HENRY HATHAWAY writes that construction companies need to revisit their payment procedures as payers now must respond to payee payment claims or applications for payment, or amounts claimed for could become payable in full regardless of the what of the actual application value is.
This article concerns payment in construction and the recent development in the courts of Ireland. While the contents of this article do not focus on the potential impact overall of the recent judgement of Aakon Construction Services Limited v Pure Fitout Associated Limited [IEHC] 562, it intends to set out what the practical ramifications are and how they will invariably apply to every entity that is under a payment mechanism and caught by the Construction Contracts Act 2013 (the Act).
This article does not deal with all of the judgement itself; it seeks at this point to raise the issue of what the adjudication (which was subject of the enforcement) decided and how all construction companies should be aware of the process that led to that adjudication decision.
In summary, an adjudication decision has been upheld that concerned the principle that if a payment claim notice is deemed to have been made validly and is not met with the appropriate response to that payment claim notice within the strict timeframes, then by default and where fraud is absent, those amounts may become payable in full, regardless of what the true value of the applied sum was. This is a draconian position and is derived entirely through procedure rather than merit.
In short, this ruling means that every construction contract is to have an adequate payment mechanism, and if not, terms will be implied to supplement those payment provisions. Essentially, what this case concerns is where an application for payment by the payee is submitted, it must be met and addressed with what the payer intends to pay and the basis of calculation as a minimum. Either under the contract or implied provisions, this is a strict timeline. Note that there are tests in respect of what a basis of calculation is to be also presented.
The question then becomes this, what if the application or claim for payment is not addressed or responded to within the given timeframe or at all? This very question was raised in a case that occurred in 2013 in the UK and became famous (or infamous). It was called ISG Construction Limited v Seevic College  EWHC 4007.
In summary, in that case, it was decided that where a default payment notice was not met with a valid pay less notice by the given timeline, then the full amounts become payable. This is regardless of whether or not the stated sum reflects the true value of the work undertaken. It was a procedural point, and the merits of the value were not relevant.
This judgment commenced a whole genre of adjudications and became known colloquially as “smash and grab” adjudications, though that term itself has not been appreciated. The theory is straightforward, had the payer intended to pay less than the amount applied for or became due under the payment mechanism, then they had every right and opportunity to do so. The fact that they did not then must mean that they agreed that those sums would become payable. Practically, this may not be the case. However, again, it is a procedural point rather than one of merit.
This launched a number of adjudications and indeed a number of cases in the following years that then attempted to address what was a draconian but evidential procedural point of law. Eventually, in Grove Developments Limited v S&T (UK) Limited  EWCA Civ 2448;  181 ConLR 66, the Court of Appeal did address the point to set out that even though the amounts by procedural default did become due, that the paying party having paid those sums decided could then re-adjudicate on the true value.
Is this new ground for Irish construction?
I have spent a number of years in practice in London and have many such cases within my portfolio. It was only a matter of time before this issue would come to the fore in Ireland, and we have been updating our clients continuously through training, lectures and seminars.
This may well be new ground in Ireland. However, it is a ground that has been well-trodden in the UK and is very straightforward to address. There is a very real prospect now that there will be numerous adjudications following this principle.
Valid payment claims and timely responses
Key to this principle is the application for payment or claim for payment. The parties should be aware that in the first instance, that there must be a valid claim for payment under the contract or a compliant one under the provisions of the Act or any implied term. This became the subject of numerous reported cases in the years following ISG v Seevic in the UK.
This is where a payment schedule may become useful, but do ensure that there is an adequate mechanism to provide payment in the contract in any event as problems arise if such a payment schedule concludes prior to the works being complete, through delays or otherwise. Understand that the dates are key and that little sympathy will be provided if those dates are not applied correctly.
Another issue is now raised. What is the effect where a pay-less notice/notice in response is not issued in a previous cycle, but then the value is corrected in the subsequent payment cycle and certificates?
Going on the current case law, it would appear that each payment cycle is treated uniquely and that such an argument as set out above would apply, even if there has been a subsequent adjustment in a later payment cycle.
Revisit your company procedures
It is now time to revisit procedures in every construction company and to inform and involve all of those employed in payments or applications/claims for payments. What do the provisions of each contract say, and when are the applicable dates in order to give effect to those payment provisions?
Every response to a claim for payment in a construction operation must not only be in time, it must be in the correct format and set out how much is to be paid and the basis of the calculation. Parties would do well to ensure that there is an agreement at the time of forming the contract so as to ensure the format and presentation of all notices required under the payment mechanisms are agreed.
Henry Hathaway originally qualified as a civil/structural engineer from Trinity College Dublin and practised in the construction industry for 12 years prior to becoming a solicitor specialising in construction law. He also is a partner of law firm Shemmings Hathaway LLP in London as well as being the principal in the Irish practice Henry Hathaway Solicitors. He specialises in both contentious and non-contentious construction-related matters and places a particular emphasis on providing training and to construction companies to advance dispute avoidance.
To learn more, email Henry.email@example.com
Disclaimer: This content is provided for information purposes only and does not constitute legal advice. It is provided to present information to the broader construction industry and provide awareness. Independent legal advice should always be sought prior to application, and no solicitor/client relationship is formed, and no duty of care nor liability arises from any of the contents of this article.