By Legal Futures Associate dospay
What is ‘pay now, argue later’?
Robert Fenwick Elliott is credited with coining the phrase ‘pay now, argue later’ in the context of construction operations as he advised Lord Howie in early 1996 on how the statutory adjudication process (which came to exist in the Construction Act 1996) should work.
The principles he based this on were straightforward:
- Construction projects run for many months, or even years;
- Disputes can also take many months, or even years;
- Construction margins are small, so the ‘free cash’ in the system is small;
- Disputes are costly;
- Disputes can therefore readily derail a construction project, because they can tie up what little spare cash exists in the system.
The solution, therefore, was for an expedited dispute resolution process which would be binding on the parties and get money flowing in the construction project again, all subject to later detailed argument in the courts if either party considered itself hard done-by.
Construction Adjudication & ‘Pay Now, Argue Later’
The process calls for a tight (28-day) timetable, designed to get the money flowing again as quickly as possible. This can be extended by 2 weeks at the Referring Party’s (the claimant – often the party who hasn’t been paid) option, or longer with both parties’ consent. In the event that the losing party doesn’t pay what the adjudicator says they should pay, there is an expedited enforcement process in the Technology and Construction Court (TCC) that provides for enforcement within approximately 28 days.
In summary, therefore, if the Employer is directed to pay by an adjudicator, and does so, the Contractor will have had to wait:
- the full duration of the payment cycle;
- sufficient time for a ‘dispute’ to have arisen in respect of the non-payment;
- the time required for the nominating body to appoint an adjudicator;
- the time required to prepare and serve its Referral Notice;
- 28 days (or 42 days, or longer) for the adjudication process; and
- any time for the Employer to pay if so directed.
That’s already quite a period. If the Employer is disgruntled (or can’t pay), then it may drag its feet further – requiring the Contractor to carry out enforcement proceedings in the court – and so to this can be added up to another 4-6 weeks.
In total, therefore, from the due date to the ‘money in the bank’, the period could be anything from 10 weeks to 3 months, depending on the terms of the contract and the goodwill of the Employer (who, remember, didn’t pay in the first place).
Given the wafer-thin margins in construction, the reality of this some 28 years after first coined is that it isn’t quite fit for purpose.
The State of Adjudication in 2023-24
In November 2023, Kings College London produced its second construction adjudication report – widely heralded as an accurate and informative ‘state of the nation’ with regard to construction adjudication (and building on the excellent work of the first report), some of its contents were quite alarming:
- The total cost of an adjudication is between £20,001 and £30,000 (excluding each party’s legal fees and management time);
- the vast majority of adjudications were for a sum between £500,000 – £2m;
- only 12% of those questioned said that most adjudications they are involved with settle within 28 days
It’s clear, therefore, that in 2024 we are looking at a situation more akin to ‘pay late, argue even later’, which can have significant consequences for the viability of the build and completion of the project…
How can a construction escrow account help the parties?
- An arbitrary amount (usually, 3 months’ of forecast valuations) is deposited with an independent escrow agent in an agreed, segregated, ring-fenced bank account at the beginning of the project;
- If the Employer doesn’t pay on time against a Payment Notice issued by the contract administrator (either because it cannot, or because it does not wish to), the Contractor can present the Payment Notice to the escrow agent and be paid immediately;
- The parties can still choose to adjudicate (by which time, in almost all circumstances, the Contractor will have ‘caught up’ with the payments made by carrying out further work), though it is not likely to be commercially interesting to them;
- The Employer must then top up the escrow account to bring it back to the agreed level or the Contractor may suspend works until the Employer has done so.
How much does a construction escrow account cost?
The benefits of this to any project are clear, but there is also a clear commercial benefit – the cost of escrow accounts is considerably lower than the cost of adjudication – Contractors will generally (rightly) argue for including the costs in the contract preliminaries as a cost of the project (as quid pro quo to the cost of performance bonds and advanced payment bonds).
The below-the-line commercial benefits should not be understated either. Savvy Contractors will always include a risk factor in their tenders based on the profile of the Employer and their perception of the chance of payment delinquency – with a construction escrow account in place, this risk doesn’t need to be costed into the project.
Where can you get a Construction Escrow Account?
dospay, a Certified B Corp, offers escrow accounts in the UK for projects of any size and is able to work with complex Employers (including trusts, offshore structures and PEP’s) to open accounts promptly. They also offer fast, free, no-obligation quotes.