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Pay now, argue later?

View profile for Hazel Boland-Shanahan
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There has been some confusing case law regarding interim applications and payments, valuation disputes and how the adjudication process slots in, which led to the rise of smash and grab adjudications. Sir Rupert Jackson in his Court of Appeal judgment for S&T (UK) Limited v Grove Developments provides reasoned clarity and other helpful guidance.

As the judgment has great importance for the construction industry, this article is a bit longer than usual to give you a detailed summary of the background and the decision. It then provides some take away points at the end.

Background

You may be familiar with the saga between S&T (UK) Limited (“S&T”) and Grove Developments Limited (“Grove”) regarding interim payments and true valuations which went from serial adjudications to the Technology and Construction Court (“TCC”).  To refresh your memories, I have set out a brief synopsis below.

Grove (the employer) engaged S&T (the contractor) to design and construct a hotel at Heathrow Airport under an amended JCT Design and Build Contract 2011. Works duly commenced but were delayed. Grove served a non-completion notice on S&T on the contractual completion date and practical completion (“PC”) was achieved 5 months later than the contractual completion date.

After PC, S&T sent an interim application for payment to Grove. The application was for just under £40 million. The increase from Grove’s last valuation, and therefore S&T’s expected payment, was just over £14 million. Grove sent a payment notice to S&T but it was 8 days late. Grove valued the works at around £26 million, meaning, on its interpretation, there was only around £1.4 million to pay.

5 days after the late payment notice, Grove sent S&T a pay less notice, which also notified S&T of Grove’s right to withhold liquidated damages (“LDs”). The same afternoon, Grove notified S&T that it may require payment of and/or withhold or deduct LDs. A few seconds later, Grove then sent a LDs deduction notice to S&T. Relying on these notices; Grove did not pay S&T anything for the interim application.

Adjudications and claims in the TCC

Adjudications followed regarding contract terms, S&T’s entitlement to an extension of time (“EOT”) and the validity of Grove’s pay less notice. The decisions found that the schedule of amendments were part of the contract, S&T was entitled to some EOT, but only around 2 months, and Grove’s pay less notice was invalid. Grove was unhappy with that decision and so made a Part 8 Claim to the TCC for declarations that (a) its pay less notice was valid and (b) it was entitled to commence an adjudication for the true sum due to S&T. S&T counterclaim that Grove was not entitled to LDs because it had not complied with the notice procedure. S&T also brought another claim in the TCC to enforce the third adjudicator’s decision.

The first instance judge, Mr Justice Coulson, found that Grove’s pay less notice was valid, that Grove was entitled to commence an adjudication to determine the true value of S&T’s interim application and that Grove had complied with the notice requirements under the contract for LDs. As a consequence, the same judge also declined to enforce the third adjudicator’s award.

Appeal

S&T was dissatisfied with the findings of the TCC at first instance and so appealed. The issues on appeal were:

  1. whether Grove’s pay less notice sent in response to the interim application complied with the contractual requirements;
  2. whether Grove is entitled to pursue a claim in adjudication to determine the correct value of the works on the date of the interim application; and
  3. whether Grove complied with the contractual requirements in order to maintain its claim for LDs.

Sir Rupert Jackson (who came out of retirement to hear the appeal) agreed with the first instance judge, Mr Justice Coulson, on all 3 issues.

Decision

Grove’s pay less notice sent in response to the interim application complied with the contractual requirements

S&T’s argument was that Section 111(4) of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”) requires that a pay less notice given by the employer “shall specify” both the sum that it considers due and “the basis on which that sum is calculated”. The basis on which the sum was calculated was set out in the payment certificate, sent with the late payment notice, and was referred to in the pay less notice. The adjudicator did not think it was sufficient to refer to a separate document to show the calculation because he believed the word “specify” required the explanatory calculation to go with the pay less notice. S&T agreed with the adjudicator.

Mr Justice Coulson did not agree. Rather than focus on the word “specify” he emphasised that the question was how a reasonable recipient would have understood the notice. Sir Rupert Jackson noted that it is common to refer to a detailed calculation set out in another document. However, there is no bright line rule on this. Reference to other documents may or may not be permissible in other cases.

Grove is entitled to pursue a claim in adjudication to determine the correct value of the works on the date of the interim application

Despite confirming that Grove’s pay less notice was valid, Sir Rupert Jackson still gave his findings on this issue because of its importance to the construction industry. There has been some conflicting case law on this subject.

Previous confusing case law made construction professionals wonder whether they had the right to refer a dispute about the true value of an interim application if an adjudicator already decided the same interim application in dispute had to be paid.

Sir Rupert Jackson confirmed YOU CAN ARGUE LATER by commencing an interim valuation adjudication after an adjudicator has decided the same interim payment in dispute must be paid but YOU MUST PAY FIRST.

Just because the adjudicator has decided an application must be paid, does not mean that it is the true value of the works at the time it was given. However, you/the other side must first comply with the immediate payment obligation and then you/they may commence an adjudication. The adjudication regime does not trump the prompt payment regime.

Grove complied with the contractual requirements in order to maintain its claim for LDs

In the particular circumstances of this case, there were no timing requirements for the LDs’ notices. They just needed to be in a particular order.

As no timing requirements were specified, it did not matter no close together Grove sent its notices, even if it was just a few seconds.

Conclusion

The big question we wanted to know the answer to was whether you can refer an interim valuation adjudication after an adjudicator has already awarded that the same interim application/payment in dispute must be paid.

The answer is yes, but only after the interim valuation is paid.

What else can we take away from this matter?

Adjudication is not a final and binding process unless your contract states otherwise. Both parties have the right to go the court for a final judgment.

It seems you may refer to other clearly specified documents in a notice, but this is not a hard and fast rule for every case. It will depend on the wording of your contract. It would be better to provide any document you refer to and rely on with your notice.

If an adjudicator has just decided either:

  1. you must pay an interim application for payment; or
  2. you are not entitled to payment of the whole amount of an interim payment because there is a valid pay less notice withholding all or some of the payment
  3. you may still adjudicate the true value of the works up until the date of the interim application. However, payment of the first adjudicator’s decision must be made before embarking on a second adjudication regarding the true valuation. Note that it is not clear yet whether the adjudications may be concurrent, so stay alert that concurrent adjudications may led to arguments that the adjudicator lacks jurisdiction.
  4. If there are signs that the contractor is becoming insolvent, it is up to the employer to ensure that it sends its payment notices and/or pay less notices on time and in accordance with the contract to protect its position. Otherwise the employer could end up paying the first adjudicator’s decision, commence a valuation adjudication and the contractor goes bust in the meantime.
  5. If your contract does not contain timing provisions and there is no sensible specific period that could be implied, the courts will not imply timing provisions for you. In this case, it meant the Employer only needed to comply with the sequence required for notices. That did not give the Contractor any time to process the notice before receiving the claim. If you want time between notices so that a party has time to consider them and respond before a claim is made, then this needs to be specified in your contract.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.