Could a company dispute a debt arising by virtue of the payment provisions of the Housing Grants Construction and Regeneration Act 1996 (as amended) in the absence of a pay-less notice. If so, was there a genuine and substantial cross-claim exceeding the petition debt.
The debtor (“R&S”) was a specialist fire suppression sub-contractor; the petitioner (“FD”) was sub-sub-contracted to design and install sprinkler systems. The contract was said to be on a bespoke form provided by the Main Contractor; the contract provided for interim payments but there was a dispute as to whether the provisions complied with the requirements of the Housing Grants Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009 (“the Act”).
FD made 3 successive applications for payment. The first was paid without withholding but was paid late; the second was challenged by way of an e-mail within the timeframe for issuing a pay-less notice and the third was unchallenged and unpaid. FD issued a statutory demand that went unanswered and presented a winding up petition based on payment application No3.
FD argued that the provisions of s110B of the Act meant that in the absence of a payment notice from R&S, its own payment application No3 stood as a default notice; if R&S wished to pay less than the sum claimed in the application it was required to issue a pay-less notice and were indisputably due and owing. Absent a genuine and substantial cross-claim, there could be no defence to the petition.
R&S contended that there had been a series of complaints about FD’s performance and that it was entitled to dispute the debt itself. In the alternative, R&S argued that it had terminated FD’s contract as a result of FD’s breaches and alleged that it had a cross-claim that overtopped the petition debt. FD countered that the termination was clearly in breach of a "stand-still agreement" whereby FD had agreed not to suspend works under s112 of the Act and R&S agreed not to terminate; FD further argued that there was no substance to the cross-claim and that the evidence presented could not satisfy the requirement of arguability.
There were a number of ancillary issues relating to the incorporation of the Main Contractor’s terms and the effect of those terms; however, they played no part in the decision.
- In the absence of any payment notices from R&S, the provisions of s110B of the Act allowed FD’s payment applications to stand as default notices. If R&S wished to pay less than the sums notified it was required to issue a pay-less notice pursuant to s111. R&S did not challenge payment application No3 and was therefore obliged to pay regardless of whether issue had been taken with previous applications.
- S111 of the Act obliged R&S to pay the sums due without any deduction regardless of any alleged defence based on defective workmanship. As the relevant debt was due and payable, FD was a creditor with locus standi to present the winding-up petition. The decision of David Donaldson QC in Re: A Company 1299 of 2001  CILL 1745, referring to the effect of the original withholding notice provisions under the Act, was correct and, in the absence of a pay-less notice the debt was not capable of being disputed.
- It was nevertheless permissible for R&S to assert a genuine and substantial cross-claim (Re: Bayoil  1 WLR 147 considered) unless there were “special circumstances” which precluded the Court from considering such a cross-claim.
- It was common ground that the "pay-now, litigate later" regime imposed by the Act did not create such "special circumstances" and that approach was consistent with the judgments in Guardi Shoes Ltd v Datum Contracts (28 October 2002, Unrep, ChD), Medlock Products Ltd v SCC Construction Ltd  CILL 2384, Shaw v MFP Foundations & Piling Ltd  2 BCLC 85 and was also consistent for the reasons set out by HHJ Davies in Shaw v MFP at  with other "pay now, litigate later" regimes outside the construction sphere.
Whilst FD’s case in relation to the breach of the standstill agreement was strong, with a degree of hesitation the Court held that there was sufficient merit in R&S’ position that it could not be dismissed "out of hand" and in the circumstances the court held that there was a genuine and substantial cross-claim.
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