Practical Law

Unless you have been hiding under a rock (or have been on holiday somewhere), you can’t have failed to notice that Coulson J has handed down his last substantive TCC judgment. So much has already been written about Grove v S&T and what it means for the construction industry that there’s barely been room for anything else on my Twitter and LinkedIn feeds. There really is nowhere to hide from all the commentary.

However, I make no apology for adding to the already voluminous commentary because the case is of such importance. I don’t agree with those that consider the case spells the end for smash and grab adjudications, and I want to focus on a point that doesn’t really seem to have been covered in great detail by others, namely what the judgment means in terms of parties having to pay up (and pay up before any merits-based adjudication takes place).

Grove v S&T

Very briefly, this was a payment dispute that arose out of works undertaken by S&T to design and build a new Premier Inn hotel at Heathrow terminal 4. The contract sum was just over £26 million, the contract incorporated the terms of the JCT Design and Build Contract, 2011 Edition and works were due to achieve practical completion in October 2016 (although PC was actually achieved in March 2017).

The parties had been involved in three adjudications:

• The first decided that a schedule of amendments was part of the contract.
• The second decided that S&T was only entitled to part of the extension of time it claimed.
• The third decided that Grove’s pay less notice was invalid, which meant that S&T was entitled to be paid in excess of £14 million pursuant to its interim application for payment 22 (IA 22).

S&T started Part 7 enforcement proceedings when Grove failed to pay the £14 million odd the third adjudicator determined was due to it, and these were heard with Grove’s Part 8 declaratory relief proceedings.

The issues before the court can be summarised as follows (and I’m ignoring issue D, the liquidated damages one):

•  Did Grove’s pay less notice comply with the requirements of the contract? (Issue A.)
• Even if the pay less notice did comply, should the third adjudicator’s decision be enforced? (Issue B.)
• Was Grove entitled to commence a separate adjudication seeking a decision as to the “true” value of IA 22? (Issue C.)

The outcome can also be summarised:

• Yes, the pay less notice did comply (issue A). The judge found that the basis on which the sum stated as due in a payment and/or pay less notice has been calculated can be by reference to documents served separately (in this case, the detail was in a spreadsheet that was attached to Grove’s invalid payment notice).
• No, the third adjudicator’s decision should not be enforced (issue B). That was the “only permissible consequence” of finding that Grove’s pay less notice was valid.
• Yes, contrary to ISG v Seevic and Galliford Try v Estura, an employer can start another adjudication concerning the correct value of the sum due, and is not deemed to have agreed the valuation because of a failure to serve a payment or pay less notice (the “value is not agreed” issue). On this point, he noted that:
  

  “… the contractor has always had the right to raise the question of the true value of a pay less notice in a second adjudication, and it has never been suggested that that is somehow contrary to policy or the operation of the 1996 Act.The sky has not fallen in, just because the contractor has a residual right to challenge the ‘true’ value of the sum stated as due in a pay less notice. I am confident that there will be no significant adverse consequences if the employer is able to exercise a similar right.”

• If an adjudicator finds that there has been an overvaluation, he can order repayment even if there is no express provision for repayment, such as where the interim payment regime under a JCT contract applies.

“The sky has not fallen in”

This is without doubt one of the most, if not the most important payment notice judgment to come out of the TCC. Regardless of whether you think Coulson J is right or wrong, the case undoubtedly provides clarity on a number of matters that parties frequently argue over. While it is obviously only a first instance judgment, it is clear that Coulson J considers that it is consistent with previous Court of Appeal decisions, and therefore that it will take precedence over the conflicting judgments in ISG v Seevic and Galliford Try v Estura. However, to put the matter beyond doubt, it would be helpful if the case goes to appeal.

This is not the end of smash and grab adjudications

Near the end of his judgment, Coulson J states that he does not:

“… consider that the conclusions which I have reached strike at the heart of the adjudication system. On the contrary, I believe that it will strengthen the system, because it will reduce the number of ‘smash and grab’ claims which, in my view, have brought adjudication into a certain amount of disrepute.”

While I agree that the clarity he has provided should strengthen the system, I am not entirely sure that it will reduce the amount of smash and grab adjudications. I say this because:

• Although contractors will be aware that an employer can start a second adjudication concerning the correct value of an interim payment, contractors may still see the merit in trying to obtain payment due to a lack of the correct notices (as they are expressly entitled to do under the Construction Act 1996, lest we forget), rather than going to the time and expense of arguing the merits of a valuation. Contractors can then use the adjudicator’s decision as a negotiation tool to try and resolve their dispute.
• Contractors may be more likely to succeed in a smash and grab adjudication if the adjudicator knows that an employer will be able to start its own adjudication challenging the merits of a valuation. Consciously or unconsciously adjudicators may be more sympathetic to a contractor’s claim that an employer should “pay now, and argue later”, rather than being unable to recover any overpayment for months or even years, as was the position under ISG v Seevic.

A new regime for payment notice disputes?

I have noted that in his judgment, Coulson J repeatedly makes it clear that an employer can only commence an adjudication concerning the correct value of the works once it has paid the sum due in a default payment notice (see paragraphs 75, 90, 93, 102 and 103). That clearly differs to the situation that arose pre-ISG.

Pre-ISG, both under the original and amended Construction Act 1996, what would commonly happen is that a contractor would commence a smash and grab adjudication and the employer would start their own adjudication on the merits shortly afterwards (a counter adjudication), with the two adjudications running in parallel. The employer’s justification for this strategy was that, even if it lost the smash and grab adjudication, by the time of the enforcement proceedings, it would also have a decision on the merits of the valuation and could attempt to limit the amount of its liability.

If Grove is followed, an employer will not be able to commence its own adjudication until it has paid the “sum stated as due” under the smash and grab adjudication. I think that this will mean that smash and grab adjudications continue to be popular among contractors.

As an aside, it will be interesting to see the jurisdictional arguments that arise if employers try and commence adjudications on the merits before paying a sum awarded by an adjudicator in a smash and grab adjudication.

It’s goodnight from him

Many of you reading this blog post may well be questioning why I have referred to Coulson J, rather than Coulson LJ. This is because the case was heard (and the blog written) before his appointment to the Court of Appeal (which is effective from 8 March 2018).

Sir Peter has been an outstanding servant to the TCC over the past 14 years, and his erudite and forthright judgments will be missed (but perhaps not by some of the experts who didn’t cut the mustard in his trials!). He will clearly miss the TCC as well, as he made clear in the final paragraph of his final TCC judgment:

“If, as seems likely, this is my last substantial judgment in the TCC, after almost 14 years as a judge of the court, I cannot leave it without pointing out all those aspects of this case which, in my experience, are so typical of TCC litigation, and which make the court so attractive to a busy judge: the well-prepared bundles; the clear and direct skeleton arguments; the proper concessions made by each side; and the excellence of the oral advocacy. I will miss it very much.”