The Court of Appeal has upheld the High Court decision in Grove Developments Limited v S&T(UK) Limited and confirmed that employers do have the right to refer to adjudication a dispute about the 'true value' of a contractor's interim application.
This means that, even if an employer misses serving a payment notice and a pay less notice, it still has a means of challenging the contractor's interim valuation.
This endorses the Technology and Construction Court judgment of Mr Justice (now Lord Justice) Coulson in which he declined to follow the line of cases starting with ISG v Seevic. Those cases have been the basis for contractors’ “smash & grab” adjudications.
However, the Court of Appeal also confirmed that employers must pay first before adjudicating. So employers cannot start an adjudication regarding the ‘true value’ of the valuation until they have paid the amount applied for by the contractor. This may mean that contractors continue to pursue such “smash & grab” claims in the future. The Court of Appeal recognised that this might leave employers exposed in contractor insolvency situations.
“Smash & grab” adjudications and the first instance decision
In response to a contractor’s interim application for payment, an employer has the right to serve a payment notice or a pay less notice setting out its calculation of the sum due to the contractor. If it fails to do so, then the employer is required to pay the amount stated in the contractor’s interim valuation.
The line of cases beginning with ISG v Seevic had held that an employer in that situation, who had failed to issue a valid payment notice or pay less notice, was stuck with the contractor’s valuation of the interim payment – the employer was not subsequently able to ask an adjudicator to open up, review and revise that interim valuation so that they can recover any overpayment. This principle underpins so-called “smash & grab” adjudications, where a contractor claims the full amount of its application because an employer has failed to serve the correct notices. This is because it prevented the employer subsequently seeking a decision as to the “true” value of a contractor's interim payment and reversing any unjustified “windfall” obtained by the contractor, at least until the next interim certificate or, more often, the final account (which may be months or even years later).
In his first instance decision, Mr Justice Coulson had tackled this issue head-on and decided that the case law beginning with ISG had been wrongly decided. He confirmed that an employer is entitled to bring its own adjudication to decide the “true” value of the interim application, even if it had not issued a valid payment or pay less notice (although payment of the application amount may still have to be made in the meantime).
That had created a conflict within the decisions issued by the Technology and Construction Court and had left the state of the law unclear.
Impact of the Court of Appeal judgment
The Court of Appeal has now clarified the position. It has agreed with Mr Justice Coulson’s first instance judgment and confirmed that an employer who fails to serve a valid payment or pay less notice is entitled to challenge the contractor’s interim valuation in a subsequent adjudication (a so-called ‘true value’ adjudication).
This is good news for employers, as it increases the options available to an employer in the face of a “smash & grab” adjudication from a contractor.
However, the Court of Appeal has also explicitly confirmed that the employer is not permitted to start this ‘true value’ adjudication until the employer has first paid the contractor the sum the contractor has applied for.
This may mean that contractors continue to pursue “smash & grab” adjudications in the future in order to obtain the cash flow benefit and commercial leverage which result from obtaining full payment of their interim application. Contractors may consider that it is worthwhile securing payment of the amount they have applied for, even if there is the chance that an adjudicator will subsequently order them to repay part of that sum a month or so later. It also means that employers will be left exposed to contractor insolvency risk in the interim, a possibility which appears to be acknowledged by the Court of Appeal in its judgment.
The option of a ‘true value’ adjudication has its limits, therefore. Despite the welcome clarification of the law from the Court of Appeal, the best way for employers to protect themselves remains to ensure that the correct notices are issued in response to a contractor’s interim payment application.