09 Nov 2018

S&T (UK) Limited v Grove Developments Limited [2018] EWCA Civ 2448 

The Court of Appeal may have issued the death blow to the informally termed "smash and grab" adjudication in its recent judgment. However, Employers may still be parting with their cash before a true value is determined.

Following our update in March 2018 from the Technology and Construction Court's decision in S&T(UK) Limited v Grove Developments Limited, the Court of Appeal has now handed down its judgment. The Court of Appeal has upheld the first-instance judgment of Mr Justice Coulson which considered the proper application of the payment provisions set out in the amended Housing Grants, Construction and Regeneration Act 1996 (HGCRA).

The Court of Appeal judgment, delivered by Sir Rupert Jackson, identifies the three key questions that had been addressed at first instance and that would now be considered in the appeal:

  1. Was the Pay Less Notice issued by the Employer valid and effective?
  2. Was an Employer who has failed to serve a valid Payment Notice or Pay Less Notice entitled to pursue a claim in adjudication to have the true value of the interim application assessed?
  3. Were liquidated damages payable to an Employer where a warning notice was served seconds before a notice claiming liquidated damages?

The Court of Appeal addressed, and upheld, all three questions in turn. However, the majority of the judgment was devoted to the second question which was the hotly anticipated determination as to whether Coulson J had been correct that an Employer was entitled to adjudicate the 'true' value of a sum in an interim payment application, despite its failure to serve the relevant notices.

The significance of the finding as to the second question above is apparent from the extent to which this issue is covered in both the first instance and appeal judgments, despite the fact that the issue was 'academic' given in both instances the Pay Less Notice was found to be valid. Mr Justice Coulson's first instance judgment had suggested a dissatisfaction with the concept of the 'smash and grab' claim noting the increase of such claims had "brought adjudication into a certain amount of disrepute". Likewise, the Court of Appeal acknowledged that the question was of "great importance to the construction industry".

The Court of Appeal upheld Mr Justice Coulson's conclusion that an Employer, who has failed to serve both a Payment Notice and a Pay Less Notice, is nevertheless entitled to commence an adjudication to have the true value of the application assessed and to reclaim any sum which has been overpaid; a significant departure from previous authorities. The Court of Appeal affirmed each of Coulson J's six reasons for his decision:

  1. The value of interim payments remains justiciable between parties due to the wide powers of the courts and adjudicators to open up and revise sums shown as due in an interim application where the interim application determines what is payable.
  2. Despite no express provision in the HGCRA or in paragraph 20 of the Scheme for Construction Contracts (Scheme), the powers of adjudicators in both are broad enough to enable them to review, revise and order payment of interim payments.
  3.  A dispute over the sum which has to be paid ("the notified sum") does not transmute into a true valuation of the work done – each addresses different questions.
  4. "The sum due" is distinguishable from "the sum stated as due": the former dictates what must be paid immediately ("the payment bargain") whereas the latter sets out the process for reviewing and adjusting the payments made ("the valuation bargain").
  5. In the interests of fairness, an Employer has the right to adjudicate over the true value of an interim payment because the timescales provide only a short window for an Employer to make a determination. This should be viewed as offering only a provisional figure for immediate payment. Adjudication sits behind the payment notice provisions of the legislation and offers an Employer the opportunity to undertake a more detailed valuation than the notice provisions.
  6. Neither the HGCRA nor the Scheme provide for any distinction between interim and final applications for payment.

The Court of Appeal went on to consider the mechanism for repayment of any sum which, following a true value assessment, would be regarded as having been overpaid. Taking a different view from Mr Justice Coulson, the Court of Appeal held that no self-standing cause of action for repayment was required and that the order for repayment was merely part of the dispositive remedy which flows from the adjudicator's revaluation – there was no need to rely on any implied term or restitution.

A further point that was considered by the Court of Appeal was the timing of a true value adjudication. The issue had not been debated before Coulson J, so his comments that an Employer must have made payment before a true value adjudication could be brought had no juridical basis. The point was, however, raised by the appellant and the Court held that "the [HGCRA] cannot sensibly be construed as permitting the adjudication regime to trump the prompt payment regime" and the Employer cannot therefore bring a true value adjudication until he has "complied with his immediate payment obligation".

Conclusion

The Court of Appeal's judgment provides greater clarity for the construction industry on the payment provisions of the amended HGCRA and confirms the availability to Employers of true value adjudications even if they have failed to issue a timely payment or a valid Pay Less Notice.

A Contractor's advantage by securing sums from an Employer for its failure to serve relevant notices may therefore be short lived now that an Employer's successive adjudication could order immediate repayment

Nevertheless, to avoid being compelled to commence a 'true value' adjudication an Employer should use its opportunity in the payment certificate or pay less notice to prevent the immediate entitlement to payment. If that opportunity is missed, the consequences for the Employer may be less draconian in light of this judgment but it will still be necessary for it to pay first and argue later.