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Adjudication Matters – April 2018

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06/04/2018

Going out with a bang! Coulson J delivers a significant blow to the use of “smash and grab” adjudications in final TCC judgment

Grove Developments Limited v S&T (UK) Limited [2018] EWHC 123 (TCC)

In his final decision before his appointment to the Court of Appeal, Mr Justice Coulson in Grove Developments Limited v S&T (UK) Limited departed from a well-established body of case law relating to payment notice disputes, which may (if followed in the future) have significant implications for the application of “smash and grab” adjudications going forward.

“Smash and grab” adjudications – What are they?

Prior to Grove, the cases of ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC), set out that where the employer fails to serve a valid payment notice or pay less notice, the employer is deemed to have agreed the value of an application for payment and may not subsequently adjudicate on the substantive value of that application.

This led to a growth in “smash and grab” style adjudications, whereby the party seeking payment could automatically obtain an adjudicator’s decision for the amount stated in its interim application, even if the amount claimed did not reflect the true value of the works carried out. As a result, the paying party would be unable to dispute the true value of the interim payment, and any payment over and above the true value could not be rectified until a subsequent interim certificate or on the final account (which could be many months later).

Coulson J’s judgment in Grove departed from this established line of case law to entitle the paying party to challenge the “true value” of a contractor’s interim payment in a subsequent adjudication. However importantly the paying party must still make payment of the application amount i.e. “pay now and argue later”.

Background

Grove Developments Limited (Grove) engaged S&T (UK) Limited (S&T) to design and build a new Premier Inn Hotel at Heathrow for £26,393,730.04 under the JCT Design and Build Contract 2011 (the Contract).

A number of disputes arose during the Contract (which led to three adjudications). The third adjudication concerned the validity of Grove’s pay less notice of 18 April 2017. The adjudicator found that the pay less notice was invalid and that S&T were entitled to be paid in excess of £14,000,000.

When Grove failed to pay the decided amount, S&T commenced enforcement proceedings. At the same time, Grove started Part 8 Declaratory Relief proceedings to determine (amongst other issues) whether, in principle, Grove was entitled to commence a separate adjudication seeking a decision as to the ‘true value’ of the interim application.

The Court’s decision

In his judgment, Coulson J. departed from the established rulings in ISG Construction and Galliford Try and held that (following payment of the interim payment) (“pay now”) Grove was entitled to commence a separate adjudication (“argue later”) seeking a decision as to the ‘true value’ of the interim application.

The judge set out 6 key reasons for reaching this conclusion:

  1. A court (and importantly, any adjudicator) could decide any subsequent dispute as to the ‘true valuation’ of an interim application – applying Henry Boot Construction Limited v Alstom Combined Cycles [2005]1 WLR 2850.
  2. There was no statutory limitation (for either the court or an adjudicator) on the nature, scope and extent of a dispute which either side could refer to an adjudicator.
  3. There was no restriction of referring the “true valuation” to a subsequent adjudication as the issues raised in the previous adjudication (i.e. whether the payment/pay less notice were valid) was entirely different to those raised in the third (i.e. the ‘true value’ of the interim application).
  4. The words of the Contract were “of the utmost importance”. Coulson J considered that the Contract here differentiated between “the sum due” (the sum calculated using a mechanism designed to calculate the ‘true value’) and “the sum stated as due” (i.e. the sum stated in the interim application). Having paid “the sum stated as due”, the paying party can adjudicate on the “true value” of the other party’s interim application.
  5. If a party seeking payment could “launch an immediate attack” because they dispute the value, it would only be fair in principle to allow the paying party to do the same.
  6. There is no contractual basis for drawing a distinction between interim and final applications (where the employer could dispute the “true value” of a final payment application: Harding (t/a M J Harding Contractors) v Paice and another [2015] EWCA Civ 1231). The Contract treated both interim and final payment in the same way, and Coulson J concluded that the parties, therefore, should do the same.

Implications

The intention behind the judgment is clear: to reduce the practice of “smash and grab adjudications” but whether or not Coulson J’s judgment has the desired effect remains to be seen and the jury is out as to how this decision will affect the adjudication landscape.

Given that the ruling is a significant departure from two eminent TCC cases in ISG and Galliford Try, there is still yet a possibility that any subsequent judgment concerning this area could return to the previous ISG position rather than Coulson J’s new Grove approach.

If followed, the decision can be seen as good news for paying parties who, can now challenge the true value of an interim application once payment of the application is made.

However, as the Grove ruling only allows for a ‘valuation’ adjudication to occur after payment of the application has been made, it is likely that “smash and grab” adjudications will continue to be a popular choice of recourse for parties seeking to improve their cash flow, unless and until a suitable alternative is created.

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