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Grove Developments Ltd v S&T (UK) Ltd: the end of "smash and grab" adjudications?

Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC)

Following the 2014 decision in ISG Construction Ltd v Seevic College, where a paying party failed to issue a valid payment notice in response to a payment application, the amount applied for by the contractor in its payment application became payable. The contractor's ability to claim the full sum lead to the phenomenon of "smash and grab" adjudications.

The recent TCC decision in Grove v S&T marks a departure from the approach in ISG: an employer may now adjudicate on the "true value" of a payment application, even where invalid payment notices have been issued.

The Grove judgment is likely to impact payment practices in the industry, but whether it will result in a demise of smash and grab adjudications is less certain.

Background

Grove engaged S&T by way of a JCT Design and Build Contract to design and construct a new hotel at Heathrow Terminal 4. In response to an interim payment application by S&T, Grove issued a payment notice providing the basis of its valuation. However, the notice was issued out of time. Following ISG, Grove's failure to issue a valid notice would have enabled S&T to refer the dispute to adjudication with the possibility of recovering the full sum identified in its interim payment application.

Grove subsequently issued a Pay Less Notice (including the levying of Liquidated and Ascertained Damages against S&T) that sought to incorporate by reference its detailed calculation that had been contained in the earlier (purported) payment notice. When Grove declined to pay, S&T successfully persuaded an adjudicator that Grove's Pay Less Notice was invalid because the calculation was set out in a separate document. Following ISG, the Adjudicator held that S&T was entitled to be paid in excess of £14 million.

Part 8 Proceedings

In response to the adjudicator's findings, Grove commenced Part 8 declaratory relief proceedings. It sought a series of declarations from the Court, to the effect that its Pay Less Notice was valid. At the same time, Grove sought to challenge the reasoning in ISG. 

Mr Justice Coulson summarised the issues before him as follows:

  1. Whether Grove's Pay Less Notice was valid;
  2. Whether Grove was entitled to commence separate adjudication proceedings to decide the "true value" of S&T's application; and
  3. Whether Grove's notices regarding liquidated damages for delay had been properly issued.

Pay Less Notice

S&T challenged the validity of Grove's Pay Less Notice on the grounds that the notice specified the sum it intended to pay by reference to calculations contained in a separate document, specifically a payment certificate that had been issued out of time. According to S&T, the employer must instead attach any documents to its Pay Less Notice.

Coulson J held that an employer can incorporate documents by reference into a Pay Less Notice; Grove's notice was therefore valid. The "only permissible consequence" of this finding was that the adjudicator's decision should not be enforced.

Whether a notice is compliant will be a matter of "fact and degree" with the question turning on the facts of each case. In the present case the Court concluded, "the reasonable recipient would have known precisely what sum was being deducted and the basis of its calculation."

A Separate Adjudication

Despite ruling that Grove's notice was valid, the Court went on to consider an employer's right to commence separate adjudication proceedings in the absence of a valid notice.

Under the reasoning in ISG, where an employer fails to issue valid payment notices he is deemed to have agreed to pay the full sum demanded in the contractor's payment application. Moreover, the employer cannot seek a revision of that valuation to determine a "true" valuation or recover any overpayment.

The Grove decision departed from ISG, ruling that Grove was entitled to adjudicate on the true value of the services for which S&T had claimed payment in its application, even without having served valid notices. Mr Justice Coulson relied on six "first principles":

  1. An adjudicator has the same powers as the Court to decide all disputes, including the true value of an application;
  2. On interpretation of the Housing Grants, Construction and Regeneration Act 1996 and the Scheme for Construction Contracts there is no limit on the nature, scope and extent of the dispute which either party can refer to an adjudicator;
  3. The dispute raised by an employer in the second adjudication would be a separate issue to that being determined in the first, as it would relate to valuation rather than the validity of a notice;
  4. The terms of the JCT D&B 2011 Contract expressly differentiate between "the sum due" and "the sum stated as due", which leaves open the possibility of a second adjudication;
  5. A contractor can refer a dispute about the true value of a payment notice to adjudication: it would be wrong in principle to prohibit an employer from doing that which the contractor can do;
  6. Neither the Act nor the Scheme distinguish between interim and final applications for payment, meaning that the decision in ISG was misguided.

The Judge also considered that the Court of Appeal authorities on the matter "all point the same way"  an employer is free to commence its own adjudication to determine the true value of an application.

Liquidated Damages Notices

The Grove decision issued important guidance regarding the requirements under the JCT forms of contract for service of notices as a pre-condition to the deduction of liquidated damages for delay.

Under most JCT building contracts, an employer must (1) issue a non-completion notice; (2) notify the contractor it may require the payment of or may withhold or deduct liquidated damages; and (3) serve a pay less notice no later than five days before the final date for payment before it can deduct or claim liquidated damages for delay. In the present case, S&T received the two notices from Grove approximately seven seconds apart. 

S&T claimed this was insufficient to allow it to register the warning notice and as such, the deduction notice was invalid. Rejecting S&T's argument, the Judge confirmed that the two notices would be valid as long as they were received in the right order.

The finding by Mr Justice Coulson provides clarity to employers (and their advisers) who must now ensure that the notices required as pre-conditions to the deduction of liquidated damages for delay under JCT forms of building contract are sent sequentially and in the correct order. Where the notices are sent by post, for example, it will be advisable to send them on separate days.

Going Forwards

In his judgment, Mr Justice Coulson makes it clear that an employer may only commence a second adjudication once it has paid the sum stated as due in a default payment notice: that second adjudication will not act as "a Trojan Horse to avoid paying the sum stated as due." Query how this sits with the ability of a party under the Construction Act to refer a dispute to adjudication "at any time"?

Smash and grab adjudications are therefore likely to remain popular among contractors. There is also the possibility that the option of a second adjudication may lend itself to the adoption of a "pay now, argue later" attitude among adjudicators.

Whilst Grove marks a departure from previous case law, it is unlikely to mark the demise of smash and grab decisions, as suggested by some commentators. It is also worth noting that S&T has obtained permission to appeal the decision, which it is hoped at the very least will bring greater certainty to payment practices in the construction industry.

Contact

For more information please contact, Robert Goodlad, Senior Associate +44 02072808829 robert.goodlad@dwf.law or Georgia Hine, Trainee Solicitor +44 20 7645 4223 Georgia.hine@dwf.law

 

 

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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