In Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC), the TCC has provided guidance on the right of an Employer who has fails to provide a payment notice or pay less notice to subsequently dispute the amount paid through adjudication. 

Background

The claimant (“Grove”) engaged the defendant (“S&T”) to design and build a Premier Inn Hotel at Heathrow Terminal 4. The parties’ contract incorporated the JCT Design and Build Contract 2011. 

On 31 March 2017, S&T sent Grove its interim application 22. Practical completion had been achieved (although not yet certified) by this time, meaning this was S&T’s final interim application before the final account process would begin. 

In its previous application (No. 21), S&T said the overall contract value was £25m. However, in interim application 22, S&T asserted that the total value was £39m, and sought payment of £14m accordingly. The basis for this claim was set out in a spreadsheet attached to S&T’s application. 

On 13 April 2017, Grove responded by email. Attached to the email was a version of S&T’s spreadsheet, but now containing Grove’s assessment of the figures. On this basis, Grove issued a separate payment notice and interim certificate 22 setting out its view that the net amount due to S&T was £1.4m. However, the payment notice was not issued in time pursuant to the time periods in the Contract.

On 18 April 2017, Grove emailed its pay less notice to S&T. Grove’s pay less notice (which was itself in time) referred back to its detailed calculation of £1.4m in the (purported) payment notice of 13 April 2017. As a result, S&T argued that Grove’s pay less notice was invalid. 

S&T did not seek payment for approximately six months. However, when Grove declined to pay, S&T served a (third) notice of adjudication, during which the adjudicator determined that Grove’s pay less notice of 18 April 2017 was invalid. On the face of it, this meant S&T was entitled to be paid £14m in accordance with interim application 22 – an expected result in a ‘smash and grab’ adjudication.

Grove brought proceedings under Part 8 of the CPR seeking various declarations from the Court, including that its pay less notice was, in fact, valid. However, Grove also asked the Court to determine whether, if the pay less notice was invalid, it could commence a separate adjudication seeking a decision as to the ‘true’ value of interim application 22. 

The Employer’s Right to Adjudicate the ‘True’ Value 

On the facts, the Court found Grove’s pay less notice was valid – the detailed calculation sent to S&T 5 days earlier on 13 April 2017 along with the (purported) payment notice would have permitted the reasonable recipient to understand exactly how Grove’s valuation was calculated. Furthermore, the Court found that there could be no objection in principle to a notice referring to a detailed calculation set out in another, clearly-identified, document.

However, the Court nonetheless considered the alternative: whether Grove would have a right to adjudicate in the absence of a valid pay less notice. Mr Justice Coulson approached this issue from three angles: first principles, relevant Court of Appeal authorities, and finally relevant TCC authorities. On all three approaches His Honour reached the view that Grove would have a right to adjudicate the ‘true’ value. 

Applying first principles, Mr Justice Coulson found there were six reasons to support such a right:

1. A court can decide the ‘true’ value of any certificate, notice or application and that, as part of that process, it has an inherent power to open up, review and revise any existing certificates, notices or applications. An adjudicator had the same wide powers given the parties can confer upon them the power to decide all disputes.

2. Linked to the first reason, under section 108(1) of the Construction Act 1996 and paragraph 20 of the Scheme for Construction Contracts 1998, there is no limitation on the nature, scope and extent of a dispute that can be referred to adjudication – to the contrary, paragraph 20 of the Scheme is expressed in the widest possible language. Accordingly, an adjudicator would have the power and jurisdiction to determine the ‘true’ value. 

3. The dispute which Grove (or any Employer in this situation) would wish to raise in a second adjudication would be different from that considered in the first adjudication. In the first adjudication, the adjudicator would be concerned only with whether the payment notice and/or pay less notice was deficient or out of time. If so, then the sum stated in the Contractor’s application would be due and payable, and there would be no need (or jurisdiction) for the adjudicator to consider whether that sum was correct. It followed that this could then be considered afresh in a second adjudication. 

4. The words of the JCT Design and Build Contract (as was used by the parties) differentiated between “the sum due” and “the sum stated as due”. The former refers to the mechanism designed to calculate a Contractor’s precise entitlement (i.e. the correct, or ‘true’ value). The latter is the amount a Contractor has included in his application, and which will be payable in the absence of a valid payment notice and/or pay less notice. The two are not the same and preventing an Employer from adjudicating would ignore this distinction.

5. It was not controversial that if a generic Employer served a payment notice or pay less notice for a lower sum than what a Contractor applied, the Contractor could immediately refer a dispute about the ‘true’ value to adjudication. It was only fair that an Employer had a similar right.

6. There was no contractual basis for treating interim and final applications/payments in different ways. Accordingly, whether what is in dispute is an interim payment or a final payment, the Employer has the right in principle to refer to adjudication.

Turning then to the relevant case law, Mr Justice Coulson’s view was that the Court of Appeal authorities all pointed the same way: an Employer who fails to serve a payment notice or pay less notice has to pay the amount claimed, as that is the “sum stated as due”. But the Employer would then be free to commence adjudication proceedings so as to determine the ‘true’ value of the application. This is true even if there had been an earlier adjudication to determine the validity of the payment notice or pay less notice.

Finally, in respect of previous TCC cases, Mr Justice Coulson found that they were generally consistent with the Court of Appeal authorities – i.e. giving an Employer the right to adjudicate. In reaching this view, he noted out that this conclusion would not threaten Contractor cash-flow – the Contractor would still get paid the sum from the interim application in the first instance as the Construction Act 1996 requires – but a Contractor could not hang on to overpayments and sums to which he is not entitled.

Comment

Before Grove Developments, there was a line of TCC cases, led by ISG v Seevic, which established that an Employer who failed to serve the correct notices was not entitled to subsequently adjudicate the ‘true’ value of a claim. They had to wait until the next interim certificate or (more commonly) the final account (which could be months or years away in some cases) to reverse what it considered to be an overpayment. 

This approach underpinned what are known as ‘smash and grab’ adjudications, where a Contractor claims (and receives) the full amount of its application for payment on the basis the Employer fails to serve the correct notices. The Contractor then holds on to sums to which it may not be entitled until a later date. 

By contrast, a Contractor has always had the right to immediately adjudicate if an Employer serves a payment notice or pay less notice for a lower sum than what the Contractor considers to be the true value. 

Grove Developments does away with this with this inconsistency, and departs from the ISG v Seevic line of authority. Accordingly, on a practical level, this decision could lead to a reduction in the number of ‘smash and grab’ adjudications, as they are unlikely to be cost-efficient for Contractors if the Employer can turn around and (almost) immediately seek to ascertain the ‘true’ value. 

Of course, and as the Court was at pains to make clear, an Employer who finds itself in a position like Grove did here will first need to pay the amount claimed in the interim application before commencing adjudication proceedings – it cannot withhold payment pending that process. 

On a practical level, the decision (re) emphasises the fact that care must be taken to ensure notices are properly drafted, and served within the appropriate timeframes. This is true for both Contractors and Employers. Ensuring compliance with the relevant contractual and statutory provisions is the easiest way to avoid the situation the parties faced in Grove Developments.