Construction

Putting ‘smash and grab’ adjudications back in their place: Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC)

Coulson J’s already famous judgment is not the end of ‘smash and grab’ adjudications.

What this decision does is to bring the system of payment notices and adjudication back to what it was originally intended to be: a way to keep money flowing and hence the project moving but without ending parties’ rights to adjudicate for value.

The headline point from Grove Developments is that it is possible to adjudicate for the true value of the works following an earlier adjudication based on a failure to serve a pay less notice under section 111(1) of the Housing Grants, Construction and Regeneration Act 1996 (‘HGCRA 1996’), more commonly known as a ‘smash and grab’ adjudication. One question that arises, however, is whether we shall see more adjudications as a result: the first one based on a failure to serve an appropriate notice, to be quickly followed by a second adjudication for a ‘true’ valuation.

The judgment goes further than this, however. It is also the quietus to attempts to fight such notice-based adjudications through artificial challenges based on apparent defects in the notices themselves.

What the judgment does, therefore, is to make notice-based adjudications easier to win, harder to challenge and more rapid to revisit on the question of valuation. The common retort that an application for payment is defective for a technical reason will now be a more difficult response to run.

The facts

The facts of Grove Developments have almost become lost in the chatter about this case, but they remain important. Grove engaged S&T to design and built a new Premier Inn Hotel at Heathrow Terminal 4 under a JCT Design and Build Contract 2011. There were three adjudications between the parties: it was the third adjudication, which decided that Grove’s Pay Less Notice of 18 April 2017 was invalid, which went to the TCC.

In fact, Grove had anticipated that the result of the third adjudication might go against them, and had already issued Part 8 proceedings. The result of those proceedings would, of course, trump any decision of the adjudicator.

S&T counterclaimed for enforcement of the third adjudication.

The problem with the Pay Less Notice was that it did not, by itself, set out the basis of calculation of the sum that the employer said was due, which was both a contractual requirement and an obligation under section 111(4)(b) HGCRA 1996:

A notice under subsection (3) must specify—

(a)     the sum that the payer considers to be due on the date the notice is served, and

(b)     the basis on which that sum is calculated.

Instead, it referred back to an earlier document as setting out the basis of calculation. It was S&T’s case that in order for the Pay Less Notice to have been valid, the annotated spreadsheet had to be re-attached to the Pay Less Notice itself; a reference to it was not sufficient to comply with the contract.

How should a payment notice and a pay less notice be interpreted?

The first point that Coulson J dealt with is an important one which has been unfortunately overlooked by some of the commentary on this decision. He re-emphasised that notices have to be construed objectively, from the viewpoint of how a reasonable recipient would have understood the notice, taking into account the relevant contextual scene: Mannai Investment Co Limited v Eagle Star Life Insurance Co Limited [1997] 1 AC 749.

A number of decisions of the TCC have adopted this approach. Coulson J referred to a number of judgments criticising a ‘fine textual analysis’ of notices, calling it ‘artificial and contrived’ [23]. He suggested that the litmus test for the adequacy of a notice was whether ‘the contents of the notice are adequate is to see if the notice provides an adequate agenda for a dispute about valuation and/or any cross-claims available to the employer.’ [26] This is a reformulation of Akenhead J’s test advanced at [32] in in Henia Investments Limited v Beck Interiors Limited [2015] EWHC 2433 (TCC): there the test was whether the pay less notice ‘provided an adequate agenda for an adjudication as to the true value of the Works and the validity of the alleged entitlement to liquidated damages for delay’. There was no difference of approach in construing an application for payment by the payee or a payment notice or pay less notice by the payer: [27]-[28].

Coulson J confirmed at [34] that there was ‘no possible objection in principle to a notice referring to a detailed calculation set out in another, clearly-identified document.’ Coulson J sounded a note of caution to parties who do decide to proceed in this manner:

40. Of course, I recognise that if a party incorporates a document already sent by reference, and does not re-send it, then that party takes the risk that something may go wrong with the technology or the mode of delivery of the first document.  Equally, the words of reference, or the precise document being referred to, might be unclear.  Each of those situations may give rise to a subsequent finding that the relevant notice was invalid.  But it is idle to speculate on all the many ways in which the process of referring to another document might go wrong: all that matters is whether any of those difficulties occurred here.

What this meant was that the third adjudication decision could not be enforced, not least because it had been superseded by the court’s decision.

Can you commence an adjudication for the true value of the sum due after a first adjudication based on a failure to serve a pay less notice (a ‘smash and grab’ adjudication)?

The issue that Coulson J addressed, and his ultimate conclusion, was flagged at [67]: ‘can an employer, whose payment notice or pay less notice is deficient or non-existent, pay the contractor the sum stated as due in the contractor’s interim application and then seek, in a second adjudication, to dispute that the sum paid was the ‘true’ value of the works for which the contractor has claimed?  In my view, on the application of first principles, there are six separate reasons why the answer to that question is Yes.

There had been some suggestion from the way that the case law had evolved that an adjudication as to value in relation to the same sum as the notice adjudication would have to wait until a final account or payment. This confusion has now been laid to rest.

The dispute raised in a section 111(1) HGCRA 1996 adjudication (i.e. whether or not a notice is valid or out of time) is a different dispute to that raised in a valuation dispute. In Grove Developments, as the only question referred to the adjudicator was whether the content of the Pay Less notice was deficient, ‘he did not need – and did not have the jurisdiction – to address any questions of valuation’ [78]. Further, a JCT contract typically marks a difference between a sum ‘due’, on the basis of valuation, and a sum ‘stated as due’, which is the figure in the payment notice or pay less notice.

Coulson J extensively reviewed the Court of Appeal decisions in this field. His ultimate conclusion was that ‘An employer who has failed to serve its own payment notice or pay less notice has to pay the amount claimed by the contractor because that is “the sum stated as due“.  But the employer is then free to commence its own adjudication proceedings in which the dispute as to the ‘true’ value of the application can be determined.’ [103]

Coulson J disagreed with the first instance decisions of Edwards-Stuart J in ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC), [2015] 2 All ER (Comm) 545 and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC), [2015] BLR 321, which created the confusion referred to above. He accepted that these cases should generally be followed ‘unless there is a powerful reason for not doing so’: Lord Neuberger in Willers v Joyce and another (No. 2) [2016] 3 WLR 534 at [9]. Coulson J held that there was such a reason and these authorities should now be doubted. Instead, the learned Judge remarked at [119] that ‘In my view, it is clearer and simpler (which, as Mr Speaight continually urged me, were the watchwords of the 1996 Act) to order payment of the sum stated as due, in order to maintain the contractor’s cashflow (subject to any arguments about the risk of a failure to repay, which is a different point) and then allow a second adjudication to proceed as to the ‘true’ value.’

A warning was given to parties who attempt to use a forthcoming value adjudication as a reason not to pay. if there is a first adjudication under the notice regime, and then a second adjudication as to value, the adjudications will proceed in strict sequence: ‘The second adjudication cannot act as some sort of Trojan Horse to avoid paying the sum stated as due.’ [141].

How much time can you leave between serving a liquidated damages (LADs) warning notice and a deduction notice under a JCT contract?

This was very much the understudy to the other points raised in Grove Developments. In order to claim liquidated damages under the JCT DB 2011 contract, an employer must first serve a non-completion notice under clause 2.29.1.1. This had been done some time ago. Clause 2.29.1.2 then requires a notice that the employer ‘may require payment of, or may withhold or deduct, liquidated damages’, which was styled a warning notice. This was sent by Grove Developments by email.

Seconds after the warning notice has been sent, however, a clause 2.29.2 notice (under which an employer ‘requires’ the contractor to pay liquidated damages) was sent: this was styled a deduction notice. Clearly, S&T had no time to consider the warning notice before it received the deduction notice. Coulson J refused, however, to imply a term that there was to be a ‘reasonable period’ between the service of these notices for them to be effective.

 Conclusion: why this is not the end of ‘smash and grab’ adjudications

The reasoning in Grove Developments is not novel. The conclusions reached are grounded in a thorough review of the authorities. What it provides, however, is considerable clarity in an area that had become vexed by competing first instance decisions.

Is this the end of ‘smash and grab’ adjudications? Part of their attractiveness previously lay in the considerable uncertainty as to whether it was possible to re-visit the payment on a value adjudication, which often meant that this was not attempted until at least the final payment stage. Legal uncertainty is a poor jurisprudential basis to keep parties out of their money, however.

While it is traditional to refer to Sir Michael Latham’s report ‘Constructing the Team’ (HMSO, 1994) (the Latham Report) when it comes to adjudication, it is easy to forget that Sir Michael also proposed ‘Clearly setting out the period within which interim payments must be made to all participants in the process, failing which they will have automatic right to compensation’ (p37). Notice-based adjudications have become the procedural method to enforce that ‘automatic right’. There is still considerable advantage in receiving prompt payment. I still think that they will play an important role.

Will we now see ‘double adjudications’, with the second, valuation adjudication being launched almost as soon as the referral notice for the notice adjudication is served? Mobilising for a valuation adjudication is slower, more resource-draining and more complicated than for a notice-based adjudication. During this period, the disputed money will be with the party undertaking the work and who, on the face of the contract, is entitled to it. We shall wait and see, however, if construction adjudication ‘double headers’ will become the new spectre that stalks the construction law landscape.

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