Employer entitled to challenge the ‘true value’ of interim application

26 / 07 / 2018

Employer entitled to challenge the ‘true value’ of interim application to overcome “smash and grab” adjudication Grove v S&T.

Grove Developments Ltd v S&T (UK) Limited [2018] EWHC 123 (TCC)

Background:

S&T (UK) Limited (‘S&T’) was appointed by Grove Developments Limited (‘Grove’) as contractor to design and construct a hotel at Heathrow airport for a contract sum of approximately £26m under a JCT Design and Build Contract 2011. The hotel was completed in March 2017, five months after the contractual completion date.

Disputes arose between the parties and a series of three adjudications took place. The final adjudication decided that S&T should be awarded in excess of £14m pursuant to an interim application, on the basis that Grove’s pay less notice was invalid.

Responding to an interim payment application from S&T, Grove submitted a payment notice detailing the sum it considered due including calculations (on a detailed spreadsheet). However the payment notice was served out of time in accordance with the terms of the contract (which was based on). Grove subsequently issued a pay less notice, which was served on time in accordance with the contract. The notice included the sum referred to in the payment notice, however it did not include details of the calculation or the spreadsheet. The adjudicator agreed with S&T, that the information was insufficient to constitute a valid pay less notice, and Grove was ordered to pay S&T approximately £14m.

Grove had anticipated this outcome and commenced Part 8 proceedings in the High Court to seek declaration that it was entitled to challenge the ‘true value’ of the interim application.

Pay less notice

In the High Court, Mr Justice Coulson dismissed S&T’s argument that the pay less notice served by Grove was invalid by virtue of the notice not including full details of the calculation of the sums considered due. The court held it was permissible to refer to a calculation in a document that had been sent to S&T a few days before (even though it was submitted with an invalid payment notice). Each notice was clear as to the amount the employer considered due.

Smash and grab

Grove sought a declaration that it was entitled to challenge the “true value” of the sum stated as due under the contractor’s interim application. Recent case law had established the practice commonly referred to as “smash and grab” adjudications, whereby an employer is required to pay the sums stated as due in a contractor’s interim application if the employer fails to serve a valid payment notice and/or pay less notice. In this case, the court assessed, in the circumstances, whether Grove could commence a separate adjudication to challenge the true value of the sum applied for.

The court decided that the answer to that question was yes! Coulson J was of the opinion that the findings in case law which led to the so called “smash and grab” adjudications (namely ISG Construction Limited v Seevic College [2015] 2 All ER Comm and Galliford Try Building Limited v Estura Limited [2015] EWHC 412 (TCC)) were “erroneous and/or incomplete”. Coulson J held that although the employer had failed to raise an effective challenge to the ‘sum stated as due’ by not serving a pay less notice, this did not in itself deem the employer to have agreed that the sum represented the ‘true value’ of the payment application. Therefore Grove was entitled to commence a separate adjudication to challenge payment of the £14m applied for by S&T.

Practical impact

This judgment is likely to have significant impact in the construction industry and may reduce smash and grab adjudications in particular. Coulson J summarised that this decision should strengthen the system by reducing the number of smash and grab claims, which in his view, have brought adjudication into a certain amount of disrepute.

We may also see an increase of adjudications by employer’s who seek to challenge a smash and grab adjudication even where they have failed to serve a valid payment notice or pay less notice. This is a positive result for employers, as although they may be required to initially pay the full interim application claimed by the contractor, they could then seek to challenge the “true value” of the payment by starting a separate adjudication.

The case also provided helpful guidance on content of pay less notices and notices in respect of withholding liquidated damages as follows:

  • It is possible to incorporate a document by reference into a pay less notice. However it is advisable to physically attach all relevant documentation to a pay less notice where practicable.
  • Notices of withholding liquidated damages under JCT contracts usually require a ‘warning notice’ to be served by the employer followed by a ‘deduction notice’. The period of time between such notices is immaterial (unless the contract expressly provides for this), however the warning notice should be received before the deduction notice (in accordance with the contract). It is important to check the procedure under the contract before issuing such notice. If the contract is silent on time period between each notice, it is advisable to allow a slight interval between serving each notice to ensure there is no issue as to which notice was served first.