A new approach
A recent ruling by Coulson J represents a significant departure from the line of cases which paved the way for “smash and grab” adjudications.
Since ISG v Seevic (2014) and Galliford Try v Estura (2015) an employer that fails to serve a payment notice or a pay less notice is deemed to have agreed to the amount stated in a contractor’s interim application. These decisions gave rise to the affectionately termed “smash and grab” adjudications which prevented the employer from challenging the “true” value of the adjudication due to their deemed agreement as to its value.
Coulson J has decided that the case law has been wrongly decided and that an employer that fails to serve a payment notice or a pay less notice, although still required to pay the amount in the application, can now refer the question of the “true” value to adjudication.
However, the contractor in this case was given leave to appeal, so it seems likely that the Court of Appeal will settle the question once and for all in the near future. Coulson J’s decision may not be the end just yet.
What does this mean?
This is good news for employers. Although an employer that fails to serve a payment or pay less notice is still required to pay the full amount of the application, it now has the ability to immediately seek return by way of an adjudication to determine the application’s “true” value.
Grove Developments Ltd (“Grove”) engaged S&T (UK) Ltd (“S&T”) to design and build a new Premier Inn Hotel at Heathrow Terminal 4. The contract incorporated the JCT Design and Build Contract 2011.
The adjudications between the parties
In the first adjudication it was decided that the Schedule of Amendments was part of the contract (the “First Adjudication”).
In the second adjudication it was decided that S&T were not entitled to a full extension of time, but were entitled to an extension of time down to 9 January 2017 (the “Second Adjudication”).
In the third adjudication it was decided that a Pay Less Notice issued by Grove was invalid, meaning that S&T were entitled to be paid in excess of £14 million pursuant to their interim application (the “Third Adjudication”).
In anticipation of an unfavourable decision in the Third Adjudication, Grove issued CPR Part 8 proceedings.
In this case there were four issues to be determined by the Court:
Issue A: whether or not Grove’s Pay Less Notice complied with the requirements of the contract (the “incorporation by reference issue”);
Issue B: whether, even if the Pay Less Notice did comply with the contract, the result in the Third Adjudication should still be enforced (the “enforcement issue”);
Issue C: whether Grove is entitled to commence a separate adjudication seeking a decision as to the “true value” of S&T’s application (the “true value issue”); and
Issue D: whether Grove’s notices in respect of liquidated damages were properly issued (the “liquidated damages issue”).
Coulson J found in favour of Grove on all four points.
Issue A: the incorporation by reference issue
It was held that the Pay Less Notice was valid and did properly set out the basis of calculation. The decision in the Third Adjudication was therefore no longer binding on the parties.
The contract required that any payment notices “specify the basis of calculation” for the sums stated to be due by the Employer. The basis of the calculation was set out in Grove’s Payment Notice (which was out of time and invalid). Grove therefore issued a Pay Less Notice specifying the sum due and referred S&T back to the Payment Notice for the basis of the calculation.
Coulson J considered that this was sufficient to enable the Pay Less Notice to be valid and S&T’s argument that it was invalid because Grove did not resend the spreadsheet setting out the basis of the calculation which was included in their Payment Notice was “artificial and contrived”.
This has provided important clarity on the law relating to incorporation by reference. However, each case will ultimately be decided on the precise facts.
Issue B: the enforcement issue
Following on from his decision in relation to Issue A, the issue of whether the decision in the Third Adjudication was binding fell away.
S&T sought to argue that, even if the Pay Less Notice did specify the basis of calculation, Grove failed to comply with the time limits set out in the contract. The Schedule of Amendments (the subject of the First Adjudication) altered the period for when the Pay Less Notice must be served. If this Schedule of Amendments had not been validly incorporated, Grove’s Pay Less Notice would have been out of time.
Neither party had commenced proceedings to challenge the decision in the First Adjudication, therefore it continued to be binding. As Coulson J had determined that the Pay Less Notice was valid the Pay Less Notice was served validly and in time.
Coulson J noted that S&T had indicated that it intended to commence proceedings to challenge the decision in the First Adjudication and that the parties were participating in the TCC Pre-Action Protocol process. Therefore, we may well see this issue before the court very soon.
Issue C: the “true” value issue
Coulson J held that an employer is entitled to commence an adjudication to determine the “true” value of the interim account, even if it failed to issue a valid Payment Notice or Pay Less Notice.
In his judgement, having noted the significant impact that his decision has on the construction industry, Coulson J considered both the authorities of the Court of Appeal and the TCC at length and found that:
“the analysis in ISG v Seevic and Galliford Try v Estura is erroneous and/or incomplete. I consider that the analysis and certainly the result in ICI v Merit (2017) is in accordance with first principles and the Court of Appeal Authorities.” (para 145)
He gave six reasons for his decision, which can be summarised as follows:
- Citing Henry Boot (2005) and Beaufort v Gilbert Ash (1999), he considered that the court had always had the power to decide the “true” value of any certificate, notice or application and this included the ability to open up, review and revise any existing certificates, notices or applications.
- An adjudicator also has broad powers stemming from the wording of s.108(1) of the 1996 Act and paragraph 20 of the same, to decide a dispute as to the “true” valuation of a certificate, notice or application.
- A dispute about valuation is different from a dispute about the sum stated in a notice. The “true” valuation was therefore not considered or decided in the Third Adjudication.
- The terms of the contract provided the employer with a contractual mechanism to commence an adjudication as to the “true” valuation. He considered that the parties had intentionally used the words “sums due”, as opposed to “sums stated to be due”, in order to achieve this.
- As the contractor has the ability to bring a valuation adjudication on the basis of the sums stated in the Payment Notice or Pay Less Notice, and there is nothing in statute prohibiting the employer from doing the same, for reasons of “equality and fairness” an employer should also be entitled to commence a valuation adjudication.
The only real justification for prohibiting an employer from commencing an adjudication in relation to the “true” value of a contractor’s interim application has been “the mantra that it does not really matter, because the prohibition only applies to interim applications, and does not apply to the final application”. In respect of both interim and final applications and payments under the contract, the same distinction as set out at point 4 above was made. Coulson J did not consider that there was a material difference between the valuation and payment regimes for interim and final payments to warrant them being treated differently.
Issue D: the liquidated damages issue
Finally, on a completely unrelated issue to those set out above, Coulson J came to the conclusion that various notices issued in respect of liquidated damages were properly issued, despite being sent within seconds of each other. The basis of his decision was the absence of a specified period in the contract requiring there to be any greater length of time between the two notices being served.
The employer served the notices required under Clause 2.29 of the contract. The clause required:
- the issue of a non-completion notice;
- the issue of a notice that the employer “may require payment of, or may withhold or deduct, liquidated damages” (the “Warning Notice”); and
- the issue of a notice that the employer “requires” the contractor to pay liquidated damages and/or that the employer “will” withhold or deduct liquidated damages (the “Deduction Notice”)
All of the notices were received by the contractor. Although received in the correct order, the Warning Notice and Deduction Notice were received by the contractor within seconds of each other and S&T sought to argue that the Deduction Notice was invalid “because they were not given time to read/understand/digest the Warning Notice”.
Coulson J expressed some sympathy with S&T and the “brevity of the interval”, but held that Grove’s actions were not contrary to the contract. There was no specified period between service of the Warning Notice and the Deduction Notice. They were served in the correct order and the gap in time between the two notices was irrelevant. He also made it clear that, in his view, it would make commercial sense that a certain time gap is not required.
This is clearly another win for employers and calls into question the use and purpose of the Warning Notice.
The full effect of Coulson J’s decision remains to be seen and whether it will bring the era of “smash and grab” adjudications to an end is debatable. Ultimately, adjudications of this nature remain to be valid, although they are certainly less significant now that the notion of an employer’s ‘deemed acceptance’ has been discarded.
An employer will still need to comply with the payment regime under the contract or they will run the risk of having to pay the full amount of a contractor’s interim application (at least on a temporary basis). Although they will now have the opportunity to seek immediate recourse by way of their own valuation adjudication, this will also bring with it the associated time and irrecoverable cost of doing so, and the risk that an adjudicator may take a different view on valuation to it.
The contractor has been given leave to appeal in relation to Issues A, C and D. It will be interesting to see how the Court of Appeal will approach these important issues when the time comes.