Theresa Mohammed and Stephanie Geesink of Trowers & Hamlins explain an important ruling on the payment notice regime
Parties can now seek a valuation of the sum due at an interim stage and are not reliant on the payment notice regime – following an important Appeal Court ruling last week.
Since February there has been much debate on whether “smash and grab” adjudications are now resiled to the history books and whether payment notice defaults are no longer a concern as employers can just counter-adjudicate on the value of the relevant application. On 7 November the landmark judgment S&T (UK) Ltd vs Grove Developments Ltd was handed down, providing clarity to the payment dispute landscape.
This case at first instance raised specific questions on the payment practices pursuant to a JCT Design and Build 2011 Contract for the design and construction of hotel and link bridge at Heathrow.
Two of the issues before the court were:
- Whether a pay less notice was invalid because it failed to specify the calculation of the sum due within the notice
- If the employer had been liable to pay the sum stated to be due in the contractor’s interim application due to an invalid payment or pay less notice, whether it would be entitled to commence an adjudication (or other proceedings) to establish the sum actually due to the contractor in respect of the application.
Following the 2014 judgment in ISG Construction Ltd vs Seevic College and subsequent cases, it was accepted that where no valid payment and/or pay less notices had been served, the sum applied for would become the sum that had to be paid, and the paying party could not commence a subsequent or parallel adjudication requesting a determination on the value until the final account stage. In many respects this reflected the intention of parliament, namely to address the failure to pay contractors, commonly referred to as the blight on the construction industry, which generated disputes, delayed progress and caused downstream insolvency.
ISG vs Seevic also reinforced the specific requirements of the Construction Act to issue payment and pay less notices and represented the two chances a paying party has to avoid making payment during the payment cycle. If the paying party failed to issue the notices, it would be obliged to make payment in full, which could then be reassessed at the next payment cycle or at final account stage.
The end of smash and grab?
The court at first instance in S&T vs Grove found a pay less notice could properly incorporate the calculation of the sum due by reference, and that if a paying party failed to issue a payment or pay less notice, it could commence a value adjudication once payment was made in full. Commentators hailed this as an end to “smash and grab” adjudications, but we would argue the opposite: In high-value disputes there is still an incentive to adjudicate on a failure to issue a valid pay less notice if the law is you must be paid first, before the paying party can adjudicate on value.
S&T appealed against the judgment at first instance. The Court of Appeal held that the relevant dispute between the parties arose out of the validity of the pay less notice, which pursuant to the JCT standard form and the Construction Act was required to specify the sum due and the basis on which that sum had been calculated. In this case, Grove referred to a payment certificate sent previously to explain the basis of calculation. It was S&T’s position that this invalidated the pay less notice as it did not itself specify how the sum had been calculated.
The Court of Appeal found that it would be a question of fact and degree in each case whether the purported pay less notice achieved the requisite degree of specificity. On the facts of this case, as the pay less notice was sent to the same individuals who were dealing with the application, the court held they were bound to be familiar with the package of documents the employer had sent them five days earlier and there could be no doubt or misunderstanding in the mind of a reasonable recipient.
As a consequence, the pay less notice was held to be valid on the facts.
Adjudication for revaluation
In terms of the valuation adjudication, the Court of Appeal noted this issue was one of great importance to the industry.Agreeing with the judge at first instance, the court found an employer failing to serve a payment or pay less notice is nevertheless entitled to adjudicate to determine the value of an interim application. The court nevertheless highlighted that the employer is under a statutory obligation to pay the “notified” sum – the sum stated as due in the contractor’s application – where there is no valid payment or pay less notice.
The decision on the pay less notice may be specific to this case, but of wider applicability is the suggestion that the requirements of such notices (such as how the sum due has been calculated) can be incorporated into the notice by reference. We would argue this leaves room for disputes over what can be incorporated and over what time period.
Of most interest to the industry will be the court’s decision on the paying party’s right to start an adjudication on value where no valid payment or pay less notice has been issued. The court has sought to reach this decision without undermining the payment notice regime, that is, by finding that payment must be made before obtaining a revaluation.
In making this finding, the court considered that the Construction Act and the contract must be construed as prohibiting the employer from embarking on an adjudication to obtain a revaluation of the work before having complied with its immediate payment obligation.
The Court of Appeal’s decision in this respect has taken a step further and has sought to find a juridical basis for the proposition that a party must pay the notified sum first before commencing a valuation adjudication, but how that will work in practice remains to be seen. What we may see is a vast increase in adjudications, the first dispute being on notice defaults and then valuation adjudications following payment being made. In any event, in our view, what this case highlights is a clear tension between the statutory payment obligations and what was the unfettered right to adjudicate at any time.