Cough-up medicine

Given all the publicity surrounding adjudication, it would not be surprising if most readers believed that the Construction Act was synonymous with adjudication. Let me scotch this notion once and for all. The primary objective of this legislation was to promote payment certainty. In other words, it was about enabling firms (especially small businesses) to establish the existence of a debt. Previously, it had always been difficult to establish at any one time how much one was owed and when it was due. Few other industries experienced this problem.

Do you remember the days when applications for summary judgment and the use of statutory demands (threats to issue a petition to wind up a company unless the debt was paid within 21 days) were bound to fail because it was not possible to demonstrate the existence of a debt? Spurious complaints about the quality of work could immediately stymie any quick legal fix to get one's money. The alternatives were injustice or embarking on costly and uncertain arbitration/litigation.

Two recent cases illustrate my point. The first is Re A Company (no 1299 of 2001), decided by deputy High Court judge David Donaldson in the Chancery Division. The second is Millers Specialist Joinery Co Ltd vs Nobles Construction Ltd, decided by Judge Gilliland QC in the Salford Technology and Construction Court.

In Re A Company, a roofing subcontractor, GAL, was claiming outstanding money from a main contractor, CCL. The main contractor refused to release the outstanding amount because water was leaking from the rear kitchen roof, as corners had been cut on the quality of materials used. GAL denied responsibility, but in a subsequent adjudication between the client and CCL, the adjudicator decided that remedial works to the roof were required; GAL had no knowledge of this adjudication.

GAL threatened to wind up CCL, but CCL obtained a temporary injunction to stop GAL from going ahead with the petition. CCL then asked the court to issue a final injunction.

CCL argued that no money was due because the work was defective. The judge decided that the position on payment had been radically altered by the Construction Act. The intent of the act was to preclude the payer (in the absence of a withholding notice) from "contending that all or part of the sum demanded by the [subcontractor] is not, in fact, due".

In the absence of a witholding notice, the main contractor had to pay the outstanding amount to the subcontractor, regardless of any defence on the grounds of alleged defects

The judge added that if the work was defective, the payer retained the right to recover damages for breach of contract in any subsequent litigation, arbitration or adjudication. "The rule [was] 'pay now, litigate later'." In the absence of a withholding notice as required by section 111 of the act, CCL had to pay the outstanding amount, regardless of any defence on the grounds of alleged defects. Consequently, CCL's application for the injunction was refused.

In Millers vs Nobles, Millers had issued an application for summary judgment against Nobles because of non-payment on 10 invoices. Withholding notices under section 111 had not been issued.

Judge Gilliland shared Judge Donaldson's view of section 111 of the act. "The effect of section 111 is to prevent the paying party, if he does not give appropriate notice, from exercising his right to retain or withhold payment of monies that would otherwise be due and payable, but for the existence of some right to withhold payment. [Section 111] … must have been intended to include situations where the paying party was legitimately entitled to withhold monies that were otherwise payable."

He concluded: "The adjudicator and the court, whether on an application for summary judgment or trial, would, it seems to me, be bound to give effect to the failure to serve a notice under section 111 and to order payment in full."