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A constructive development for employers to construction contracts?

Contract with magnifying glass and pen Print publication

16/04/2018

A significant judgment in Justice Coulson’s final case in the TCC before heading off to the Court of Appeal (Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC, [2018] All ER (D) 08 (Mar)) has allowed an employer to challenge, by way of further adjudication, the amount due to a contractor in respect of an interim application (by reference to the true value of the works). This was despite the fact that an earlier adjudication had determined that Grove’s pay less notice was invalid. On the basis of previous case law (including the ISG v Seevic and Galliford Try v Estura case), S&T would ordinarily have been entitled to be paid in excess of £14 million on the basis of its interim application irrespective of the “merit” of such application and leaving the payer with little comeback until subsequent interim valuation or at final account stage.

This case marks a considerable shift from the previous position under TCC authorities such as ISG where if a paying party under a construction contract failed to give a payment or pay less notice, it was deemed to have agreed to the amount stated in the contractor’s interim payment application. It was made clear in the judgment that the failure to issue a valid notice does mean that the payer still has to pay the full amount of the application (the Notified Sum) in the first instance.  However, the payer can subsequently commence a further adjudication to seek a declaration on the ‘true value’ in adjudication.

Other issues addressed

The court also held that a pay less notice was valid even though it specified the basis of calculation by reference to an earlier document, and that the employer’s notices in respect of liquidated damages were valid under the contract (in this case, a JCT Design and Build Contract 2011).

Background

Grove, a developer (and employer under a JCT contract), appointed S&T as contractor to build a Premier Inn hotel at Heathrow Airport.

The chain of events was as follows:

  • S&T sent Grove interim payment application 22, which was the last interim application prior to the final account. The amount of the application was £39 million, up £14 million from the previous certificate. It was accompanied by a detailed spreadsheet.
  • Grove sent S&T a payment notice, to which the same spreadsheet was attached but with Grove’s detailed assessment/valuation added. It was accepted that this payment notice was not valid as it was not served in time under the contract.
  • Grove sent S&T a pay less notice, which stated the amount due to S&T was £0. The pay less notice referred to the payment notice by way of explanation as to how this sum had been calculated. The pay less notice was in time, but S&T argued that it was not valid as it did not re-attach the spreadsheet and therefore did not in fact ‘specify’ the basis upon which the pay less notice was calculated as required by clause 4.10.2.1 of the contract.
  • S&T referred the matter to adjudication and argued that as the pay less notice was invalid, Grove was required to pay the amount stated in S&T’s interim application.

Issues for the court to determine

The issues that the court was required to determine included:

  • Was the payless notice valid?
  • If it was valid, should the adjudication, nonetheless, be enforced?
  • Whether Grove could commence a separate adjudication on the ‘true’ value of interim application 22?
  • A secondary issue arose whereby the court was asked to determine whether notices in respect of liquidated and ascertained damages (LADs) had been properly issued by Grove.

Outcome

  • Yes – the pay less notice did comply. The basis upon which a sum stated as due in a payment and/or pay less notice can be by reference to documents served separately (i.e. in this case by reference to the spreadsheet attached to the invalid payment notice).
  • No – the “only permissible consequence” of finding that Grove’s pay less notice was valid, was that the adjudicator’s decision should not be enforced.
  • Yes – contrary to ISG, an employer can start another adjudication concerning the correct value of the sum due and should not be deemed to have accepted the valuation as a result of a failure to serve a payment or pay less notice. If an adjudicator finds that there has been an overvaluation, he can order repayment even if there is no express provision for repayment, such as where the interim payment regime under a JCT contract applies.
  • The court rejected S&T’s argument that the deduction notice was invalid due to it having been sent a few seconds before the warning notice. The contract required separate notices to be sent and for them to be sent in the right order, however, there was no requirement regarding timing.

Implications

At first glance, the judgment could be interpreted as the end of smash and grab adjudications. A number of commentators appear to have reached this conclusion.

Coulson J states that he does not, “consider that the conclusions which I have reached strike at the heart of the adjudication system. On the contrary, I believe that it will strengthen the system because it will reduce the number of ‘smash and grab’ claims which, in my view, have brought adjudication into a certain disrepute.”

It remains to be seen whether this will be the case. Whilst this judgment has offered clarity and provides some comfort to payers under construction contracts that a failure to serve a valid pay less notice is not necessarily as disastrous as it may have been previously, payees may continue to see the merit in attempting to obtain payment in the absence of a valid notice and then use any decision in their favour as a means by which to negotiate with the payer.

Further, if Grove is followed, an employer will not be able to commence its own adjudication until it has paid the “sum stated as due” under the smash and grab adjudication. This could mean that ‘smash and grab’ adjudications remain popular for cash flow purposes.

Irrespective, this case has significantly departed from the position under ISG which Coulson J confirmed to be “erroneous and/or incomplete” and should therefore be viewed positively by payers.

However, there remains uncertainty arising out of the above, if a payer loses a smash and grab adjudication but has a valid jurisdictional point to run to resist enforcement, are they entitled to run the valuation adjudication before the courts have dealt with the enforcement proceedings. Preventing the payer from commencing an adjudication would fetter the right to refer a dispute to adjudication however the commencement of a valuation adjudication would appear to breach Mr Coulson’s judgment.

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