“Never has a Court of Appeal judgment been so eagerly awaited by the construction law community as the appeal in S&T (UK) Ltd v Grove Developments Ltd.”
I admit that this might be somewhat of an exaggeration, but I’ve certainly been keen to read it ever since I heard that Coulson J’s (as he was then) judgment was being appealed. I blogged about it at the time.
In a nutshell, S&T lost its appeal, with the Court of Appeal agreeing with Coulson J that:
- Grove’s pay less notice complied with the requirements of the contract.
- Grove is entitled to commence a separate adjudication seeking a decision as to the “true” value of its interim application, with the result that, contrary to ISG v Seevic, an employer can start an 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.
Sir Rupert Jackson, who gave the leading judgment, acknowledged that, as a result of his decision on the first issue, his finding on the second issue was academic, but he dealt with it because:
“… it has been fully argued and the parties have asked the court to decide the second issue in any event. Both the profession and the industry need to know which of the conflicting High Court decisions are correct.”
I’m not going to analyse the judgment in detail: I will leave that to others. Rather, what I want to concentrate on are the implications of the Court of Appeal’s judgment for the construction industry, and in particular the part of the judgment which deals with when an employer can exercise its right to commence an adjudication concerning the correct value of the works.
Pay now, adjudicate on the merits later
In my blog on the first instance judgment I questioned whether there would now be a new regime for payment notice disputes because:
“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.”
This was an issue that came before the Court of Appeal, with S&T arguing that there was no juridical basis for Coulson J’s finding, and that if an employer has an accrued right, it must be able to exercise that right at any time. Sir Rupert did not agree, finding at paragraph 107 that:
“Both the HGCRA and the Amended Act create a hierarchy of obligations, as discussed earlier. The immediate statutory obligation is to pay the notified sum as set out in section 111. As required by section 108 of the Amended Act, the contract also contains an adjudication regime for the resolution of all disputes, including any disputes about the true value of work done under clause 4.7. As a matter of statutory construction and under the terms of this contract, the adjudication provisions are subordinate to the payment provisions in section 111. Section 111 (unlike the adjudication provisions of the Act) is of direct effect. It requires payment of a specific sum within a short period of time. The Act has created both the prompt payment regime and the adjudication regime. The Act cannot sensibly be construed as permitting the adjudication regime to trump the prompt payment regime. Therefore, both the Act and the contract must be construed as prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation.”
Therefore, it is quite clear that, despite section 108 providing a party with the right to refer a dispute to adjudication “at any time“, the Court of Appeal has found that there is a fetter on this right, namely that where an employer has not paid the notified sum in accordance with section 111, that employer is unable to refer a dispute concerning the correct value of the works to adjudication.
Regardless of whether you agree or disagree with this conclusion, the construction industry now has the benefit of a Court of Appeal decision on this point. However, the question is, how will this work in practice? I think that it’s best to consider the implications by means of a scenario that we might see in the future.
The scenario: Jack v Jill
Jack is constructing a commercial building for Jill, and on 1 February 2019, he submits his application for payment number 10 (IA10) claiming the net sum of £1 million. Jill does not pay. On 18 February 2019, Jack commences an adjudication claiming £1 million on the ground that Jill has failed to issue a valid payment or pay less notice, and that IA10 constitutes a default payment notice (Adjudication #1).
Jill argues that she has submitted a valid pay less notice, and that this sets out that the correct value of the sum due to Jack is nil. However, on 25 February 2019 Jill nevertheless starts her own adjudication to determine the correct value of IA10 (Adjudication #2). A different adjudicator is appointed in Adjudication #2 (before anyone raises this as an issue!).
What should be the basis of Jack’s objection?
Jack’s not happy about Adjudication #2 and wants to object, but what should be the basis of his objection?
I submit that it should be a jurisdictional objection given that Sir Rupert has made it clear that an employer is prohibited from commencing an adjudication on the merits until it has complied with its “immediate payment obligations” under section 111. Jack would therefore invite the adjudicator in Adjudication #2 to resign as he or she lacked jurisdiction to decide the dispute. Jack would obviously need to refer the adjudicator to the Court of Appeal’s finding in S&T v Grove that section 111 trumps the right to adjudicate at any time under section 108.
Regardless of the clarity provided by the Court of Appeal on this point, I suspect that the question of whether an adjudicator should resign in such circumstances will be argued vigorously by parties such as Jack and Jill in the future, and I set out a couple of examples below.
The dodgy pay less notice
Jill’s retort to Jack’s jurisdictional objection is likely to be that, as she has served a valid pay less notice that sets out that no sum is due to Jack, she does not have any “immediate payment obligation” and, as such, the adjudicator in Adjudication #2 does not lack jurisdiction and should proceed to reach a decision.
So what is the second adjudicator to do?
The options appear to be:
- To resign on the grounds that, until the question of whether Jill has served a valid pay less notice is resolved in Adjudication #1 and (if Jill has not) she has paid the £1 million claimed, the second adjudicator does not have jurisdiction. However, if Jill is subsequently found in Adjudication #1 to have served a valid pay less notice and not to have any “immediate payment obligations”, then at no stage would the second adjudicator have lacked jurisdiction, and any resignation would be incorrect and unnecessarily delay the resolution of the parties’ dispute concerning the correct value of Jack’s works.
- To continue with Adjudication #2 because the issue of whether Jill has an immediate payment obligation is in dispute and is being resolved in Adjudication #1. If the first adjudicator finds that Jill did not serve a valid pay less notice and is due to pay £1 million as a result, then the second adjudicator could resign at this point. However, the parties could have already expended significant costs in Adjudication #2, and perhaps this provides further justification for initially resigning as per option 1? But what if Jill paid the sum of £1 million on receipt of the decision in Adjudication #1: should the second adjudicator still resign or continue on the ground that they now have jurisdiction?
- To make a non-binding decision on jurisdiction, which would involve considering the effectiveness of the pay less notice. However, we would then end up with the unsatisfactory situation of the second adjudicator reaching a non-binding conclusion on the same matter as the substance of Adjudication No.1.
The dodgy default payment notice
The same uncertainty arises if we change the scenario to one where Jill had not served any pay less notice, but contends that IA10 is defective and does not constitute a default payment notice, such that there was no need for her to issue a payment and/or pay less notice, or to pay the sum of £1 million claimed by Jack.
Until the question of whether IA10 constitutes an effective default payment notice has been decided, it cannot be said whether the adjudicator in Adjudication #2 lacks jurisdiction.
Where do we go from here?
Some might argue that the points I am making are too fact dependent and that we should concentrate on the principle set out by the Court of Appeal. However, I am merely applying that principle to the types of disputes I regularly see as an adjudicator, and highlighting the issues that I think could potentially arise. It might take the industry some time for these points to fully come to the fore, and I imagine that it may well be something that the TCC, or even the Court of Appeal, will have to deal with in the future.
The results of the Department for Business, Energy & Industrial Strategy’s review of the 2011 amendments to the Construction Act have still not been published and (arguably) it would be prudent for the Construction Act 1996 to be amended so that the issues that have arisen from this seminal case are addressed in the legislation, but I suspect the chances of that are fairly remote. Alternatively, it would certainly be interesting to see what the Supreme Court would make of the issues arising from this case.
Hi Jonathan. Firstly, well done on getting your article out in super quick time! Very quick off the blocks!
I have to say that I’m a little surprised with some elements of Sir Rupert Jackson’s findings, and the scenarios you’ve outlined above highlight the potential problems perfectly.
What I find hard to reconcile is why the payment provisions of the Act should trump the adjudication provisions?
Sir Rupert states that “The Act cannot sensibly be construed as permitting the adjudication regime to trump the prompt payment regime” but he is happy to construe in the opposite way.
He also says “As a matter of statutory construction and under the terms of this contract, the adjudication provisions are subordinate to the payment provisions in section 111”.
Without reading his full judgement (which I intend to do asap) I’m not aware of any further explanation as to why this conclusion has been reached. What am I missing?
Simon – thanks for your kind comment.
I understand Sir Rupert’s justification to be that the payment provisions in s.111 have direct effect on construction contracts, whereas the adjudication provisions in s.108 set out what a construction contract must provide in respect of adjudication and, if it doesn’t, the provisions of the Scheme are implied into that construction contract. It’s certainly worth reading the judgment for more details.
But surely s108 is of direct effect too!. While there is a permissive regime for the contract to provide terms that comply with certain requirements including enabling notice of adjudication at any time, if the contract does not so provide the Scheme applies directly and wholesale.
Indeed if the contract says nothing, s108 and adjudication under the Scheme directly applies. I don’t think Parliament intended primary and subordinate parts to the Act.
I detect some element of doubt in paragraph 111 of the judgment – to the effect that if he is wrong, then it would lead to the problems Speaight identified and there would need to be statutory amendment.
There certainly appears to be scope for further argument on this point, and as I said in the blog, I’d be interested to see what the Supreme Court made of it, particularly given their approach to interpretation in recent years. Given that we’re in the post Carillon collapse era, there has probably not been a better time to justify the SC dealing with a case concerning the payment notice regime under the Construction Act.
It could save the industry millions if the words “the enforcement of” could be inserted between the words “upon” and “an” in the sentence at paragraph 107 which reads “Therefore, both the Act and the contract must be construed as prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before he has completed with his immediate payment obligation.”