‘Pay now, argue later’ still stands its ground

Theresa Mohammed and Stephanie Geesink on the implications of a recent dispute decision.

Theresa Mohammend (l) and Stephanie Geesink

In a recent decision of the Technology and Construction Court, we are reminded of the Court’s reluctance to interfere with an adjudicator’s decision. In the case of RMC Building & Civil Engineering Limited v UK Construction Limited [2016] EWHC 241 (TCC) the Court has enforced the adjudicator’s decision for payment of a largely unpaid application, and refused
a stay in enforcement.

RMC was engaged by UKC to supply labour, plant and materials for the installation of groundworks and drainage for a housing project in Arlesey, Bedfordshire. On 6 May 2015 RMC submitted Application No 8 for payment claiming £248,053, UKC did not serve a pay less or payment notice.

However, in May and June 2015, the parties met to discuss the account, and on 16 July 2015 RMC submitted an amended application stating £124,821.14 was due.

On 6 August 2015, RMC wrote to UKC stating that if the parties were unable to reach an agreement on the account, RMC reserved the right to “pursue all remedies available to us under the contract to recover these outstanding monies and any additional associated costs”.

By an email dated 1 September 2015 RMC suggested that it would again be willing to accept a reduced amount, asking UKC to “ensure the balance of £85,454.26 currently outstanding for payment is paid within 7 days from the date of this email”. No agreement was reached and, notwithstanding a small payment on account, the sum claimed in Application No 8 remained unpaid.

On 30 September 2015 RMC issued a notice of adjudication, claiming that it was entitled to be paid the difference between the £248,053 and the payment made on account. Despite UKC making arguments as to the existence of a dispute and the adjudicator’s jurisdiction, the adjudicator found in favour of RMC and ordered UKC to pay the balance of Application No 8, being £216,129. UKC did not pay and RMC commenced enforcement proceedings.

Despite UKC raising various arguments to resist enforcement, the adjudicator’s decision was enforced and no stay in execution was awarded for what many would view as manifest injustice. 

Not surprisingly, one of the integral arguments raised by UKC was that there was no dispute, as Application No 8 had been withdrawn as part of the negotiation process and superseded by RMC’s correspondence on 16 July and 1 September 2015. UKC went on to argue that even if Application No 8 was not withdrawn, RMC’s claim could not exceed £85,450.26 as per the statement made in RMC’s email of 1 September 2015, which UKC said it relied on to its detriment.

However, the Court found the relevant exchanges to be “part and parcel of a continuing attempt to ‘reach an agreement’ about the value of the works completed up to 30 April 2015”. Accordingly, they were protected by the “without prejudice rule” and any admissions made by RMC “should not have been put before the adjudicator in the first place and cannot be relied on by UK Construction in these proceedings as admissions against interest by RMC”. 

Stay of execution: manifest injustice?

UKC also argued that enforcing the adjudicator’s decision would amount to a manifest injustice. Its arguments, among others, were that the sum would constitute a windfall which would adversely affect UKC’s cash flow and potentially cause significant damage; that any overpayment could not be remedied in subsequent interim certificates, and that the injustice to UKC would greatly outweigh any detriment suffered by RMC which could be compensated by a subsequent award of interest.

In making these arguments UKC was relying on the decision in Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC). In Galliford, the contractor submitted a large interim application of around £4m towards the end of the contract, and the process for the payer to recovering these sums by way of a Final Statement was a process that would take many months if the contractor was not under any incentive to move quickly.

Estura argued that its cash flow would be harmed, and the judge agreed, staying the execution of the award above £1.5m.

However, the Court quickly distinguished this case from Galliford stating that there were no similar circumstances that disadvantaged the payer, and nothing to stop UKC issuing proceedings forthwith for a determination of the true amount to RMC.

Note to practitioners

It is not uncommon for parties to a construction contract to engage in discussions or negotiations on a disputed application, but this case reminds us that any such exchanges are likely be considered to be “without prejudice”, whether expressly headed as such or not, and can therefore not be relied upon in adjudication or Court proceedings.

The paying party should note this decision and ensure it always issues the relevant pay less or payment notices, even if amended applications have been issued and negotiations are ongoing.

Practitioners are also reminded of the Court’s warning in respect of the manifest injustice argument in Galliford that the facts in that case were exceptional and the course adopted by the Court “will be appropriate only in rare cases”.

Following on from Galliford, the decision in this case makes it clear that the Court will not easily find such rare cases, and so the status quo of “pay now, argue later” will be preserved in all but the most exceptional of circumstances.

Theresa Mohammed is partner and Stephanie Geesink a solicitor in the dispute resolution and litigation department at law firm Trowers & Hamlins