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The big construction law question: can you pay now and argue later?
This article first appeared in Construction News.
A top judge came out of retirement to help decide a crucial question around interim payments and adjudications, as Hazel Boland-Shanahan explains.
Confusing case law on interim payments led to the rise of smash-and-grab adjudications.
The Court of Appeal judgement in S&T (UK) Limited v Grove Developments provides reasoned clarity as well as other helpful guidance.
Just because the sum stated in a payment certificate or default payment notice has become due, does not mean that it represents the true value of the works. So if the client missed its chance to issue a pay less notice, tough luck: it has to pay the amount certified. However, after the client has paid, it can dispute the true value of the works at the time of the certificate or notice by referring it to another adjudication.
Background to the case
The saga between S&T (UK) and Grove Developments – regarding interim payments and true valuations – went from serial adjudications to the Technology and Construction Court.
Grove engaged S&T to design and construct a hotel at Heathrow under an amended JCT Design and Build Contract 2011. Works duly commenced but were delayed. Grove served a non-completion notice to S&T on the contractual completion date and practical completion was achieved five months later than the contractual date.
After practical completion, S&T sent an interim application for payment to Grove for just under £40m. Grove valued the works at around £26m, which would leave only £1.4m to pay. Grove sent a payment notice to S&T but it was eight days late.
Five 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. The same afternoon, Grove notified S&T that it may require payment of and/or withhold or deduct liquidated damages.
A few seconds later, Grove sent a liquidated damages deduction notice to S&T. Relying on these notices, Grove did not pay S&T anything for the interim application.
Adjudications and claims
Adjudications followed regarding contract terms, S&T’s entitlement to an extension of time and the validity of Grove’s pay less notice.
Grove was unhappy with the adjudicator’s 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 counterclaimed that Grove was not entitled to liquidated damages 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 liquidated damages. As a consequence, the same judge also declined to enforce the third adjudicator’s award.
Out of retirement for the appeal
S&T was dissatisfied with the findings of the TCC at first instance and so appealed. Sir Rupert Jackson (who came out of retirement to hear the appeal) agreed with the first instance judge, Mr Justice Coulson, on all three issues.
Among the bottom lines was that Grove’s pay less notice sent in response to the interim application complied with the contractual requirements.
In its pay less notice, Grove referred to a separate document to show its calculation previously provided to S&T but was not attached to or enclosed with the pay less notice.
The court emphasised that the question was how a reasonable recipient would have understood the notice. It is common to refer to a detailed calculation set out in another document. However, there is no strict rule on this. Reference to other documents may or may not be permissible in other cases.
Grove was entitled to pursue a claim in adjudication to determine the correct value of the works on the date of the interim application.
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 had already decided the same interim application in dispute had to be paid.
The court confirmed you can argue later. Just because a sum became due does not mean it is the true sum. Once you pay the sum due, you can refer the valuation to adjudication. The key is you must pay first.
Grove complied with the contractual requirements in order to maintain its claim for liquidated damages.
There were no timing requirements for the liquidated damages’ notices in the contract. Notices just needed to be in a particular order. As no timing requirements were specified, it did not matter how close together Grove sent its notices, even if it was just a few seconds.
The big question we wanted answered was whether you can refer an interim valuation adjudication after an adjudicator has already decided the same interim application/payment in dispute must be paid.
The answer is yes, but only after the interim valuation is paid.
- 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 judgement.
- It seems you may refer to other clearly specified documents in a notice, but this is not a definitive rule. 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 as a precaution.
- If an adjudicator has just decided either that you must pay an interim application for payment, or that 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, then 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.
- If there are signs that the contractor is becoming insolvent, it is up to the employer to ensure 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.
- Finally, 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.
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.