Court of Appeal rules on ‘smash and grab’ adjudications
Grove Developments Limited v S&T (UK) Limited [07.11.18]
Following on from our article “Adjudication update: smash and grab no more”, the Court of Appeal has now handed down its judgment on S&T’s appeal.
In March 2015 Grove engaged S&T to design and build a hotel at Heathrow. The contractual completion date was 16 October 2016. In fact, practical completion was only achieved in March 2017.
A dispute arose over an interim payment application which greatly exceeded Grove’s valuation of the work. Grove sent a payment notice disputing the calculation and providing its own assessment in an annotated version of S&T’s spreadsheet. The payment notice was out of time. Grove subsequently served a pay less notice, referring to the payment notice and asserting that it was entitled to withhold liquidated damages for the delay in completion. As a result the amount due was reduced to nil.
A number of adjudications followed culminating in a finding that Grove’s pay less notice was invalid as it did not “specify” both the sum which was due to S&T and the basis upon which that sum had been calculated. Grove then commenced proceedings in the TCC for a declaration that the pay less notice was valid and that it was entitled to commence an adjudication to establish the true sum due to S&T under the interim application.
Mr Justice Coulson granted the declarations and held that S&T were not entitled to the interim payment of £14 million. S&T appealed the decision.
The Court of Appeal upheld the decision of Coulson J and dismissed the appeal. Crucially, the court found that an employer, having failed to serve a payment notice or pay less notice, was nevertheless still entitled to adjudicate to determine the true value of an interim application.
In reaching that decision, the court made the following observations:
- The employer’s immediate obligation at an interim stage under s.111 of the Housing Grants, Construction and Regeneration Act 1996 (the Act) was to pay the sums stated in the relevant notice. Neither the Act nor the contract made the sums payable at an interim stage conclusive as to the correct value of the work done.
- The Scheme for Construction Contracts was wide enough to enable adjudicators to review interim applications in the absence of a payment notice or pay less notice.
- The obligation under s.111 to pay the notified sum before the final date for payment did not transmute the sum into a true valuation of the work. Its purpose was to provide cash flow, not a valuation. As Sir Rupert Jackson put it “s.111 is not the philosopher’s stone”.
- There was a distinction between the payment bargain which “dictates what must be paid immediately”, and the valuation bargain which “sets out the process for reviewing and adjusting the payments which have been made”.
- The contract provided 18 days before a pay less notice had to be issued, while under the Construction Scheme, the default period was 10 days. Such a rushed process could not sensibly lead to a definitive valuation of the work at any particular date. The mechanism was simply intended to provide a provisional figure for immediate payment.
- Finally, with regard to timing as to when an employer could commence a “true value” adjudication, the Act created a hierarchy of obligations. The adjudication provisions were subordinate to the payment provisions in s.111, which requires payment of a specific sum within a short period of time. The Act could not “sensibly be construed as permitting the adjudication regime to trump the prompt payment regime”. Accordingly, the Act and contract had to be construed as prohibiting the employer from embarking on an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation.
This decision, therefore, confirms that an employer is entitled to refer a dispute over the true value of a contractor’s interim payment application to adjudication notwithstanding a failure to serve either a valid pay notice or a pay less notice.
However, given that the entitlement only arises after the employer has paid the sum due under the disputed application and – contractors will be pleased to note - cannot therefore be used as a mechanism to stall or withhold payment, a prudent employer will still be best served by ensuring they serve a valid pay notice or pay less notice in the first instance.
Related item: Adjudication update: smash and grab no more