When can you adjudicate with an outstanding payment obligation?

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In the second case between Lidl and 3CL, the court considered the scope of the decision in S&T(UK) Ltd v Grove [2018] EWCA Civ 2448  and in particular, what type of adjudications can be brought whilst a payment application is outstanding. This point has not been considered by the High Court before. 

Background of the case

The dispute between Lidl and 3CL, an industrial refrigeration and air-conditioning contractor, arose under a framework agreement for refrigeration works at Lidl’s Belvedere 2 Regional Distribution Centre. 3CL initiated an adjudication seeking payment of a notified sum following interim payment application  19 (AFP19). 

The adjudicator’s decision in favour of 3CL was enforced (the 3CL Decision ). Please see our previous article on the Lidl case regarding the 3CL decision, which provides clarity on payment provisions in construction contracts.

Prior to the enforcement, and before it paid the 3CL Decision, Lidl commenced two adjudications:

  • Defects adjudication: Lidl sought to recover costs for defects/snagging, either to be paid as a debt or offset against amounts owed to 3CL
  • Extension of time adjudication: Lidl sought a declaration that 3CL was not entitled to any extension of time

3CL argued, relying on the case of S&T v Grove, that Lidl’s failure to pay the 3CL Decision  before starting its own adjudications meant that the adjudicator for both lacked jurisdiction.

Background of the S&T v Grove case

In the S&T v Grove case, covered in our previous article here, it was established that Grove could start an adjudication to dispute the true value of the works for which S&T claimed in an interim payment application, but only after Grove had paid the notified sum. The primary obligation of payment had to be complied with before the paying party had the right to adjudicate on the true value of the payment dispute.

Several cases following this case have confirmed that where a paying party commences a ‘true value’ adjudication prior to payment of a notified sum, the adjudicator is unlikely to have jurisdiction.

However, until the judgment in Lidl v 3CL, there has been no guidance as to whether the principles established by Grove are confined solely to the actual value of the works for the relevant application (payment cycle) in question or whether they can extend to other claims such as alleged defects and delay or whether it applied broadly to any further adjudications. 

What was the outcome of this case?

Firstly, the court ruled against a blanket prohibition on all adjudications commenced in the absence of a payment of the notified sum. The court held there was no basis in principle or in case-law to consider otherwise. 

As to whether the principle in S&T v Grove could extend to claims for alleged defects and delay and not simply a true value of the same payment cycle or another payment cycle, the judge considered the relevant payment provisions in the Housing Grants, Construction and Regeneration Act 1996, as known as the Construction Act. 

The Construction Act states at s.111(1) that there is an obligation to pay the notified sum on or before the final date for payment. The notified sum is the sum considered to be due at the payment due date as stated in a payer’s or a payee’s notice. That notice is usually focused on the valuation of the work at that time. However, the obligation to pay the notified sum is subject to s.111(3),   under which the payer may issue a pay less notice confirming an intention to pay less than the notified sum. That notice is often focused on deductions for defective work or for delay.

If a pay less notice has been missed, a defaulting payer may still wish to bring an adjudication to determine issues such as alleged defective work or delay, either collectively as part of a broad true value adjudication or individually. The court held that the adjudicator’s jurisdiction on such individual issues must be considered by reference to the principles in the Grove case, but that only applied if the issue referred addressed matters which could have been the subject of a pay less notice served in respect of the particular outstanding notified sum in question, that is, within the same payment cycle.  

Similarly, where a true value adjudication is brought on a subsequent payment cycle, this would also be caught by the principles in the Grove case, where the dispute referred sought to raise matters that could have been raised in a previous payment cycle but the sum due remained unpaid. However, when the issues could not have been included in any such pay less notice for a previous payment cycle, the principles in the Grove case would not apply. 

In summary therefore, if a payer fails to serve a valid pay less notice, it cannot adjudicate on matters that could have been the subject of that notice. However, a payer can adjudicate on claims arising after the pay less notice date and not covered by it.

On the facts of this matter, the court found that:

  • Lidl was entitled to summary judgment on £496,946.02 of the £757,845.63 awarded in the defects adjudication, but the balance would not be enforced as it included items which could have been the subject of a pay less notice in the same payment cycle covered by the 3CL Decision ; and
  • 3CL was entitled to a declaration that the adjudicator in the extension of time adjudication did not have jurisdiction to determine 3CL’s extension of time entitlement for the period 18 June 2022 to 29 September 2022, because that was within the payment cycle period of the 3CL Decision. The decision that 3CL had no right to an extension of time inevitably invoked Lidl’s right to liquidated damages, and as such a claim could have been included in a pay less notice, but was not, the Grove principle applied. 

What can we take away from this?

This case provides some useful clarity on the scope of the Grove principle. It demonstrates the primacy the courts are giving to the payment obligations under the Construction Act before a party can refer a valuation adjudication, albeit this only extends to payment rights and obligations arising within the same payment cycle. 

Further, whilst Lidl had complied with its payment obligation by the time of the decision in the defects adjudication, this was not relevant. The key point in time was the time of the referral of the dispute, if the referring party has not complied with its payment obligation, the adjudicator will not have jurisdiction over any issues that relate to the outstanding payment, if those issues relate to the same payment cycle and therefore could have been the subject of a pay less notice. 

The need to issue payment notices and pay less notices, as ever, remain crucial for an employer to avoid paying more than they consider due, and timely administration of contracts will avoid unnecessary costs being incurred for debating payment of notified sums.

For more information, please contact the construction and infrastructure team.

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