Shadowy Claims and Tactical Games

Posted on 24 January 2017 by Alex Barker. Source: Construction Law Quarterly

Shadowy Claims and Tactical Games

The recent decision of the High Court in COD Hyde -v- Space Change should serve as a reminder that construction disputes can be resolved using a wide variety of tactics, whilst also reiterating more familiar themes around payment notices.

Since the advent of the Housing Grants, Construction and Regeneration Act 1996, we in construction have become increasingly familiar with adjudication as an industry-specific means of dispute resolution. As the adjudication process has evolved, it has developed its own body of case law, and it is no exaggeration to say that it has spawned a sub-economy, populated by lawyers, adjudicators, experts and other actors.

Through this evolution, adjudication has become the centrepiece of the established armoury in cases of non-payment. This can be seen in the well-documented rise in so-called "smash and grab" adjudications since the 2014 decision of the Technology & Construction Court in ISG Construction v Seevic College.

For contractors and those who would otherwise be denied payment for no valid reason, this has been a welcome development. However, what of other, older tactical devices for recovering debts such as the trusty winding up petition? And how might they interact with adjudication and the payment provisions in the 1996 Act? The recent case of COD Hyde -v- Space Change Management brought these issues into sharp focus, and highlighted the arsenal of weapons available in a non-payment case.

The Case

COD employed Space Change to carry out works using the JCT Design and Build 2011 contract. Space Change made various applications for payment. COD failed to either make payment or issue the necessary payment/pay less notices under the contract (so far so normal).

The lack of payment caused the relationship between the parties to break down, to the point where Space Change left the site and COD employed an alternative contractor. Space Change gave notice that, if non-payment continued, it would exercise its contractual right of suspension (pursuant to clause 4.11.1 of the JCT form) and would also terminate the contract. At the same time, Space Change issued a statutory demand. Non-payment continued and Space Change explained that it was therefore terminating the contract (owing to what it considered to be COD's repudiatory breach, arising out the employment of alternative contractors and the non-payment).

In response, COD made the familiar argument that it was in fact Space Change that was in repudiatory breach of contract, because the contractor had suspended work without reasonable cause. In relation to the statutory demand, COD's solicitors said that the underlying debt (relating to the unpaid payment applications) was disputed and therefore any subsequent winding-up petition would be misguided and bound to fail (it being trite law that a dispute or a genuine cross-claim will prevent a winding-up petition from succeeding).

After Space Change rejected COD's request that the statutory demand be withdrawn, COD sought an injunction to restrain the presentation of a winding-up petition.

Warren J refused the injunction. His rationale was that COD were unable to make out "even a shadowy claim" that the underlying debt was not due. The judgment drew heavily on the fact that COD had failed to serve the required default notices under the contract, which meant that Space Change was entitled to suspend works, terminate the contract and, ultimately, present a winding-up petition (notwithstanding COD's contention that the debt was disputed).

Lessons Old and New

This is an interesting case because it reminds us that an unpaid party may have more weapons at its disposal than just the ubiquitous "smash and grab" adjudication. Space Change opted to invoke its contractual right to suspend the works, before terminating and threatening (justifiably, in Warren J's view) to wind up COD. There are valuable lessons to be drawn from this.

Firstly, for contractors, a new lesson. In the era of "smash and grab", there is a risk that adjudication is pursued with little thought to any viable alternatives. This is a risk of which lawyers in particular should be mindful. Often there is an alternative, which may be no less aggressive and effective in achieving the desired outcome, but may have the advantage of not committing the would-be referring party to the irrecoverable costs of an adjudication.

Secondly, for employers, an old classic that is worth re-stating nonetheless. Put procedures in place that ensure you are alive to the payment/pay less notices that you are contractually obliged to serve. Doing so could prevent serious headaches from developing in the future.

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