudicator’s decision and seeks to use the Part 8 process as the mechanism by which the adjudicator’s decision can, in effect, be “appealed”.

The facts of the procedural steps taken in the Hutton case are perhaps an extreme example but the case gave the opportunity for Mr Justice Coulson to review the current guidance in the Technology and Construction Court Guide and the existing case law, in which the question of the relationship between the Part 7 and Part 8 proceedings had been considered by the courts.  Following that review and in the light of the potential for the Part 8 process to become a mechanism by which the decision of an adjudicator could, in effect, be reviewed before enforcement, Mr Justice Coulson has issued new guidance with regard to the relationship between Part 7 and Part 8 in enforcement proceedings. In modifying the existing guidance he has given primacy to the doctrine of “pay now, argue later”.

The new guidance draws a distinction between those cases in which the parties are able to combine the competing desire to enforce an adjudicator’s decision with the desire for a final resolution of a matter that had been determined by the adjudicator. The argument in favour of finality is to avoid unnecessary cost and duplication of proceedings and in some cases there is a clear consensus that that is desirable. The judge contrasted those circumstances and the situation where there was no consensus as to the process by which these matters should be brought before the court.  Mr Justice Coulson endorsed the current practice where the parties cooperate to agree the process but highlighted the difficulties that parties faced.  In particular, the party seeking enforcement may not want an issue finally determined before it receives the benefit of the Part 7 claim. The complexities in seeking to introduce the Part 8 application into an enforcement hearing under Part 7 are in many cases not easily resolved.  In reviewing the case law, the judge referred to the practical difficulties facing not only the parties but the court.  It is critical for the court to be aware of the requirement to combine competing processes from an early stage so that the directions, which in the context of a simple Part 7 enforcement application are based upon standard directions, can be modified to address the requirements of the Part 8 claim and also to allow the requisite time for hearing and deciding issues which are different from a straightforward adjudication enforcement application.

Where there is a good deal of cooperation between the parties from the outset, then the court has been able to respond to these additional requirements.  Problems arise however in cases where there has been no such consent.

In particular, where there is no consent, the enforcing party wishes to receive the benefit of the adjudicator’s decision and is not interested in the final resolution of any matter decided by the adjudicator being determined either before or at the same time as the enforcement proceedings.  The judge pointed out that for the party seeking enforcement that is entirely appropriate.  As set out in the Caledonian Modular case, the fact that a party may consider that the adjudicator got it wrong is in 99/100 cases irrelevant to any enforcement application.  If the decision is within the adjudicator’s jurisdiction and the adjudicator broadly acted in accordance with the rules of natural justice, such defendants must “pay now and argue later”.

The judge sets out a new test that will now override the guidance contained in the Technology and Construction Court Guide.  The judge stated, “If the degree of consent noted in the authorities set out is not forthcoming then the following approach must be adopted”. The first requirement is that the defendant must issue a CPR Part 8 claim setting out the declarations it seeks or, at the very least, indicate in a detailed defence and counter claim to the enforcement claim what it seeks by way of final declaration. The court emphasised however that a prompt Part 8 claim is the best option.

Turning to the current guidance, there is some support in the current guidance for a more informal approach (see paragraph 9.4.3 of the Technology and Construction Court Guide), however that must now be taken to be superseded by the guidance given in the judgment.

The judgment sets out the necessary requirements in order to contest summary judgment on the basis of the Part 8 claim.

The defendant must be able to demonstrate that:

  • there is a short and self-contained issue which arose in the adjudication and which the defendant continues to contest;
  • that issue requires no oral evidence, or any other elaboration beyond that which is capable of being provided during an interlocutory hearing set aside for the enforcement; and
  • the issue is one which, on a summary judgment application, it would be unconscionable for the court to ignore.

The court gave examples of the sort of issue which might meet those requirements, such as if the adjudicator’s construction of a contract clause is beyond any rational justification, or that the adjudicator’s calculation of the relevant time periods is obviously wrong or that the adjudicator’s characterisation of a document as, say, a payment notice is on any view not capable of being described as such a document. The court suggested that in a disputed case, anything else would be contrary to the principles set out in Macob, Bouygues and Carillion.

The court also made clear that such issues could still only be considered by the court on enforcement if the consequence of the issue raised by the defendant was clear cut.  Again the court gave an example using the case of Caledonian v Mar City in which it was agreed that if the document was not a payment notice, the claimant’s case failed.  If however the effect of the issue that the defendant wishes to raise is disputed, it will be most unlikely that the court will take that issue into account on enforcement.  Such a dispute or “arguable interleafing of issues” would almost certainly be fatal to a claim by the defendant that its challenges were properly brought within the limited exception.  Again the court pointed to the practical difficulties where there is no consent, as any argument as to whether or not matters should be dealt with on enforcement, would itself require argument before the court.  Given the time constraints of enforcement proceedings, the judge considered that it would be rare for the court to decide that such an issue could be raised as a defence to the enforcement application.

The judgment is a warning to those who have seen the development of the Part 8 process as a mechanism for challenging the decision of an adjudicator.  The judge went so far as to say, “In my view, many of the applications which are currently being made on this basis by disgruntled defendants (and which are not the subject of the consensual process noted above) are an abuse of the court process.”

As an abuse of process, the judge was clear that a defendant who unsuccessfully raises this sort of challenge on enforcement will almost certainly have to pay the claimant’s cost for the entire action on an indemnity basis.  However, this does not relieve parties seeking to enforce an adjudicator’s decision who are met with a competing Part 8 claim from all obligations to cooperate and comply with the overriding objective.  If a claimant does not agree to the defendant’s proposal to deal with the issue on enforcement, but the court concludes that the issue does fall within the limited exception to which the court referred, it is the claimant who runs the risk of being penalised on costs.

The facts of the case are of interest in that the defendant was late in issuing its Part 8 proceedings and the correspondence and witness statements relied upon in the context of the response to the Part 7 enforcement application did not set out clearly the basis upon which the defendant objected to the enforcement proceedings.  It was only when the Part 8 claim was provided that the claimant and the court were in the words of the judge, “given inkling as to the defendant’s stance”.  However, it was not simply the dearth of information provided to the claimant and the court to allow the proper cooperation between the parties and timetabling with the court that was criticised by the judge.  The judge also considered that the issues raised went beyond a discrete issue that would be determinative of the matters decided in the adjudication and stated “the points raised by the defendant endeavour to re-run the entirety of the issues in the adjudication. Indeed, on one view, the defendant seeks to raise and rely on other matters too, such as the earlier sequence of interim applications and how they were dealt with by the parties and the conversations referred to…”

The court therefore considered that on adjudication enforcement it simply could not deal with all the points and more raised by the Part 8 claim. Enforcement would be granted and the Part 8 claim heard at a later date (May or June 2017). On the broader question of whether or not it was unconscionable that matters raised in the Part 8 claim should not be addressed by the court in the context of the Part 7 proceedings, the judge pointed out that the central question as to whether the document described by the defendant as “a pay less notice” had been considered at length by the adjudicator, it was unlikely that the court would decide that it was in fact something else altogether.  The court also relied on the fact that the adjudicator considered all the relevant issues carefully and decided them against the defendant, and in those circumstances, in the ordinary way the claimant is entitled to the fruits of that victory.

The judgment is a welcome clarification of an area of practice that has produced real difficulty for those seeking to enforce adjudicators’ decisions.  The summary enforcement process is undermined by the opportunity for a disgruntled defendant to introduce a competing Part 8 application. There has been the potential for a disgruntled party to, in effect, negate the intention behind the Construction Act and the process by which a decision which is only binding on an interim basis nevertheless entitles the successful party to the fruits of its victory.  The courts will be more alive to attempts to use the Part 8 process as “an appeal” and the burden will be firmly on those issuing Part 8 proceedings to demonstrate that they are appropriate or to run the risk of an indemnity costs order.  The judgment is consistent with the general approach of the courts to support the adjudication process and to give effect to the “pay now, argue later” regime.  In providing clarity to the parties and their representatives the judgment is to be welcomed.