07 March 2018 #Construction
Judge Coulson’s decision in the Technology and Construction Court published last week, his last before moving to the Court of Appeal, concerns the infamous “smash and grab” adjudications.
Grove Developments Ltd v S&T (UK) Ltd  EWHC 123 (TCC)
Ever since Harding v Paice, ISG v Seevic and Galliford Try Building v Estura (see our analysis on all three cases here), the industry has seen a flurry of “smash and grab” adjudications. A “smash and grab” adjudication, in a nutshell, involves one party to a construction contract who has issued an interim application, claiming payment from another where the paying party has failed to issue either a payment or a pay less notice. The effect of the “smash and grab” is that it:
For that reason, and as Coulson J put it, smash and grab claims “have brought adjudication into a certain amount of disrepute”.
SUMMARY OF DECISION AND ITS IMPACT
Whilst a contractor or specialist sub-contractor is still entitled to recover the full amount claimed in an interim application in a smash and grab style adjudication absent a compliant pay less notice, they are now obliged to repay the employer any overpayment found to have been made if the employer successfully takes the issue on the 'true' valuation to a subsequent immediate adjudication. The employer or contractor as the case may be no longer needs to wait until the next payment cycle or the final payment determination stage. As Coulson J put it, “cash-flow must not be confused with the contractor retaining monies to which he has no right”.
Grove and S&T entered into a JCT Design and Build Contract 2011 by which S&T were to design and build a new Premier Inn Hotel at Heathrow. Adjudication No.3 between the parties was a “smash and grab” and concerned the validity of Grove’s pay less notice. In March/April 2017 S&T issued an interim payment application (No. 22) and attached a detailed spreadsheet. Grove responded by late issue of a payment notice with their detailed assessment of S&T's valuation, attaching a version of the same spreadsheet sent by S&T, but now with Grove's valuation added. Grove issued a pay less notice which referred to the relevant spreadsheet attached to the payment notice. The spreadsheet was not re-attached to the pay less notice.
5 months after the pay less notice, S&P sent a letter to Grove alleging for the first time that the pay less notice was invalid because "the purported Payment Notice and calculation is not attached to the purported Pay Less Notice, and so the explanation of the basis on which that sum is calculated is not attached". On 01 November 2017, S&T served a notice of adjudication in which they sought a declaration as to the validity of the pay less notice.
The adjudicator decided that the pay less notice was invalid and so Grove were liable to pay over £14 million against an application which it believed had a true value of only £1.4m. Grove issued court proceedings to overturn the adjudicator’s decision. Coulson J identified three relevant issues for the court to decide:
Issue A: whether Grove's pay less notice complied with the requirement in clause 18.104.22.168 of the contract to make clear the basis of its calculation. Clause 22.214.171.124 states that a pay less notice “shall specify both the sum … due to the Contractor at the date the notice is given and the basis on which that sum has been calculated”.
Issue B: whether, even if the pay less notice did comply with the contract, the award in the third adjudication in S&T's favour should still be enforced.
Issue C: whether in principle, at this stage, Grove is entitled to commence a separate adjudication seeking a decision as to the 'true' value of interim application 22.
S&T argued that the detailed spreadsheet was not re-sent with the pay less notice and therefore the basis for how the sum in the pay less notice was calculated was not provided. The general principle is that a pay less notice must always clearly set out the sum which is considered due and the basis on which that sum is calculated.
Coulson J disagreed with S&T, saying that argument was 'artificial and contrived' noting “there is nothing in the contract which required the re-sending of a document already sent, provided always that, as it was here, it was clear to what document the pay less notice referred”.
Coulson J considered the 'objective contextual scene' and concluded that a reasonable recipient would have understood how the sum in the pay less notice was calculated. The pay less notice was therefore valid, it being clear how the sum due was calculated.
Coulson J decided that the Adjudicator’s decision could not therefore be enforced. As he decided the dispute about the validity of the pay less notice differently from the Adjudicator, there was nothing left to enforce.
This is by far the most contentious issue in the judgment. Coulson J himself makes no apologies for its length (165 paragraphs in total, issue C consisting of 81 paragraphs) as it “will be of particular interest to the construction industry”.
As Coulson J put it: “can an employer, whose payment notice or pay less notice is deficient or non-existent, pay the contractor the sum stated as due in the contractor's interim application and then seek, in a second adjudication, to dispute that the sum paid was the 'true' value of the works for which the contractor has claimed?”.
He concluded that the answer is YES by applying 6 ‘first principles’:
1) The authority in Henry Boot Construction Limited v Alstom Combined Cycles Limited  1 WLR 3850, by which the court can decide the 'true' value of any certificate, notice or application. As part of that process, it has power to open up, review and revise any existing certificates, notices or applications. He concluded that the court (and/or an adjudicator), therefore, has the power to decide the 'true' valuation of interim applications.
2) Section108(1) of the Construction Act provides that “A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section.” Coulson J also drew attention to paragraph 20 of the Scheme of Construction Contracts which essentially provides that an adjudicator may “open up, revise and review any decision taken or any certificate written by any person referred to in the contract unless the contract states that the decision or certificate is final and conclusive”.
He concluded that not only can a court decide any subsequent dispute as to the 'true' valuation of the interim application, but there is also no limit on the power or jurisdiction of an adjudicator which would prevent him or her from doing the same.
3) The dispute which the employer would wish to raise in any second adjudication: “to dispute that the sum paid was the 'true' value of the works for which the contractor has claimed?” is a different dispute to that decided in the first. The Judge said that the initial adjudication concerned the validity of the pay less notice and not the value of the works. As the dispute relating to the 'true' valuation of interim application 22 was not considered or decided in the adjudication, it could be referred to a subsequent adjudication.
4) The contract. The contract expressly differentiated between "the sum due" (Clause 4.7.2) on the one hand, and "the sum stated as due" in the payment notice or the pay less notice (Clause 4.9), on the other. Coulson J said that "the sum due" is the 'true' valuation, very different to "the sum stated as due", a twice used phrase in Clause 4.9. Clause 4.9 recognises that the contractor's application/payment notice will identify the sum which the contractor has "stated to be due" and it provides that, in the absence of a payment notice and/or a pay less notice from the employer, it is "the sum stated as due" which will be payable.
Coulson J, therefore concluded that an employer, having paid "the sum stated as due", is entitled to commence an adjudication as to the 'true' valuation of the contractor's interim application (i.e. the ‘sum due’).
5) Equality and fairness. Coulson J considered it wrong that a contractor can launch an immediate attack on the "sum stated to be due" in the pay less notice, because they say that it is too low, and prohibit the employer from being able to do the same. He noted there is no such wording prohibiting the employer from doing so in either the Construction Act or the Scheme or the contract.
6) There is no difference between the payment rights and obligations of the parties in respect of interim and final payments. He concluded that there is no contractual basis for treating interim and final applications/payments in different ways. The contract treats them in the same way and so too should the parties, adjudicators and the courts. The employer has the right to refer to adjudication a dispute about the 'true' valuation.
Coulson J, reassured by certain Court of Appeal cases which he found support his reasoning, then looked at various TCC cases including importantly ISG v Seevic and with which Coulson J expressly disagreed i.e. “if the employer fails to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong … therefore, in that situation the first adjudicator must be in principle taken to have decided the value of the work carried out by the contractor for the purposes of the interim application in question”.