In Henry Construction Projects Ltd v Alu-Fix (UK) Ltd [2023] EWHC 2010 (TCC) the court confirmed that a valuation (or “true value”) adjudication can only be commenced or relied on when the paying party has complied with its immediate payment obligation.

This article summarises the court’s decision in Henry v Alu-Fix and gives some general guidance for parties to construction contracts.

Background

In June 2021, Henry Construction Projects Ltd (“Henry”) engaged Alu-Fix (UK) Ltd (“Alu-Fix”) to carry out some works at a hotel project in London.

On 15 November 2022, Alu-Fix issued a payment application for around £257,000 plus VAT (the “PA”). The final date for payment of the PA under the sub-contract was 13 December 2022.

By 13 December 2022, Henry had not paid the sum under the PA and so, on 15 December 2022, Alu-Fix referred the dispute as a notified sum (or “smash and grab”) adjudication.

On 18 January 2023, while the smash and grab adjudication was ongoing, Henry referred a true value dispute regarding the PA to adjudication, claiming a repayment of around £235,000 plus VAT from Alu-Fix.

On 27 January 2023, the adjudicator in the smash and grab adjudication decided that Henry should pay Alu-Fix the sum in the PA. The true value adjudication was stayed pending payment of that sum and recommenced on 2 February 2023.

On 6 March 2023, the adjudicator in the true value adjudication decided that Aluf-Fix should repay Henry around £191,000 plus VAT. Henry applied to enforce the true value decision.

Relevant law and parties’ positions

The judge started by setting out the relevant legal principles, which are summarised in Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC) (at [76]) as follows:

i) where a valid application for payment has been made, an employer who fails to issue a valid Payment Notice or Pay Less Notice must pay the 'notified sum' in accordance with section 111 of the 1996 Act;

ii) section 111 of the 1996 Act creates an immediate obligation to pay the 'notified sum';

iii) an employer is entitled to exercise its right to adjudicate pursuant to section 108 of the 1996 Act to establish the 'true valuation' of the work, potentially requiring repayment of the 'notified sum' by the contractor;

iv) the entitlement to commence a 'true value' adjudication under section 108 is subjugated to the immediate payment obligation in section 111;

v) unless and until an employer has complied with its immediate payment obligation under section 111, it is not entitled to commence, or rely on, a 'true value' adjudication under section 108.

The judge also summarised the parties’ respective positions, as follows:

• Henry said that the adjudicator in the true value adjudication did have jurisdiction, because it paid the sum in the PA after the smash and grab decision. Henry also said that there was no immediate payment obligation due to a “genuine dispute” regarding the validity of a pay less notice apparently issued on 25 November 2022.

• Alu-Fix contended that the true value adjudication was commenced before Henry had paid the notified sum (being the sum in the PA) and therefore the adjudicator in the true value adjudication did not have jurisdiction. Alu-Fix said that an immediate payment obligation had been “there all along” and that Henry’s attempts to retrospectively save the true value adjudication should not succeed.

The court’s decision

The judge stated that the key issue in the case was identifying the date of Henry’s immediate payment obligation for the PA. If the obligation arose before 18 January 2023 (the date that Henry commenced the true value adjudication), then Henry should not have commenced and could not rely on the true value adjudication.

The judge agreed with the adjudicator in the smash and grab adjudication that the final date for payment of the PA was 13 December 2022.

The judge also said that:

• His decision above was a restatement of the facts as they existed at the time and not a retrospective decision that the true value adjudicator did not have jurisdiction.

• Henry’s “genuine” dispute argument risk subverting the “pay now and argue later” policy underlying the Housing Grants, Construction and Regeneration Act 1996 because, if allowed, it would allow a true value adjudication to start where there was a notified sum all along. The judge reiterated that, if a paying party genuinely disputes a sum claimed, it can issue the appropriate notices.

Considering the above, the judge dismissed Henry’s application for summary judgment.

The judge concluded by stating that:

[…] the outcome in this case, whilst not closing the door on commencing a [true value adjudication] prior to the outcome of an [smash and grab adjudication] and later relying upon the outcome, ought to discourage such a course in areas of spurious [smash and grab adjudication] dispute, but not deter those who have a sufficient level of confidence that any dispute raised should result in a finding of no immediate payment obligation having been established.

Summary and practical tips

Henry v Alu-Fix reaffirms the position in S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448 and following cases, namely that that a true value adjudication can only be commenced or relied on when the paying party has complied with its immediate payment obligation.

As suggested by the judge in Henry v Alu-Fix, parties should issue valid and timely applications and payment notices. Any arguments regarding a “genuine dispute” where the relevant notices have not been issued are likely to fail.

Following the judge’s concluding remarks, a paying party can commence a true value adjudication if it is confident that there was no notified sum. That conclusion will require an analysis of the contract and any notices issued.