GRAB THE CASH, ADJUDICATE LATER [November 2018]
In March 2018, we wrote about the case of Grove Developments v S&T, in which The Hon Mr Justice Coulson held that an employer whose payment notice or pay less notice was deficient or non-existent could, by way of an adjudication, dispute that the sum paid was the ‘true’ value of the works for which the contractor had claimed.
Our article finished with the question “Is this the end of “smash and grab” adjudications?”. While we concluded that Mr Justice Coulson did not think so, the door was very much ‘left open’ as to: (1) whether S&T would appeal the judgment, the effect of which was to permit Grove Developments to commence a separate adjudication as to the ‘true’ valuation of S&T’s interim application for payment number 22; and (2) the way in which going forward the courts would respond to Mr Justice Coulson’s judgment.
Well…S&T did appeal and, eight months on, the Court of Appeal has handed down its judgment dismissing the appeal.
Was Grove Developments’ purported Pay Less Notice valid and effective?
Grove Developments’ Pay Less Notice was valid and effective because it did “specify” the basis on which the valuation figure of £0.00 had been calculated.
Sir Rupert Jackson’s view was that it was neither tenable to say that reference to other documents is always permissible nor to say that such reference is never permissible. It is a question of fact and degree in each case whether the purported pay less notice achieved the requisite degree of specificity.
Is a party entitled to pursue a claim in adjudication to determine the correct value of the works on the date of an interim application for payment?
Despite his finding on this issue being academic as a result of deciding that Grove Developments’ pay less notice was valid and effective, Sir Rupert Jackson acknowledged that, while “The payment regime and adjudication regime which that legislation [Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”)] introduced now play a critical role in the functioning of the construction industry”, the issue as to whether a party is entitled to pursue a claim in adjudication to determine the correct value of the works on the date of an interim application for payment is of great importance to the construction industry in circumstances were, he says, there are conflicting decisions of High Court judges.
In analysing that issue, Sir Rupert Jackson suggested that the employer’s payment obligation at an interim stage can be categorised as “immediate” rather than “primary”. That is because section 111 of the HGCRA is concerned with cash flow and immediate payments.
Sir Rupert Jackson then went on to consider the six reasons set out in Mr Justice Coulson’s decision, in relation to which he made the following comments:
The HGCRA (as amended) does not make the sums payable at interim stages conclusive as to the correct valuation of work done, thereby rendering a justifiable issue between the parties if it is disputed. The wide powers of the court (and in consequence of the adjudicator) permits opening-up and revising the sums shown as due in an interim application in any case where the interim application determines what is payable.
Two answers were given in relation to the argument that there is no express provision in the HGCRA or the Scheme for Construction Contracts (the “Scheme”) enabling adjudicators to review interim applications in the absence of a payment notice or pay less notice. Firstly, paragraph 20 of the Scheme on its face is wide enough to do that. Secondly, there is no express power in the HGCRA or the Scheme for the contractor to challenge the employer’s payment notice or pay less notice in adjudication but it is accepted that such a power exists. In particular, section 111(8) of the HGCRA presupposes the existence of such power.
The interim application, the payment notice and the pay less notice are three documents, one of which will trigger the operation of section 111 of the HGCRA. That section generates an obligation to pay the notified sum before the final date for payment. It does not transmute the sum notified by one of those three documents into a true valuation of the work done.
Mr Justice Coulson’s fourth reason distinguished between “the sum due” and “the sum stated as due”. In Sir Rupert Jackson’s view, that distinction was a helpful one. The payment bargain dictates what must be paid immediately. The valuation bargain sets out the process for reviewing and adjusting the payments which have been made.
There is a problem with the argument that an employer only has himself to blame if he misses the two chances to present his own valuation by failing to serve a timeous payment notice or pay less notice. That is because the employer may have very little time (for example, 10 days under the Scheme) to carry out a complex valuation, leading to a rushed process which cannot sensibly lead to a definitive valuation of the work at any particular date. The notice provisions are simply intended to generate a provisional figure for immediate payment, behind which the adjudication provisions stand to facilitate a more detailed valuation of the work if it is necessary. Behind adjudication stands, subject to the contract, litigation or arbitration if either party is dissatisfied with the adjudicator’s evaluation.
The wording of section 111 of the HGCRA applies to both interim and final certificates.
Mr Justice Coulson’s six reasons supported Sir Rupert Jackson’s view that the employer, having failed to serve a payment notice or pay less notice, is nevertheless entitled to adjudicate to determine the true value of an interim application.
Implications of the Court of Appeal’s decision
Having agreed with the decision of Mr Justice Coulson, Sir Rupert Jackson turned to the practical aspects of the Court of Appeal’s judgment and answered the following questions:
How can an employer recover any overpayment made at the interim stage?
In many cases, this can be done as an adjustment at the next interim payment.
Alternatively, an adjudicator can order a repayment of any amounts he finds were overpaid at the interim stage. That is because the parties have agreed (albeit under statutory compulsion) that the adjudicator should have jurisdiction to deal with disputes between them, including any dispute concerning the correct valuation of the work. Having determined the true value of the works at an interim stage, the adjudicator (whose powers are co-extensive with the powers of the court in matters such as this) must be able to give effect to the financial consequences of his decision.
When can an employer exercise his right to dispute by adjudication the valuation contained in an interim application, despite the absence of any payment notice or pay less notice?
The answer is that the employer can only exercise that right after he has paid the notified sum. Some may seek to argue that that answer flies in the face of section 108 of the HGCRA and is a fetter to a party’s right under that section to refer a dispute to adjudication at any time. Sir Rupert Jackson’s view was that the HGCRA cannot sensibly be construed as permitting the adjudication regime to trump the prompt payment regime, thereby rendering the adjudication provisions subordinate to the payment provisions in section 111.
The Court of Appeal’s decision has, most certainly, hacked “out a pathway through a dense thicket of amended legislation, burgeoning case law and ever-changing standard form contracts” in clarifying that Mr Justice Coulson was correct to decide as he did. That said, the same decision, in particular as to the timing of an employer’s right to proceed to adjudication, raises further questions within the construction industry. Does Sir Rupert Jackson’s decision in that regard give rise to a new jurisdictional challenge if an employer starts an adjudication before paying the ‘notified sum’? Is there an ‘immediate’ payment obligation if the employer contends that it issued a valid payment or pay less notice? Does a second adjudicator lack jurisdiction to decide the ‘true’ value of part of the works (rather than the whole of the works) in circumstances where there is already a “smash and grab” adjudication on foot?
Only time will tell if the Court of Appeal’s decision has created a new thicket for the industry to hack through…In the meantime, the best advice is to ensure your payment notice or pay less notice is valid and issued at the right time.
Case: S&T(UK) Ltd v Grove Developments Ltd
This article and/or any information contained herein is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking, or refraining from, any action as a result of the contents of this article.