In February 2018, the Technology and Construction Court in England (TCC) issued an important decision which signalled the end of the windfall effect of 'smash and grab' adjudications. That decision has now been confirmed by the Court of Appeal.
Smash and grab adjudications
In terms of Section 111 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the "Act") in the absence of a valid payment notice by the employer or the certifier under the contract the amount claimed in a payment application issued by a contractor will become the "notified sum". In the absence of a valid pay less notice the employer is obliged to pay that amount irrespective of any dispute over the true valuation of the application.
Circumstances of the case
The case - in S&T (UK) Limited v Grove Developments Limited - related to a JCT Design and Build contract between Grove Developments Limited ("the Employer") and S&T (UK) Limited ("the Contractor") for the construction of a new Premier Inn Hotel at Heathrow Terminal 4.
The Employer asked the TCC to declare that a Pay Less Notice it had issued was valid and that it was entitled to commence an adjudication to establish the true sum due to the Contractor in respect of an interim application for payment where the amount claimed in the application had become the notified sum due to the absence of a valid payment notice in terms of the Act.
The case followed a series of adjudications in which the Contractor had successfully argued that the Pay Less Notice issued by the Employer was invalid as it had failed to specify the basis of how it had calculated the relevant sum because it referred to a spreadsheet previously and separately issued when 'specifying' the relevant sum.
Validity of Pay Less Notice - reasonable recipient test approved
Section 111(4) of the Act requires a pay less notice to specify both the sum that the paying party considers to be due and the basis on which that sum is calculated.
The Pay Less Notice issued by the Employer here referred to a previously issued document to set out the basis of calculation and that document was not re-sent to accompany the Pay Less Notice itself.
The Contractor argued that "specify" the basis on which the sum considered due is calculated meant that, to be valid, the pay less notice "must contain or have attached to it" all detailed calculations upon which the employer relies to substantiate his assessment. This argument was presented as a "bright-line rule" from which there could be no deviation.
The Court of Appeal disagreed with the Contractor, reaffirming the decision of the TCC. It was held that the interpretation of pay less notices must be approached objectively. The question to be answered was how would a reasonable recipient have understood the notice and that there was no "bright line rule".
The Court held that reference to other documents in Pay Less Notices is neither always permissible nor never permissible with the degree of specificity being a question of fact and degree. In the circumstances, the Contractor in the current case, as a reasonable recipient, should have understood the basis on which the Employer had calculated the relevant sum.
True valuation of an interim account – adjudication available for employers
Whilst this question was rendered academic due to the court deciding that a valid and effective Pay Less Notice was served, the Court of Appeal thought it appropriate for this matter to be clarified due to its importance for the construction industry.
The Court again reaffirmed the original decision of the TCC that a second adjudication could be raised in relation to an Interim Application to determine the true value of the works. Previously the view was that such an adjudication to address a dispute by an employer over the true value of the works was restricted to the final account stage.
The court held that whilst section 111 generates an obligation to pay the notified sum by the final date for payment the section is not the "philosopher's stone" and does not turn the notified sum into a true valuation of the work done so that it is open to either party to challenge the correctness of the notified sum by way of adjudication.
In terms of the Act, the adjudication provisions are subordinate to the payment provisions. Section 111 requires a notified sum to be paid within a specific period of time. Where a key purpose of the Act is to promote cash flow in the construction industry, the Court considered that prompt payment should come before any true valuation adjudication so that the paying party must actually pay the disputed notified sum before being entitled to recover any difference by adjudication.
Being an English decision, the judgment in the S&T (UK) Limited v Grove Developments Limited case is not binding in Scotland. However, in practice it is likely that it will be followed by adjudicators in Scotland as representing the proper interpretation of the Act.
It is as yet unclear whether the decision will result in fewer 'smash and grab' adjudications being raised and our experience is that these continue to be threatened. However where there is now a clear and quick redress available by a true valuation adjudication any windfall effect for the contractor to be achieved by a smash and grab adjudication will be much reduced in time
Employers must remain careful to ensure that Payment Notices and Pay Less Notices are served timeously, particularly when there is the risk of a large notified sum being paid which they cannot afford or which they are unlikely to get back from the contractor following the true value being determined. This is particularly so in instances where the contractor may be veering towards insolvency so that any sums paid by the employer may be swallowed up by secured creditors prior to any re-evaluation of the works.
Get in touch
If you require advice or assistance in relation to the proper preparation of Payment Notices and Pay Less Notices or in dealing with threatened adjudications for payment under construction contracts please contact a member of our team.