Iain Taylor is an associate in the construction and engineering department at law firm Fladgate
Henry Construction Projects’ high-profile collapse has left creditors in its supply chain short of £43m. The company’s administrators have pointed to Ozel Group’s winding-up petition against Henry in May as the beginning of its downfall. However, it may be the company’s dispute with Alu-Fix, ruled upon by the Technology and Construction Court earlier that same month, that has longer-lasting implications for the construction sector.
“The judgment is likely to act as a deterrent to companies initiating ‘true value’ adjudications without complete confidence in the outcome of a ‘smash and grab’ adjudication”
The background to Henry’s dispute with Alu-Fix revolves around payment for works completed by Alu-Fix on a boutique hotel development in central London, as a subcontractor to Henry. The latter failed to pay Alu-Fix by the final date for payment set out in the subcontract, leading Alu-Fix to submit a ‘smash and grab’ adjudication (SGA) to recover the amount due.
In response, Henry contended that it had submitted two valid pay-less notices (PLN), which, it claimed, nullified its obligation to pay Alu-Fix the amount claimed.
While the SGA was ongoing, Henry commenced a ‘true value’ adjudication (TVA), contending that it was owed more than £235,000 as a result of overpayment.
In January of this year, the SGA adjudicator ruled that Henry’s PLNs were invalid and that the company was required to pay Alu-Fix circa £257,000 within seven days. Having paid this sum, the TVA adjudicator subsequently ordered Alu-Fix to repay more than £191,000, reflecting what he determined to be the true value of the works.
The question at issue
Legal precedent dictates that employers are not entitled to commence a TVA until they have complied with their immediate payment obligation. At issue in this case was the point at which that obligation came into force. Henry argued that its obligation to pay Alu-Fix came into force once its PLNs had been deemed invalid through the SGA, with which it complied while TVA proceedings were ongoing. Alu-Fix contended that the obligation had been “there all along”, thus preventing Henry from commencing TVA proceedings and nullifying the TVA adjudicator’s decision.
The court ultimately sided with Alu-Fix, finding that Henry had not been entitled to commence the TVA before complying with its immediate payment obligation – which was “there all along”.
The judgment doesn’t entirely close the door on the commencement of TVA proceedings prior to the outcome of an SGA. The judge noted that a TVA commenced before the determination of an SGA may be enforced, if the SGA adjudicator ultimately finds that a valid PLN was issued.
However, the court’s finding that immediate payment obligations can arise prior to an SGA decision should sharpen employers’ and contractors’ minds when it comes to commencing TVAs without a solid smash-and-grab defence.
The judgment is likely to act as a deterrent to companies initiating TVAs without complete confidence in the outcome of an SGA, as compounding costs and payment obligations in the event of an adverse finding can have calamitous results, as Henry’s downfall has shown.