Following the birth of a statutory adjudication scheme in the UK under the Housing Grants, Construction and Regeneration Act 1996 (the “1996 UK Act”), on 1 June 2015, the Government published a consultation document on Hong Kong’s proposed “Security of Payment Legislation” (“SOPL”) for the construction industry, which includes the implementation of a similar statutory adjudication scheme (the “Consultation Document”).
The purpose of this article is to consider an English decision, Harding (t/a Harding Contractors) v Paice  EWCA Civ 1231, on the operation of the statutory adjudication scheme under the 1996 UK Act and its potential implications on the adjudication scheme under the proposed SOPL.
The UK Regime
The relevant statutory provision in this case is para. 9(2) of Part I of the Schedule to the Scheme for Construction Contracts (England & Wales) Regulations 1998 (“para. 9(2)”), which provides that an adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to adjudication and a decision has been taken in that adjudication.
Further, the 1996 UK Act provides that after a construction contractor has given notice to his employer of a sum that it considers due, the employer may give a Pay Less notice, namely, indicating that the employer intends to pay less than the amount applied for by the contractor. If no valid Pay Less notice is given, the employer has to pay the notified sum on or before the final payment date and is precluded from disputing in adjudication that a payment demanded by the contractor is due (see ss. 110A & 111, 1996 UK Act).
Factual Background of Harding
In this case, the employers were the Respondents and the contractor was the Appellant.
In March 2013, the parties entered into a building contract. In October 2013, the Appellant commenced and succeeded in two adjudications against the Respondents in respect of two sets of interim payments due. By January 2014, the contract had come to an end.
In August 2014, the Appellant sent to the Respondents his final account showing that £397,912 plus VAT was due to the Appellant. The Appellant sent to the Respondents a notice of adjudication claiming the full amounts shown as due in the Appellant’s final account (the “Third Adjudication”). In response, the Respondents sent to the Appellant a Pay Less notice.
In the Third Adjudication, the Appellant claimed two alternative reliefs:-
- A decision that the Respondents, having failed to serve any effective Pay Less notice, were obliged to pay £397,912 to the Appellant;
- A decision that £397,912 was the sum properly due to the Appellant.
The adjudicator held that the Respondents’ Pay Less notice was invalid and they were required to pay £397,912 to the Appellant. It was not necessary to decide on the issue of valuation.
On 14 October 2014, the Respondents served an adjudication notice, seeking from the adjudicator decisions on the values of the contract, variations, loss of profit, and abatement and/or set off for defective works. (the “Fourth Adjudication”).
On 21 October 2014, the Appellant claimed injunctions and declarations against the Respondents to stop the Fourth Adjudication from going forward on the basis that all the issues raised in the Fourth Adjudication had been decided in the Third Adjudication. This was later dismissed by the judge.
The Respondents then proceeded with the Fourth Adjudication and succeeded, but were unable to enforce the decision due to the adjudicator’s apparent bias. The Respondents intend to bring a fifth adjudication before a different adjudicator covering the same grounds.
This case is an appeal against the judgment dismissing the Appellant’s claims for injunctions and declarations on the following grounds:-
- the judge erred in his construction of para. 9(2); and
- the judge erred in his analysis of the scope and effect of the third adjudication decision.
The judgment below interpreted para.9(2) as being only applicable where a dispute previously referred to adjudication had actually been decided by the adjudicator, with which the Court of Appeal agreed.
The Court of Appeal held that in considering the question of whether the dispute is the same or substantially the same as one which has previously been referred to adjudication and a decision has been taken in that adjudication, one does not look at the disputes referred to the first adjudicator in isolation, but must also look at what the first adjudicator actually decided. Ultimately, it is what the first adjudicator decided that determines how much remains available for consideration by the second adjudicator.
This ground of appeal was accordingly rejected.
The Scope and Effect of the Third Adjudication Decision
The Appellant argued that the dispute referred in both the Third and Fourth Adjudications was the same or at least substantially the same, namely the issue of the scope of the contractor’s entitlement under the relevant clauses that dealt with the post-termination final account. The Appellant argued even though the adjudicator reached his decision by relying on the ‘Pay Less notice’ point rather than a bottom-up valuation, the dispute had been effectively determined.
The Court of Appeal rejected this argument. They took the view that in the Third Adjudication, the Appellant referred to the adjudicator a dispute involving two alternative issues, namely a contractual one on the validity of the Pay Less notice and a valuation one. Since no valuation exercise was carried out in the Third Adjudication, the Respondents were entitled to refer that dispute for resolution in the abortive Fourth Adjudication.
The Judgment and the Position under the Proposed SOPL
This judgment dealt with two issues under the UK adjudication scheme. First, the undecided and related disputes, although previously referred to in the earlier adjudication, may be referred to again in a later adjudication.
Second and importantly, despite the statutory ‘Pay Less notice’ provision, a previous adjudication decision on the effect of an invalid payment notice does not necessarily bar the referral of the issue of valuation to a subsequent adjudication even if it covers the same payment.
The effect of this judgment appears to be consistent with the approach taken by the proposed SOPL, namely the emphasis on substance rather than on form in relation to entitlement to payment.
Unlike the 1996 UK Act, the proposed SOPL does not contain similar ‘Pay Less notice’ provisions. The SOPL proposes to provide parties who are entitled to claim a payment under a contract with a right to claim the payment by means of a statutory payment claim (“Payment Claim”). Paying parties may serve a response to a Payment Claim by a payment response, identifying the amounts of the Payment Claim accepted as due, the amounts disputed and any amounts intended to be set off against amounts due (“Payment Response”) (see Consultation Document, p. 17). Where the Payment Claims are disputed or ignored, the receiving party will be entitled to pursue adjudication (see Consultation Document, p. 20).
More importantly, under the proposed SOPL, the paying parties who fail to serve a Payment Response within 30 calendar days after the service of a Payment Claim, will not be automatically liable to pay the full amount of a Payment Claim, but they will not be able to raise any set off against amounts properly due against a Payment Claim (see Consultation Document, p.22). Therefore, assuming the claiming party pursues adjudication, it will remain open to the payer to raise liability and quantum defences in the adjudication.
The rationale of the proposal is set out in the Consultation Document as follows:
- If a failure to serve a Payment Response on time led to the full amount of a Payment Claim becoming due, it could lead to harsh results for paying parties including having to pay out against incorrectly calculated or inflated claims purely as a result of missing an administrative deadline.
- When claims are taken to adjudication, it will always be open to adjudicators to consider arguments as to the entitlement of the claiming party to the amounts claimed. This should reduce the risk of paying parties having to pay out sums to which there is no entitlement at all.
(See Consultation Document, p. 23).
The refusal of the English Court of Appeal to shut out the employer’s referral of the substantive issue of valuation by reason of an earlier adjudication decision on administrative grounds appears to be a move towards achieving fairer results consistent with what is aimed at under the proposed SOPL.
The proposed SOPL not only introduces the adjudication system to achieve quicker dispute resolutions, it also seeks to ensure fairer results by not imposing sanctions for failure to serve Payment Response and by allowing the paying parties the opportunity to defend their cases substantively in adjudications.