The Court of Appeal today handed down its judgment on the appeal by S&T concerning the operation of the payment provisions of the Housing Grants, Construction and Regeneration Act 1996, as amended (“the Act”). The judgment of Coulson J handed down in February 2018 was upheld in relation to the content of pay less notices, the “true value” adjudication issue, and liquidated damages under the JCT form of contract. In this blog I focus on the “true value” adjudication issue, as this is of great importance to the construction industry. Further blogs on the other two issues in the appeal will follow shortly.
In my blog post of 1 March 2018 I summarised the first instance judgment of Coulson J in Grove Developments Limited v S&T (UK) Limited.
In what was a very important judgment for the construction industry, Coulson J departed from the ISG v Seevic line of authorities. The Judge in ISG had concluded that a failure to give a payment notice or pay less notice was deemed acceptance by the paying party of the value of an interim application, and that a second adjudication on the “true value” of the interim application was not permitted.
Coulson J held in Grove that it was possible for a paying party to adjudicate on the “true value” of an interim application in circumstances where no payment or pay less notices had been given, setting out six reasons why the payer may adjudicate the “true value” in a separate adjudication.
S&T was aggrieved by the judgment and appealed to the Court of Appeal.
The Court of Appeal upheld the judgment of Coulson J. In relation to the “true value” issue, each of the six reasons cited by Coulson J were challenged by S&T and reviewed by Sir Rupert Jackson in the Court of Appeal. Sir Rupert confirmed in relation to the six reasons:
1. The wide powers of the court (and therefore adjudicators) permit opening up and revising the sums shown as due in an interim application in any case where the interim application determines what is payable.
2. There is no limit on the jurisdiction of an adjudicator which would prevent him or her from exercising the above powers.
3. There are three documents, the application, the payment notice and the pay less notice, one of which in each instance will trigger the operation of s. 111 of the Act and the obligation to pay the notified sum before the final date for payment. Either party can challenge the correctness of the notified sum by adjudication.
4. The distinction drawn by Coulson J in relation to “the sum due” and “the sum stated to be due” was regarded as a helpful one.
5. Although the payer has two bites of the cherry to present its valuation, the difficulty is the very short time period available to the payer to provide a definitive valuation of the work at any time. The adjudication provisions stand behind the notice provisions, if required.
6. There is no contractual basis for treating interim and final account payments differently; the wording of s. 111 applies equally to both interim and final certificates, see Adam Architecture (blog: section 111 interim payments).
" It was recognised that in some instances the judgment may operate harshly, for example in situations where the payee is veering towards insolvency. "
Sir Rupert Jackson stated in conclusion: “Overall, the judge’s six reasons support my view that the employer, having failed to serve a Payment Notice or Pay Less Notice, is nevertheless entitled to adjudicate to determine the true value of an interim application” providing, of course, the notified sum has been paid.
As to timing, the Court of Appeal clarified that, as a matter of statutory construction, “...the adjudication provisions are subordinate to the payment provision of S. 111.” This is because s. 111 is of direct effect as it requires payment of a specific sum within a short period of time. Both the Act and the contract must be construed as prohibiting the payer from embarking upon an adjudication to obtain a re-evaluation of the work before the payer has complied with his immediate payment obligation.
It was recognised that in some instances the judgment may operate harshly, for example in situations where the payee is veering towards insolvency. The answer given to this hypothetical argument was that the payer must ensure, in situations where there is a perceived risk of insolvency, that it does serve timeous payment notices and/or pay less notices.
The Court of Appeal judgment affirms the judgment of Coulson J. Following that judgment I suggested that, despite the express reversal by Coulson J of the ISG line of authorities, I did not believe the industry would see an end of “smash and grab” adjudications, even if the numbers did reduce. Anecdotally, this does appear to have been the case; cash flow is still the lifeblood of the industry. The clarification from the Court of Appeal that payment of the notified sum is required before a “true value” adjudication can be commenced will in my view preserve “smash and grab” adjudications as a way of protecting cash flow.