The Court of Appeal has upheld Coulson J’s (as he then was) decision in the TCC[i].

Background:

Grove Developments Ltd (‘Grove’) engaged S&T (UK) Ltd (‘S&T’) to design and build a hotel. S&T completed these works several months after the Completion Date. After the works were practically complete but before certified, S&T submitted an interim application for payment (the ‘IA’). This interim application specified a value of £14 million, in excess of the original Contract Sum. Grove then served a Payment Notice which was technically out of time. It used the same spreadsheet that S&T had to present a breakdown of the works carried out but with a different valuation. Grove then issued a Pay Less notice (in time), indicating it would pay £nil. This was different to its Payment Notice, but the incorporation of liquidated damages (‘LADS’) payable on the date of the Pay Less Notice meant that the true value was negative. Grove complied with the requirements in 2.29 JCT DB 2011 with regards to deducting LADS.

S&T brought an adjudication. They sought a declaration that Grove’s Payment Notice was invalid as it was out of time and the Pay Less Notice was invalid as it had failed to specify the basis of how it had calculated the Relevant Sum. Therefore, they should pay the sum specified in the IA. Grove bought a claim to the TCC, seeking a declaration that 1) its Pay Less Notice had been valid and 2) it could challenge S&T’s default payment notice by bringing its own adjudication to dispute the true value of the works done (a ‘Valuation Adjudication’) while S&T’s adjudication was ongoing (the ‘Adjudication 2’).

Coulson J held that the Pay Less Notice had been valid. This was a matter of construction against the factual background (e.g. Grove had presented it against the same spreadsheet that S&T had used for their IA). It had also clearly set out the sum which was due after LADS deducted. Secondly, it considered whether a valuation adjudication could be brought alongside the original adjudication on the payment scheme under the Housing Grants, Construction and Regeneration Act 1996 (‘the Act’). Here, the TCC held that the adjudicator did have powers akin to the court to determine the value of the certificate or the pay less notice. It therefore dismissed S&T’s counterclaim.

Decision:

There were 3 issues before the Court of Appeal:

  1. 1) Whether the Pay Less Notice served by Grove complied with the Contractual requirements surrounding its service;
  2. 2) Whether Grove was entitled to request a Valuation Adjudication; and
  3. 3) Whether Grove deducted LADS in accordance with the contract.

The Court of Appeal decided that the Pay Less Notice was valid and the LADS had been validly deducted.

This meant that the answer to issue 2) was an academic question. However, it is the point of real interest in this case because it sets precedent as to whether a party can pursue a concurrent valuation adjudication claim where they have not complied with the payment provisions in s.111. Both parties therefore requested that it was decided in any event. Although the Act has been amended since, this meant that the Court of Appeal had to consider how s.108 adjudication provisions and s.111 payment provisions applied and whether an adjudication could be brought where a pay less/payment notice had not been validly served. The Court of Appeal decided that it could.

In reaching this conclusion, it considered the following matters:

  • The relevant judicial precedent for courts to review payment certificates under s.111. In Beaufort Developments (NI) Ltd v Gilbert-Ash (NI) Ltd[ii], the courts were held to have the same wide powers as the adjudicator to “open up, revise and review” the payment certificates. This is because the courts do not need to make use of the contract machinery to review but can rather use their ordinary powers to examine facts and award sums.
  • The law had settled that the absence of a Certificate of Completion did not bar the right for payment under the IA (Henry Boot Construction Ltd v Alstom Combined Cycles Ltd[iii]).
  • That the distinction between “the sum due” and “the sum stated as due” (which is the language of the s.111 payment scheme prior to its amending to “the notified sum”) is “a helpful one”. “The mechanism is simply intended to generate a provisional figure for immediate payment” – a figure somewhere “in the right ball park”. This means the “payment bargain” sum under the s.111 regime is conceptually distinct from “the valuation bargain” where the true sum can be reviewed afterwards. The s.111 regime “is not the philosopher’s stone” in that it doesn’t transmute the sum stated in the IA into a true valuation by statute. This is why under the contract, arbitration or litigation is available if either party is dissatisfied with the adjudicator’s decision.
  • The Employer can recover overpayments in the interim payment regime where he failed to serve a Payment Notice or Pay Less Notice through adjusting the next interim payment.

All of this suggested to the Court of Appeal that although the Act does create “a hierarchy of obligations”. “The immediate statutory obligation” is to pay the sum stated as due and comply with the s.111 regime. However, the Act also allows for the true valuation of work done under the s.108 regime when the immediate obligation to pay up has been complied with.

Implications:

The fact that the Court of Appeal has confirmed Coulson J’s decision gives Employers the necessary reassurance that there is restricted scope to be terrorised by the ‘smash and grab’ myth once prevalent in the industry.

The subordination of the adjudication regime in s.108 the Act to the prompt payment regime in s.111 ensures cash-flow in the construction industry where prompt payment is essential given the scale and demand of most projects. However, questions remain as to whether this means that an Employer who has not served a prompt or compliant payment notice, but who in fact has grounds to contest the validity of the valuation in a payment application, may nevertheless be deemed to be under a statutory obligation to pay the full amount notified by the Contractor, until such time as a Valuation Adjudication finds in favour of the Employer. When the discrepancy between a Contractor’s payment application and Employer’s payment notice is significant, this could well have the effect of causing a cash-flow challenge in reverse.

Practical Tips

  • Employers should always prioritise getting Payment Notices and Pay Less Notices in on time and ensure they are valid – check that the amounts are accurate, allocated to specific parts of the work done, and the grounds for any deductions are clearly explained and quantified. This will avoid the need for the Employer to be at the mercy of a Valuation Adjudication, but more importantly will avoid the Employer being obliged to pay an amount (even if subsequently adjusted) which it wholly contends.
  • Employers are reminded to send notices in the correct sequence under s.111. However, the Court of Appeal has confirmed there need be no minimum time between a Warning Notice deducting LADS and a Pay Less Notice. They need only be sent “in sequence”. Punctuality with the Pay Less Notice deadlines is the overriding consideration.
  • Contractors should also be encouraged by the outcome of this case, to submit at the outset, accurate payment applications which they are confident would stand up to an adjudicator’s valuation, so as to avoid significant adjustments of payments due to them.

[i] [2018] EWHC 123 (TCC)

[ii] [1999] 1 AC 266

[iii] [2005] EWCA Civ 814

We have extensive experience advising on construction contracts and the payment and adjudication regimes under the Housing Grants, Construction and Regeneration Act 1996 (as amended). We also have a specialist construction adjudication team. Juli Lau is an Associate in the Infrastructure team at Sharpe Pritchard. Alexandra Bellis is a Trainee Solicitor at Sharpe Pritchard, currently in the Construction team.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.