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Hacking a pathway through a dense thicket - clarity from the Court of Appeal on smash and grabs

The Court of Appeal has now handed down its judgment on the appeal of S&T (UK) Limited v Grove Developments Limited [2018] EWCA Civ 2448 dismissing the appeal and upholding the decision of Coulson J. See our articles about the decision of Coulson J in the Technology and Construction Court ("TCC") here: The end of "Smash and Grab" Adjudications? and Does Grove give us more than the potential end to "Smash and Grab" Adjudications?

Coulson J had determined that the employer, Grove, was entitled to commence an adjudication to establish the true value of the contractor's application, despite not having served a Pay Less Notice in respect of that application.  The sums at stake were significant, and the contractor appealed.

Over the course of a two day hearing the Court of Appeal was asked to consider various questions including the following:

  1. Was a Pay Less Notice referring to a previous document containing the basis of the sum due valid?
  2. Was Grove entitled to pursue a claim in adjudication as to the true value of the works?

The Court of Appeal's answer to the second issue has been hotly anticipated by the construction industry as it poses the question - is the era of smash and grab adjudications at an end?  Earlier case law, including the case of ISG Construction Limited v Seevic College had concluded that if an employer failed to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong. This led to a raft of what became known as "smash and grab" adjudications, based on the paying party's failure to serve the correct notices in time.  Coulson's decision in the TCC as to the payer's ability to start an adjudication on the  true value of the works or services potentially meant the end of the ISG v Seevic position and smash and grab adjudications.

The Court of Appeal held that Grove's Pay Less Notice was valid (see our further analysis below), which meant that the Court's view on the hotly anticipated question of the entitlement to commence a true value adjudication became somewhat academic. However, given the importance of this question to the construction industry, the Court of Appeal gave the question detailed consideration.

In a lengthy judgment which commented on each of Coulson J's reasons for permitting Grove to pursue a claim for the true value of the works, the Court of Appeal dismissed the appeal brought by S&T and agreed that an employer (or paying party) can indeed pursue a separate adjudication on the true value of the works despite not having served a Payment Notice or Pay Less Notice.

The main justifications provided by the Court of Appeal included the following:

  1. The sums payable at an interim stage, whether due to a failure to issue a Payment Notice or Pay Less Notice or otherwise, are not conclusive as to the correct valuation of the work done. This is demonstrated by the wide powers of the Court which include the opening up and revising of the sums shown as due in interim applications.
  2. The wording of section 111 of the Housing Grants, Construction and Regeneration Act 1996 as amended (the "Act") applies equally to both interim and final payments. It would be strange for the same form of words to have conclusive effect in relation to interim certificates which it does not have in relation to final certificates.

However, what is particularly noteworthy from the Court of Appeal's decision (aside from the virtually wholesale agreement with Coulson J's reasoning) is that the Court of Appeal concluded that the Act creates a hierarchy of obligations, with (1) the immediate statutory obligation being to pay the notified sum as set out in section 111 and (2) the adjudication provisions being subordinate to the payment provisions. The Court of Appeal considers that the Act cannot be sensibly construed as permitting the adjudication regime to trump the prompt payment regime and as such, it must be interpreted such that an employer or paying party cannot commence an adjudication for the true value of the works before it has complied with its immediate obligation to pay the notified sum.

This appears to be based on policy above all with the Court of Appeal specifically commenting on the one important purpose of the Act being to promote cash flow in the construction industry. Giving judgment, Sir Rupert Jackson considered there should be "prompt payment followed by any necessary financial adjustments". The often cited tagline of "pay now, argue later" certainly springs to mind in this regard.

However, one issue not addressed by the Court of Appeal is the statutory right to adjudication at any time. Perhaps it is only a matter of time before the TCC is asked to consider whether the need to comply with an immediate obligation, before being able to adjudicate, fetters the statutory right to adjudicate at any time. It remains to be seen whether this saga is truly at an end, but for now, the position is clear - pay now, argue (immediately) after.

Pay Less Notices - how to set out the basis of the sum considered due

As noted above, the Court of Appeal has confirmed that it is adequate in a Pay Less Notice (and presumably, a Payment Notice) to refer to a separate document setting out the basis of the sum due. However, one must bear in mind when the previous document was provided and who to, as it is not the case that the reference to other documents is always permissible. As explained by Sir Rupert Jackson "it is a question of fact and degree in each case whether the purported Pay Less Notice achieved the requisite degree of specificity".

In Grove, the Pay Less Notice was sent to the same individuals who had received the payment certificate which contained the basis of the sum due and, as such, would have been familiar with the document being referred to. However, in circumstances where the recipient does not have awareness of the document referred to, the risk remains that there could be doubt in the mind of a reasonable recipient as to the document being referred to. In these circumstances, a Pay Less Notice may be considered invalid.

 

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