Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31October 2016 LocalGovernmentLawyer 22 The final stage of the payment cycle provides the payer with a second opportunity to submit a payment notice (also known as a pay-less notice). The payer can, after the payee has submitted its payment notice in default, or after the payer has submitted its own payment notice, submit a pay-less notice. This should be done no later than seven days before the final date for payment or any agreed period between both parties. The pay less notice has the effect of providing a new sum that becomes due by the final date for payment, overriding the payee’s payment notice in default and the payer’s first payment notice. Like the other notices, the pay less notice will detail the sum the payer considers to be due and the basis on which that sum is calculated. As noted above, this is a complicated system, often made more convoluted by parties’ amendments to standard form contracts and conduct that arises on site. In practice, the change in the Construction Act has left employers (including all public sector clients) exposed to ‘smash and grab’ adjudications. We explore this in more detail below, starting with an explanation of the adjudication process and then looking at two of the key risks for public sector clients. Adjudication process When a dispute arises under a construction contract, adjudication is undoubtedly the industry’s preferred method of dispute resolution, particularly for sums under £1.5 million. A party to a construction contract has the right to refer to adjudication any dispute arising under that contract. The process is quick – effectively 28 days from start to finish – and is cheaper than most other forms of dispute resolution. The decision of an adjudicator is expressed to be temporarily binding, which means that it is binding until it is finally determined by a judge or arbitrator or by the parties reaching agreement. If either party is unhappy with the procedure or the outcome, they may refer the dispute to litigation or arbitration, although in practice this happens infrequently. This is attractive to all parties as it allows projects to continue even if the parties are in dispute. The adjudicator is not bound by strict rules of evidence, although procedural rules may be imposed by the nominating body. Another feature of adjudication is that parties must bear their own costs. The adjudicator has no power to award costs unless this is expressly provided for in the contract or the parties agree. Unless the dispute is of public importance, there are obvious benefits in choosing a private and confidential method of dispute resolution. Like arbitration, adjudication permits parties to a dispute to maintain privacy, although details of the dispute may become public if a party seeks to enforce an adjudicator’s decision in the courts. This compares favourably to litigation where judgments are routinely reported and publicly accessible. Risk 1 - Ambush One of the key risks in adjudication is the risk of ambush. The referring party has freedom to prepare the notice of adjudication and referral without any time restriction. A responding party has an extremely limited timeframe (usually 7-14 days) in which to respond to the referral notice. A referring party may choose to use this tactical advantage in order to launch an adjudication with little or no warning. Some commentators claim to have seen a spate of ambushes prior to Christmas, but the Adjudication Society’s review did not support this in 2014/15. Risk 2 - Smash and grab It is important for authorities to recognise that they may face particular risks if their internal financial or external advisory team are not aware of the critical deadlines for dealing with applications for payment in light of the new Construction Act. Any authority which has outsourced its accounts payable function as part of a back office function needs to be particularly watchful. There has been a spate of cases in the last 18 months on payment notices, including ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC), Harding v Paice & Springall [2014] EWHC 3824 (TCC) and Galliford Try Building v Estura [2015] EWHC 412 (TCC). Whilst the decisions in these cases seem to suggest slightly different answers to the same question, the overriding principle is crystal clear – do not ignore an application for payment, or you could find yourself exposed to a ‘smash and grab’ adjudication and no basis on which to defend it. Authorities are advised to ensure that both they and their advisory teams (such as contract administrators and employer’s agents) are alive to the requirements of the payment cycle. If they fail in their duty to issue the appropriate notices at the right time, they run the risk of the authority being liable for what could be a very costly sum, simply because of an administrative failure to comply with the payment regime. Justin Mendelle is head of Construction Law at Sharpe Pritchard. ¹Chris Rhodes, Construction Industry: Statistics and Policy, House of Commons Library, Briefing paper 01432, 6 October 2015 ²JL Milligan & L H Cattanach, Adjudication Society Report No. 14, April 2016, published by Construction Dispute Resolution. It is important for authorities to recognise that they may face particular risks if their internal financial or external advisory team are not aware of the critical deadlines for dealing with applications for payment in light of the new Construction Act. Any authority which has outsourced its accounts payable function as part of a back office function needs to be particularly watchful.