Following on from our article ahead of the Court of Appeal's decision in S&T (UK) Limited v Grove, as predicted, the Court of Appeal has upheld Coulson J's judgment. We summarise the decision below.
Validity of the Pay Less Notice
Grove issued a Payment Notice which was out of time, but included a calculation as to how it had come to the valuation. Grove then issued a Pay Less Notice in time which expressly referred to the calculation in the Payment Notice, but did not attach the calculation. S&T argued that as the Pay Less Notice did not attach the valuation, it was invalid. The Court of Appeal agreed with Coulson J (as he then was) that the Pay Less Notice was valid as any reasonable recipient would have understood the notice to incorporate the valuation in the Payment Notice. Incorporation by reference is therefore permissible if a reasonable recipient would have understood what was meant.
Adjudicating the 'true value'
The Court of Appeal has again upheld Coulson's decision and reasoning that an employer who has failed to serve a valid Payment Notice or Pay Less Notice can adjudicate the true value of the application. Our previous article set out the six reasons why Coulson J considered this to be just; the Court of Appeal has fully upheld this reasoning.
Timing of the 'true value' adjudication
Coulson J was not advocating a return to the pre-ISG v Seevic position. Before ISG v Seevic, a 'true value' adjudication could be run in tandem with a smash and grab adjudication. However, Coulson J decided that it was necessary for the technical adjudication to complete and for payment to be made before the employer could challenge the 'true value' of the application. The Court of Appeal has agreed and supplemented Coulson's reasoning by deciding that the statutory right to adjudicate under s.108 HGCRA is subordinate to the mandatory payment provisions in s.111. At paragraph 108, the Court of Appeal justifies this on the basis of cash flow:
One important policy of the HGCRA and the Amended Act is to promote cashflow in the construction industry. In other words, there should be prompt payment followed by any necessary financial adjustments.
As set out in our previous article, we consider that Coulson J's judgement was correctly decided and we fully endorse the Court of Appeal's upholding of this judgment. The approach of Coulson J and the Court of Appeal, in our view, balances the interests of the employer and contractor. One of the main rationales behind HGCRA is cash flow; it is therefore just that where an employer fails to submit a Payment / Pay Less Notice, it should be required to pay the sum applied for.
However, it is equally fair that the employer should be able to challenge the value of the application (once paid) and not be forced to resolve valuation issues in later applications or the final account. The only "fly in the ointment" with this position is that a contractor paid an "overvalued" application could enter liquidation before the employer is able to challenge the value, receive and enforce an adjudication decision, but, importantly, the employer will not have to wait until the final account.