Shadowy Claims and Tactical Games

Posted on 1 February 2017

Shadowy Claims and Tactical Games

The 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 Housing Grants, Construction and Regeneration Act 1996, the construction industry has become increasingly familiar with adjudication as an industry-specific means of dispute resolution. Adjudication allows parties to benefit from a decision made by a construction professional, usually within four weeks of referral, that is binding, unless challenged in litigation or arbitration, and will be almost always enforced by the High Court. 

Adjudication has become the centrepiece of the established armoury in cases of non-payment. However, what of other, older tactical devices for recovering debts - such as the trusty winding up petition? 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

Under a JCT contract, COD failed to either make payment to Space Change, or issue the required pay less notices. The relationship between the parties deteriorated and Space Change issued a statutory demand. Non-payment continued and Space Change terminated the contract.

In relation to the statutory demand, COD argued that the underlying debt (relating to the unpaid payment applications) was disputed and therefore any attempt to wind up the company would fail, because it is established law that a substantive dispute will prevent a winding-up petition from succeeding. COD asked Space Change to withdraw the statutory demand, but Space Change refused. COD therefore sought an injunction to restrain the presentation of a winding-up petition.

The Court refused the injunction on the basis that COD could not even establish "a shadowy claim" that the underlying debt was not due. This meant that Space Change was entitled to suspend work, terminate the contract and, ultimately, present a winding-up petition (notwithstanding COD's contention that the debt was disputed).

Lessons Old and New

The case reminds us that an unpaid party to a construction contract may have more weapons at its disposal than the now commonplace adjudication. Space Change invoked its contractual right to suspend work, before terminating and threatening to wind up COD. There are valuable lessons to be drawn from this.

Firstly, for contractors, a new lesson. There is a risk that fast-track adjudications may be pursued with little thought to any viable alternatives. There may be another option, which is no less aggressive and effective in achieving the desired outcome, but avoids the irrecoverable costs of 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.

An earlier version of this article was published in the I.C.E. Journal, September 2016 issue.

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