Grove v S&T - the end of the ‘smash and grab’ adjudication?
Updated - 20th March 2019
Kirsteen Cacchioli - Technical Director, Driver Trett UK provides a summary of the guidance surrounding ‘smash and grab’ adjudications and a precedent that could lead to their demise.
Introduction
There has been a deluge of cases in recent times focussed on the so-called “smash and grab” adjudication – an unintended side effect of the changes brought about by the Local Democracy, Economic Development and Construction Act 2009 (“LDEDC”), and the interpretation and application of those changes by the courts.
These cases all resulted from an alleged failure by the paying party to issue a valid payment notice and/or pay less notice, thereby entitling the contractor or subcontractor to payment of the full amount set out in its application (the “notified sum”), whether or not that sum was an accurate reflection of the value of work performed.
Amongst the arguments over paying (or not) the “notified sum” in the first place was a further tussle over when (or indeed, whether at all) the payer was entitled to launch its own adjudication for recovery of the alleged overpayment.
The recent case of Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) has provided some guidance on this matter, with the judgement of Mr Justice Coulson (as then was) in the TCC being fully supported by the Court of Appeal in its judgement issued on 7 November 2018 (S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448) - much to the relief of the paying party…
This case involved the construction of a new hotel at Heathrow’s Terminal 4. S&T submitted an application (no. 22) to Grove in the sum of £14million. Grove acknowledged that it had not submitted a payment notice on time. However, Grove argued that it had submitted a valid and timely pay less notice in the sum of circa £1.4million, subject to LADs in the sum of circa £2.5million.
S&T argued that Grove’s pay less notice was invalid, as it did not specify the basis of Grove’s calculation, referring as it did to Grove’s previous Payment Certificate. The adjudicator agreed with S&T, and ordered Grove to make payment of S&T’s application for £14million.
At the same time, Grove had launched its own proceedings in court on two points, the first being that its pay less notice was valid, and the second that Grove was entitled to run a second adjudication to establish the true value of the sum due to S&T.
Given the detail of Mr Justice Coulson’s decision in the TCC, it is appropriate to begin with his findings before looking at Lord Justice Jackson’s judgement in the Court of Appeal, particularly in relation to the point at which an employer is entitled to seek to recover any alleged overpayment.
Grove’s pay less notice
In relation to the validity of Grove’s pay less notice, the TCC found in favour of Grove, saying the court would be “unimpressed by nice points of textual analysis, or arguments which seek to condemn the notice on an artificial or contrived basis”. Rather, the court would look to see whether the notice “provides an adequate agenda for a dispute about valuation and/or any cross-claims available to the employer”.
The entitlement to bring an adjudication to decide the true value of an interim application
Again, the TCC found in Grove’s favour, saying that the payer is entitled to bring its own adjudication to decide the true value of an interim application, even if the payer had failed to issue a valid payment notice or pay less notice (whether deficient or absent entirely).
In reaching this decision, Mr Justice Coulson listed six reasons as to why this was the case:
1. In line with Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850, the court (and thereby an adjudicator) has the power to decide the ‘true’ value of an interim application.
2. The statutory power of the adjudicator is sufficiently broad to enable them to decide the subsequent ‘true’ value of an interim application.
3. The dispute decided in a first adjudication (as to the validity or otherwise of a payment notice or pay less notice) is a different dispute to that concerning the ‘true’ value of the corresponding interim application: “if Grove challenge S&T’s evaluation, as they do, then that dispute must be capable of being referred to adjudication. Any other result would be an unwarranted restriction on Grove’s ability to adjudicate any dispute “at any time”, in accordance with s.108(2)(a) of the 1996 Act”.
4. The wording of the contract differentiated between “the sum due” at Clause 4.7.2 and “the sum stated as due” in Clause 4.9, with good reason.
5. For reasons of “equity and fairness”.
6. The wording of the 1996 Act applies to both interim and final applications, and a distinction should not be drawn between the two.
Mr Justice Coulson also looked to previous Court of Appeal decisions which pointed in the same direction in support of the court’s position. Turning to previous Technology and Construction Court (TCC) decisions, he was less convinced, particularly in relation to ISG v Seevic and Galliford Try v Estura, confirming that: “They [the decisions in ISG v Seevic and Galliford Try v Estura] are a ‘different line’, as Jackson LJ described them, and in my view, they should not be followed.”
Mr Justice Coulson also addressed some further matters in his judgement:
The absence of express wording in the contract permitting the employer to recover an overpayment
Mr Justice Coulson rejected the position that, just because the contract did not (or might not) include wording which would permit the employer to recover an overpayment, or which dealt with an adjudicator’s decision that entitled the employer to recover an overpayment, there was no contractual entitlement to such recovery: “The adjudicator has decided that there has been an overpayment, and pursuant to the contractual obligation to comply with the adjudicator’s decision, the contractor must therefore repay the excess”.
Policy considerations concerning an employer’s right to challenge the true value of an interim application
Mr Justice Coulson did not consider that the contractor would be prejudiced in any way in respect of cash-flow, or that the notice regime would be undermined if the employer was permitted to challenge the true value of an interim application in a subsequent adjudication. The notified sum still had to be paid, and it would still be more efficient for the employer to “resolve the alleged over-valuation point in the next interim payment round”. What the contractor would not be able to do would be to keep hold of money to which it was not entitled: “Cash-flow must not be confused with the contractor retaining monies to which he has no right”.
Whether an employer is required to pay the sum claimed before it could challenge the interim application
Whilst this matter was not directly addressed, the wording of Mr Justice Coulson’s judgment indicates that the position remains that the employer is required to pay the sum claimed, and to then launch its own proceedings to recover that payment (or part thereof): “The second adjudication cannot act as some sort of Trojan Horse to avoid paying the sum stated as due. I have made that crystal clear”.
Following this judgement, there was some discussion amongst commentators as to the point at which an employer would be entitled to bring a second adjudication to recover an overpayment. Was it only at (or after) the point at which the overpayment was made, or did the employer have a right to begin proceedings to recover an overpayment before it was made - ‘balancing the books’ in some way before the money is paid over?1
This matter was specifically addressed by Lord Justice Jackson in the Court of Appeal judgement2, where he stated:
“Both the HGCRA and the Amended Act create a hierarchy of obligations… The immediate statutory obligation is to pay the notified sum as set out in section 111…. 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. 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 cannot sensibly be construed 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 he has complied with his immediate payment obligation.”
And so it seems the judicial direction is clear: in the absence of a valid payment notice or pay less notice, the employer must pay the notified sum before it has the right to commence proceedings to recover any purported overpayment.
The question is though, whether this will be followed in practice or whether adjudicators will continue to find themselves being asked to determine the true value of an application at the same time as deciding on the validity of a payment notice or a pay less notice, and whether this approach will result in a plethora of jurisdictional challenges from parties seeking payment of the ‘notified’ sum.
And will this really see the end of the smash and grab adjudication, or will contractors and subcontractors still take a chance and seek payment of the sums they have claimed, challenging the repayment of any such sums when the time comes? Only time will tell…
Summary
In any event, it would be wise for all parties involved in construction contracts to heed the nuggets of advice handed down from the benches of the TCC and the Court of Appeal in preparing and submitting payment notices and pay less notices (see Box 1). After all, this is the best way to ensure that, as an employer, you do not find yourself paying a sum to which you do not consider the contractor is entitled, and for which you must pay to recover, or that as a contractor, you ensure greater certainty of payment without the battle scars of multiple adjudications.
Box 1 – Issued adjudication guidance
The guidance issued indicates the following:
- To be valid, applications for payment must meet a ’high’ threshold³. They must:
- Be submitted on time (not early or late, or out of step with an accepted course of conduct)4.
- Have “proper clarity” with the paying party being given “reasonable notice that the payment period has been triggered”5.
- Be “in substance, form and intent an Interim Application”, “free from ambiguity” and “clear that it is what it purports to be so that the parties know what to do about it and when”6.
- The threshold for pay less notices may not be as high as for payment notices, with clear wording not necessarily required, if the substance and intent of the pay less notice is sufficient7, although beware submitting a pay less notice late, as this is still likely to invalidate that notice8.
- Be sure that any payment schedule included within the contract documents is sufficient to cover the (potentially extended) duration of the project. If a specific number of application or valuation dates are set out, ensure that there is a mechanism for extending those dates beyond the scheduled timescale, as failure to do so may result in an application being invalid9.
- Check that any payment schedule which is included in the contract does not contain “obvious errors”, as reliance on a detail which is clearly wrong when read in the context of the agreement will not safeguard the validity of a payment notice or pay less notice10.
- A lack of supporting documentation to accompany an application for payment does not necessarily render that application invalid, even though it may result in rejection of all or part of the application for want of substantiation11.
- There must be some explanation as to the basis on which the sum due has been calculated, setting out any grounds for “withholding” sums and indicating how those sums have been reached¹². However, that explanation (of the calculated sum) may be included by reference to other documentation which has already been provided to the other party13.
- If you lose a ‘smash and grab’ adjudication you must still pay the sums decided by the Adjudicator when they fall due – even if you have a strong argument for overpayment.
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¹ The question being whether the cause of action arises on the overvaluation of the work or overpayment for work done.
² S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA 2448 (paragraphs 107 to 110)
³ Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd [2017] EWHC 17 (TCC)
4 Leeds City Council v Waco [2015] EWHC 1400 (TCC)
5 Caledonian Modular v Mar City Developments [2015] EWHC 1855 (TCC)
6 Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC) and Jawaby Property Investment Ltd v The Interiors Group Ltd and another [2016] EWHC 557 (TCC)
7 Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd [2017] EWHC 17 (TCC)
8 Kersfield v Bray & Slaughter [2017] EWHC 15 TCC
9 Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWCA Civ 990
10 Bouygues (UK) Ltd v Febrey Structures Ltd [2016] EWHC 1333 (TCC)
11 Kersfield v Bray & Slaughter [2017] EWHC 15 TCC
12 Muir Construction Ltd v Kapital Residential Ltd [2017] CSOH 132
13 Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) / S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA 2448