The end of Smash & Grab adjudications?

Will Mr Justice Coulson’s TCC swan song in the case of Grove Developments Limited v S&T (UK) Limited [2018] EWHC 123 (TCC) signal the end of so-called “smash and grab” adjudications? Here we consider the potential impact of this case in disputes concerning a paying party’s failure to submit a valid pay less notice under a building contract.

Facts

The claimant (Grove) employed the defendant contractor (S&T) to design and build a Premier Inn at Heathrow T4 under a JCT Design and Build Contract 2011.

There were three adjudications. The first decided that a Schedule of Amendments was a valid part of the contract; the second decided that S&T were entitled to a partial extension of time; and the third decided that Grove’s pay less notice was invalid. This third decision meant that S&T were potentially entitled to be paid £14m pursuant to an interim application. Anticipating this possible outcome Grove had issued Part 8 court proceedings whilst S&T sought enforcement of the third decision.

The proceedings raised 4 issues.

  1. Whether Grove’s pay less notice complied with the contract.
  2. Whether, even if the pay less notice complied with the contract, the third decision should still be enforced.
  3. Whether in principle Grove was entitled to commence a separate adjudication as to the “true” value of interim application 22.
  4. Whether Grove’s notices in respect of liquidated damages were properly issued. This note does not cover the fourth issue.

Issue (1) – The validity of the pay less notice

The pay less notice was to be construed in a similar way to the underlying contract. It was to be approached objectively, taking into account the objective contextual scene: how would a reasonable recipient have understood it? One way of testing it was to ask whether the notice provide an adequate agenda for a dispute about valuation and to any cross claims available to the employer?

A pay less notice was not to be construed more generously than a contractor’s application/payment notice. But the adverse consequences which follow a defective pay less notice were relevant to the test of the reasonable recipient. In the case of a payment notice/application would the recipient have realised the document was an application or payment notice with contractual force, and all the consequences that may entail?

The guidelines applied equally to a payment notice and pay less notice; each must make plain what it is; clearly set out the sum said to be due and / or to be deducted, and the basis on which that sum is calculated.

The court concluded the pay less notice was valid. It did properly set out the basis of calculation by reference to a detailed calculation sent 5 days before the pay less notice with a purported payment notice. There were detailed figures for every element of the works and it satisfied the test of providing a detailed agenda for valuation. There could be no possible objection in principle to a notice referring to a detailed calculation set out in another, clearly-identified document. The fact that the document was not reattached to the pay less notice did not matter. There was nothing in the contract requiring it be re-sent. It was clear what was being referred to and it was incorporated by reference.

The court pointed out that a party who relies on incorporation by reference without re-sending the document takes risks that something may go wrong with technology or the mode of delivery of the first document.

Issue (2): Should the decision in Adjudication 3 be enforced anyway?

Adjudication 1 had decided that the Schedule of Amendments applied. That decision was and remained binding on the parties. This meant the pay less notice was served in time.

The court’s findings on Issues (1) and (2) meant that the decision in Adjudication 3 was wrong and could not be enforced.

Issue (3): Did the employer have the right to adjudicate the ‘true’ value?

The court had to consider whether, in circumstances where it had been decided in a first “smash and grab” adjudication that a party must pay the sum due in an interim application, that paying party could commence a second adjudication to decide the “true” value of the work.

The court held that there were 6 reasons why the employer could adjudicate to decide the true value of the interim certificate:

  • A judgment of Dyson LJ (as he then was) in the Court of Appeal[1] was authority for the proposition that the court could decide the ‘true’ value of any certificate, notice or application and as part of that process open up review and revise the same. An adjudicator has the same wide powers as the court to decide the “true” value of an interim certificate.
  • There is no limitation on the nature, scope and extent of the dispute which either side can refer to an adjudicator in either s.108 of the Act[2] or paragraph 20 of the Scheme[3].
  • The dispute in the second adjudication as to the true value would be a different dispute from the first adjudication about the absence or validity of a payment or pay less notice.
  • The words “the sum due” in Clause 4.7 of the JCT contract in question is part of the contractual mechanism designed to calculate the precise entitlement (the “true” value). This is very different from the “sum stated to be due” or “stated as due” in Clause 4.9 which identifies the sum payable under a valid notice.
  • As a matter of general principle, the employer can refer the dispute about the true valuation to adjudication, once he has paid the sum stated to be due. Nothing in the Act, Scheme or contract prevented the employer doing what the contractor could do: attacking the sum stated as due in a notice.
  • Nothing in sections 110A, section 110B and section 111 of the Act, drew any distinction between an interim and a final certificate. They applied to both. Thus whether what was in dispute was an interim or final payment, the employer had the right in principle to refer to adjudication a dispute about the ‘true’ value.

It was then necessary to review existing authorities to see if they compelled a different conclusion. On the face of it the very question now raised was answered by Jacob LJ in Rupert Morgan[4] when he said that although in the absence of a withholding notice the employer had to pay the sum certified, that did not preclude the employer “from subsequently showing he was overpaid. If he is overpaid on an interim certificate the matter can be put right in subsequent certificates. Otherwise he can raise the matter by way of adjudication or if necessary arbitration of legal proceedings.” Rupert Morgan was binding and made good sense.

The court considered two previous decisions in which Edwards-Stuart J “took a different line” and found itself unable to follow them. In so doing Mr Justice Coulson observed that the value should not be deemed to be agreed merely by virtue of the absence of an effective payment or pay less notice.

Thus an employer whose payment notice or pay less notice was deficient or non-existent could pay the contractor the sum stated to be due in the contractor’s interim application but was then free to commence adjudication proceedings to dispute that the sum paid was the “true” value of the works for which the contractor had claimed.

Comment:

This decision limits the time effects of so called “smash and grab” adjudications. An employer who loses a “smash and grab” and pays up can in principle immediately adjudicate the true value of an interim as well as final payment application. In an appropriate case, the employer might seek a stay of execution in relation to enforcement of the “smash and grab” decision in the meanwhile.

Mr Justice Coulson said that his decision in this case “will strengthen the system, because it will reduce the number of ‘smash and grab claims; which, in my view, have brought adjudication into a certain amount of disrepute”. A contractor may therefore still see merit in commencing a “smash and grab” to use the adjudicator’s decision as leverage for resolution of any wider valuation dispute and to assist its cash flow.

The reference to the judgment of Jacob LJ in Rupert Morgan is interesting for another reason. It will be recalled that Jacob LJ said an overpayment could (also) be put right in a subsequent certificate. If the true value can be adjudicated why can it not be adjusted by the employer in a subsequent certificate? This question remains hanging in the air, for now.

[1] Henry Boot Construction Ltd v Asltom Combined Cycles Ltd [2005] 1 WLR 3850 at paragraph 23

[2] Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009

[3] Scheme for Construction Contracts (England & Wales) Regulations 1998 (SI 1998/649) as amended by the Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011 (SI 2011/2333)

[4] Rupert Morgan Building Services (Llc) Ltd. v Jervis & Anor [2003] EWCA Civ 1563