In M Davenport Builders Ltd v. Greer & another  EWHC 318, the Technology and Construction Court (TCC) applied the Court of Appeal's decision in S&T(UK) Ltd v Grove Developments Ltd  EWCA Civ 2448. Davenport underlines key lessons for both payers and payees under construction contracts:
- A payer dissatisfied with an adjudicator's award made because it failed to serve a pay less or payment notice must, in most cases, pay up on that award before it can refer the issue of the true valuation to another adjudication.
- This principle applies to interim and final applications alike.
- A payer's failure to issue a pay less or payment notice is not to be treated as deemed acceptance of the amount applied for by the payee.
- Payers concerned about the solvency of the payee and their chance of recovering any overpayment should tighten their payment procedures to ensure payment and pay less notices are within contractual time limits. Failure to do so will mean payers have to pay up anyway – and risk not being able to recover any overpayment if a contractor becomes insolvent.
- In certain, very limited, circumstances, a payer might be able to start a true value adjudication without first having paid up on an adjudication award and rely on the consequent decision – but only if the payment has been made by the time of enforcement.
What happened in Davenport?
Mr and Mrs Greer (the employers) contracted with M Davenport Builders Limited (the contractor) to carry out construction operations at a building in Stockport. The contract was basic: it comprised the employers' acceptance of the contractor's quotation for the works and did not include provision for adjudication or payment dates. Sections 108(5) and 109 of the Housing Grants, Construction and Regeneration Act 1996 (as amended in 2011) (the Act) therefore applied and the relevant provisions of the Scheme for Construction Contracts (the Scheme) were engaged.
The application in court related to the contractor's final account. The contractor issued its final payment application but the employers served neither the payment notice nor a notice of intention to pay less than the notified sum by the due date (as specified by the Scheme).
The contractor issued a payee's notice in default. When the employers did not pay the sum demanded, the contractor started "smash and grab" adjudication proceedings. In the absence of a pay less notice from the employers, the contractor obtained an adjudication award on the final account plus interest.
The employers still did not pay. Instead they issued their own adjudication proceedings to ascertain the true value of what was due to the contractor. The second adjudicator found no sum was payable to the contractor. The contractor applied to the TCC to enforce payment. In the TCC proceedings, the employers argued that the first adjudication decision was correct but that they could rely on the second true value adjudication as a set-off or counterclaim.
Stuart-Smith J, applying the principles set out by Coulson J in the first instance decision in Grove as upheld by the Court of Appeal, found firmly in favour of the contractor and enforced the first adjudicator's decision.
The TCC's key findings
"the defendant [in this case, the employers] should not be entitled to do so since that would enable a defendant who has failed to implement the Payment or Payless Notice provisions to string the claimant along while he goes about getting the true value adjudication decision rather than discharging his immediate obligation and then returning if and when he has obtained his true value decision." (See paragraph 21 of the judgment.)
As Coulson J stated in Grove at first instance, "the second adjudication cannot act as some sort of Trojan horse to avoid paying the sum stated as due".
"As a matter of statutory construction and under the terms of this contract, the adjudication provisions are subordinate to the payment provisions in section 111 [which contains the statutory obligation to pay the notified sum]. Section 111 (unlike the adjudication provisions of the Act) is of direct effect. It requires payment of a specific sum within a short period of time. The Act has created both the prompt payment regime and the adjudication regime. The Act cannot sensibly be constructed as permitting the adjudication regime to trump the prompt payment regime. Therefore, both the Act and the contract must be construed as prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before the [employer] has complied with his immediate payment obligation." (As quoted in paragraph 29.)
However, these factual differences do not subvert the basic policy underlying the  Act and the Scheme. Deprivation of cash flow may have a serious adverse influence on a contractor, whether it occurs during or at the end of the works. It was still necessary to maintain cash flow whether during the works to fund the continuation of the works themselves or after completion to enable the contractor to continue to operate going forward.
- While the part of the Grove (Court of Appeal) judgment dealing with these issues was technically "obiter dictum" (that is, persuasive but not binding authority), the judge felt bound to follow it noting: "as it happens I agree with the reasoning and the outcome … it was provided after full argument and was expressly intended to provide authoritative guidance on an issue that Coulson J had decided in the contractor's favour".
- Throughout, Stuart-Smith J referred to this type of "smash and grab" adjudication as the "short route" to payment. This is, arguably, less judgmental, less emotive terminology for a process where, admittedly, the "unpaid" party takes advantage of the paying party's failure to serve a notice on time or at all to obtain payment of a disputed sum. However, do not lose sight of the fact that this short route is entirely compliant with and in keeping with the underlying policy of the Act: to maintain cash flow and to make sure the contractor is paid in timely fashion. The Act does this by ensuring prompt payment followed by any necessary financial adjustments. Where a pay less or payment notice has not been served, the payee has a contractual right to payment of the amount applied for. If payment is not made, the Act gives the payee the right to adjudicate to recover that payment.
- Stuart-Smith J found that a defendant who has not discharged his immediate obligation by paying an amount found payable in a first adjudication, could not rely on a second "true value" decision in order to set off or counterclaim against the immediate obligation adjudication. As a matter of policy:
- The judge acknowledged the potential problem inherent in the short [contractual] route – that of contractors being overpaid, leaving open "the possibility that they would then hang on to the disputed payment until determination of the "true value" of their application" (paragraph 24). This was the particular problem that gave rise to the Grove case. The judge agreed with Coulson J's "clear and unequivocal" approach in Grove (first instance) that this problem is "better met by an analysis which, following payment of the relevant amount, allows a second adjudication as to the 'true' value, rather than some sort of ad hoc and partial stay of execution".
- In distinguishing between the "short route" and the "valuation route", the judge quoted from Jackson LJ in Grove (Court of Appeal): "In my view, the distinction is a helpful one. The payment bargain dictates what must be paid immediately. The valuation bargain sets out the process for reviewing and adjusting the payments which have been made."
- In dealing with the question of when an employer can dispute the valuation of an [interim] application despite not having served a payment notice or pay less notice, the judge again turned to Jackson LJ's judgment in Grove (Court of Appeal), in which he made clear that the employer/payer can do so only when he has paid the notified sum. Jackson LJ acknowledged that there is no juridical basis for this position but relied on the hierarchy of obligations created by the Act (both the 1996 version and the 2011 amended version):
- The judge found there was no material difference in policy of enforcing an employer's immediate obligation to pay, whether that arises in relation to interim or final applications. There are some factual differences between an interim and a final application. For example, by the time of a final account application, the contract works will have been concluded; and the employer may be more concerned about making a substantial payment on a payment adjudication to a potentially insolvent contractor (whether the grounds for such belief are well founded or not).
- The pragmatic answer to a payer's concerns about paying moneys to a potentially insolvent contractor from whom it might be impossible to recover overpayments was that, in any case where there is a perceived risk of insolvency, the employer should be scrupulous to protect itself by serving timeous payment notices or pay less notices.
- Both policy and authority support the conclusion that an employer who is subject to an immediate obligation to discharge the order of an adjudicator based upon its failure to serve either a payment notice or a pay less notice must discharge that immediate obligation before he will be entitled to rely upon a subsequent decision in a true value adjudication. This policy applies equally to interim and final applications for payment.
Distinction between Grove and Davenport
Note there is one distinction between Grove and Davenport and that relates to when a party can start a true value adjudication. Grove is clear that the employer/payer must pay up before starting the true value adjudication. Davenport arguably leaves it open to [payers] to start such an adjudication before that payment is made and yet still – in limited circumstances – be able to rely on the consequent adjudicator's decision.
Stuart-Smith J accepted that a court might not always restrain the start or progress of a true value adjudication where an employer had not discharged its immediate obligation to pay. Relying on the Court of Appeal decision in Harding v. Paice  EWCA Civ 1231, there were circumstances where an employer could start a true value adjudication before paying the sum ordered by the first adjudication but only in limited circumstances. In Harding, Paice had, when commencing a fourth adjudication, indicated an intention to pay the sums ordered by the third adjudicator – and went on to pay that sum before the enforcement hearing of the third adjudication.
Rather frustratingly for adjudication practitioners, the judge would not give examples, finding it would not be helpful in the circumstances. Parties seeking to rely on Harding when starting a true valuation without paying first will have to think hard about whether to risk the costs of starting a true value adjudication without first paying up after a short route adjudication.
The net effect of Davenport and Grove is that payers could, after a payee's short-cut adjudication, start a true value adjudication despite not having paid up. However, they will not be able to rely on the resulting true value adjudication decision unless they have paid that initial payment. That payment, in effect, acts as a form of condition precedent to the payer being able to counterclaim or set off the true value against the initial payment. Arguably, the payer will have to make it clear that it intends to make the payment when making the referral and might also have to explain why it cannot pay immediately.
The decision on the facts
In Davenport, the employers' failure to discharge their immediate obligation to pay the moneys ordered by the first adjudicator meant that they could not rely on the second adjudicator's true value decision. The judge dismissed the employer's application to rely on the true value adjudication by way of set-off or counterclaim and granted summary judgment to enforce the adjudicator's award of £106,160.84 plus interest.