In the first instance decision in Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC), Coulson J (as he then was) concluded three pivotal points, the second of which took the industry by surprise:
- Grove Developments Ltd (employer) had issued a valid pay less notice in response to the interim application 22 issued by S & T (UK) (contractor).
- The employer was entitled to pursue a claim in adjudication to determine the correct or ‘true value’ of the works on the date of the interim application 22, provided it paid the amount due.
- The employer had complied with the contractual requirements in April 2017 in order to maintain its claim for liquidated damages.
The Court of Appeal (CA) upheld Coulson J’s judgment in relation to each of the three issues set out above: [2018] EWCA Civ 2448.
Points one and three are case specific. Point two could have a significant impact on the construction industry’s approach to adjudication. Some even think it flags up the need for the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) to be amended even further.
Background to Grove — the rise of ‘smash and grab’ adjudications?
In the last few years, before Grove, the practice of ‘smash and grab’ adjudications has become commonplace. Once an employer (in relation to a contractor) or contractor (in relation to a sub-contractor) (payer) missed the opportunity to issue a pay less notice as to an interim application, it had no choice but to pay the full amount as stated in the interim application. This protected the contractor’s (in relation to an employer) and the sub-contractor’s (in relation to a contractor) (payee’s) cash flow. If the payer did not pay, the payee could adjudicate and was almost guaranteed success.
A successful ‘smash and grab’ adjudication also meant:
- that the payer had no further recourse to relief in relation to that particular interim application, unless or until it sought final resolution of the issues in litigation or arbitration; and
- a quick end to what could otherwise lead to a protracted dispute over the true value of the interim application.
The payer could then seek to remedy any overpayment by a reduction in later payments (if there were any). However, even if this were possible, it might not provide much comfort for the payer as the payee might still dispute that there was an overpayment. (In addition, the payer would have to be careful to serve the appropriate pay less notice in relation to the next interim application or it would end up in the same position again.)
If the disputed application already related to a final payment and the payer simply did not pay, the payee could suspend any of its contractual obligations and refer the dispute to adjudication. A payer’s defence of such an adjudication was likely to be doomed in the absence of a pay less notice.
Grove — the end of ‘smash and grab’ adjudications?
Coulson J’s decision in Grove toppled this trend of payee success in ‘smash and grab’ adjudications and redressed the balance between payee and payer.
Coulson J was clear that, just as a payee can adjudicate if it disagrees with the payer’s valuation in its payment or pay less notice, so should a payer be able to adjudicate to ascertain the true value if it disputes the payee’s claimed sum.
The ‘payment first’ principle
Those payers left without recourse after failing to issue (or issuing an invalid) pay less notice can now start another adjudication to determine the true value of the interim application. But there is a limitation: they must pay up first.
That ‘payment first principle’, decided by Coulson J and upheld by the CA, is important. The right to adjudicate is made subordinate to the right to payment. This upholds the rationale behind the HGCRA 1996 of keeping the cash flowing.
It means the payee still gets paid but the payer can attempt to claw back any overpayment as soon as that money is paid. It does not have to wait until the final account is sorted.
The payment first principle before the payer is allowed to commence a ‘true value’ adjudication is not dependent on the payee bringing a ‘smash and grab’ adjudication.
Do the HGCRA 1996 provisions relating to adjudication need to be amended?
Grove is an important decision for payers and a welcome clarification for payees on the right to start a ‘true value’ adjudication but only after the payee’s right to payment is honoured.
However, those rights are not set out specifically in the HGCRA 1996. Does this matter? Does the gap need to be filled? Would express rights avoid future uncertainty?
Arguably no. We have a common law system. Judicial decisions interpret the legislation and set precedents to be followed in later cases.
However, the Court of Appeal examined the judicial precedent prior to Grove and found it to be inconsistent, overruled those decisions it found to be wrong and clarified the position.
Difficulty for the layman adjudicating without legal representation
If the lawyers have difficulty applying the precedents, what chance does the layman have adjudicating without legal representation (which is not uncommon in the construction industry)?
A layman relying purely on the wording of the HGCRA 1996 might conclude that a payer can adjudicate at any time, which, as we know based on the surrounding case law, is not quite true.
Providing clarification?
This would not be an issue if the HGCRA 1996 made it clear that the payer can adjudicate, provided that it has paid all outstanding sums as ordered in previous adjudications. This way, the cash flow point would be protected whilst maintaining clarity for the payer. The payer would also then be clear as to when and how to take action. In addition, a provision could be added about the timing of the ‘true value’ adjudication.
What if a payee is insolvent?
The pre-condition of payment first before starting a ‘true value’ adjudication could be a problem for some payers.
As Sir Rupert Jackson pointed out, payers are justifiably concerned at the prospect of handing money over to a potentially insolvent payee before the ‘true value’ is ascertained. Payers would, no doubt, argue that the HGCRA 1996 be further amended to allow them to start a ‘true value’ adjudication before they have to pay under s 111 of the HGCRA 1996.
However, as Sir Rupert Jackson said, this would be ‘unfortunate for the construction industry’ because it would undermine the fundamental aim of the HGCRA 1996 to speed up cash flow and indicate a need for statutory amendment.
To amend or not to amend?
Grove is an important decision and will be a persuasive authority in future cases on ‘smash and grab’ and ‘true value’ adjudications. However, it is inevitable that further cases will arise trying to argue the legislative interpretation one way or another until the legislation is entirely clear on:
- whether the payer can start an adjudication as to the true value of the payee’s claim;
- if so, when it can start; and
- such an adjudication.
Clarifying these rights in the HGCRA 1996 would avoid costly arguments on procedural issues and ensure parties obtain a decision quickly.
This commentary first appeared in Construction Law on 4 March 2019. You can subscribe to the magazine here.
