06 Mar 2018

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

In what appears to be his final significant judgment in the Technology and Construction Court (TCC), Mr Justice Coulson has sought to clarify the position on what have come to be known as "smash and grab" adjudications. 

This latest judgment addresses whether an Employer is entitled to commence a second adjudication for the 'true value' of an interim application where it failed to serve a valid Payment or Pay Less Notice. Previous decisions of the Court had decided that in the absence of such a valid notice, the Employer was deemed to have agreed the sum due. 

Coulson J's conclusions indicate a significant departure from the previous authorities from the TCC. A line of authorities commencing with ISG v Seevic [2014] EHWC 4007  had held that an Employer was unable to commence a separate adjudication for the true value of the same application, where a first adjudication had determined that a Contractor was entitled to payment of its application due to the failure to serve the requisite notices. 

Previous case law had distinguished between the ability to adjudicate the true value of an interim application, and a final application (Galliford Try Building Limited v Estura Limited [2015] EWHC 412 (TCC)). In a detailed judgment which considered the previous authorities from the TCC and the Court of Appeal, Coulson J signified the end of the practice now common in the industry, referred to as the "smash and grab" adjudication, whilst expressing his dissatisfaction with these types of claim:

"I believe that [my conclusions] 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 amount of disrepute."

Background

Under a JCT Design and Build 2011 Contract (the Contract), Grove Developments Limited (Grove) were the Employer and engaged S & T (UK) Limited (S&T) as Contractor for the design and build of a new Premier Inn Hotel at Heathrow Terminal 4. 

The first adjudication between the parties found that a Schedule of Amendments formed part of the Contract. The second adjudication decided S&T's entitlement to an extension of time and the third adjudication decided that Grove's Pay Less Notice of 18 April 2017 was invalid and Grove were due to pay S&T over £14 million. 

Grove had commenced Part 8 proceedings prior to receipt of the third adjudicator's decision. Coulson J summarised the issues he was being asked to decide as follows:

A) Whether Grove's Pay Less Notice complied with the requirements of the Contract.

B) Whether, even if the Pay Less Notice was valid, the adjudicator's decision in the third adjudication should still be enforced.

D) Whether, in principle, Grove was entitled to commence a separate adjudication as to the 'true' value of the S&T's interim application. 

E) Whether Grove's notices in respect of liquidated damages had been properly issued.

 
Issues A and B – The Pay Less Notice

The conclusions of the Judge on issues A and B provide clarification on requirements for effective service of a Pay Less Notice. The judgment details the reasoning for Coulson J's decision that the Pay Less Notice complied with clause 4.10.2.1 of the Contract and was validly served. 

S&T had argued that the Pay Less Notice was not compliant as it referred to a previous spreadsheet for the breakdown of the value and that spreadsheet had not been appended to the Pay Less Notice. As it was accepted that the Payment Notice was out of time, S&T, as many contractors have done since the development of the line of authorities from ISG, were seeking payment in full of the sum stated in its application. 

In considering previous authorities on this point, Coulson J dismissed S&T's arguments that Grove's Pay Less Notice had failed to specify the amount due.

It was said that the question of whether a Pay Less Notice is compliant is a matter of "fact and degree". Coulson J also clarified that though there had been a "hint" in previous authorities that an Employer's Pay Less Notice might be construed more generously than a Contractor's interim application, there should not be a difference in approach. 

Arguments from S&T were dismissed that posed hypothetical situations that might arise from a finding that a Pay Less Notice could be compliant where a breakdown was not attached. The Judge dismissed these "fanciful factual scenarios"  in concluding that "on the facts of this case, the reasonable recipient would have known precisely what sum was being deducted and the basis of its calculation"

Issue C – The right to adjudicate the 'true value'

The conclusions reached on this issue will be of the most interest to the construction industry and represent a change of approach from the previous authorities. 

Given that Coulson J had concluded that the Pay Less Notice was effective, Grove were not obliged to pay the sum stated as due in S&T's application and there was no requirement for this issue to be considered. However, the Judge took the opportunity to set out his detailed analysis in any event. In doing so, Coulson J made clear that though not necessary to this case, his comments were not obiter. 

Coulson J was clear that an Employer can commence a second adjudication to seek the "true value" of the sum due where it has failed to serve an effective Payment Notice and/or Pay Less Notice to the Contractor's application. He gave six reasons for his decision:

  1. The early case authority of Henry Boot [1]  noted that it had always been open to the Court to revise architect's certificates and this was authority for the Court's ability to consider the "true" value of an interim payment application. 
  2. That on interpretation of the Construction Act and the Scheme for Construction Contracts there was no "limitation on the nature, scope and extent of the dispute which either side can refer to an adjudicator" and as such there is no limit or restriction on the power of an adjudicator to decide this issue. 
  3. A second adjudication to consider the "true value" would be a different dispute to the validity of a Pay Less Notice as decided in the first adjudication as it would address questions of valuation. 
  4. The Contract differentiated between "the sum due" (Clause 4.7.2) as contained in the Contractor's Interim Payment application and "the sum stated as due" (Clause 4.9) in the Payment Notice or Pay Less Notice. Should the Employer fail to issue a Payment Notice and/or a Pay Less Notice, the Contract provided it would have to pay "the sum stated as due" which does not "magically transform" into the sum due. In these circumstances an Employer would be obliged to pay "the sum stated as due" and is then entitled to commence an adjudication for the true value of the interim application. 
  5. As a matter of equality and fairness, and as envisaged by sections 111(8) and (9) of the Construction Act, the Employer's ability to adjudicate the true value of the application must be balanced with the Contractor's ability to do likewise. It would be wrong to prohibit the Employer from doing that which the Contractor can do. 
  6. There is no justification for the previous authorities that distinguish the Employer's ability to adjudicate where there is a final application as opposed to an interim application; there is no such distinction in the JCT form and there is no difference between payment rights and obligations in respect of interim payments and the final payment.

Following these conclusions Coulson J considered previous case authorities in the TCC and in the Court of Appeal and reluctantly disagreed with the approach previously taken by Edwards-Stuart J, stating that the analysis in ISG v Seevic and Galliford Try v Estura was erroneous in this regard. 

Conclusion

This judgment represents a significant change in the Technology and Construction Court's approach. Coulson J has endeavoured to bring clarity to the influx of potential issues raised by earlier cases on  "smash and grab" style adjudications and distinctions between interim and final account applications. 

The comments of the Judge have the potential to reduce the impact of  Contractors' claims for payment on the basis of failure to serve a Pay Less or Payment Notices now that there is authority in support of the Employer's ability to quickly bring a second adjudication for the true value of the same application.

Coulson J gave S&T leave to appeal and so it is likely that the Court of Appeal will soon address this issue and clarify conclusively if the "draconian consequences" that previously followed a smash and grab adjudication are now weakened. 

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[1] Henry Boot Construction Limited v Alstom Combined Cycles Limited [2005] 1 WLR 3850