Payment notice disputes after Grove: Court of Appeal decision awaited

The facts

The facts of Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) are relatively simple:

S&T (the contractor) made its final interim application for payment, which was timed to arrive after Practical Completion, but long before the final account exercise would be undertaken;
Grove (the employer) issued a payment notice which contained sufficient information for S&T to know the basis of Grove's valuation, but that payment notice was issued out of time;
Grove subsequently issued a pay less notice in time, which purported to incorporate the calculation in the payment notice, but did not attach the calculation;
S&T argued that the pay less notice was invalid because it only incorporated the calculation in the payment notice and therefore the pay less notice failed to "specify the basis of the calculation";
At adjudication, the adjudicator found that the pay less notice was invalid and consequently S&T was entitled to be paid around £14m pursuant to its interim payment application;
When Grove failed to pay the sum determined by the adjudicator, S&T started Part 7 enforcement proceedings for summary judgement in the TCC; these proceedings were heard with Grove’s Part 8 declaratory relief proceedings which together sought determination of the following issues:

Issue A: whether or not Grove's Pay Less Notice complied with the requirements of the contract;
Issue B: whether, even if the Pay Less Notice did comply with the contract, the result in the third adjudication in S&T's favour should still be enforced;
Issue C: whether, in principle, at this stage, Grove is entitled to commence a separate adjudication seeking a decision as to the 'true' value of interim application 22;
Issue D: whether Grove's notices in respect of liquidated damages were properly issued. This was a separate and discrete issue from the previous three.

In the TCC Coulson J (as he was then) decided that Grove's pay less notice was valid. However, perhaps of more significance, Coulson J went on to decided that Grove would have been entitled to challenge the 'true' value of the application in any event. At paragraph 66 Coulson J acknowledged: "there was some question as to whether this issue arose at all if (as I have done) I found in favour of Grove on Issues A and B. But I think it does arise because of the formulation of the claims for declarations in the Part 8 proceedings. For these purposes, I must simply assume that, contrary to my primary view, the Pay Less Notice was deficient. Further, the answer on Issue C would be directly relevant if, regardless of my conclusions on the Part 8 claims, it was to be decided that the Schedule of Amendments was not incorporated into the contract (because then the Pay Less Notice would have been out of time in any event). For these reasons, and for what it is worth, I do not believe that my consideration of Issue C is obiter".

The historic position (pre-ISG v Seevic)

Before ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC), it was possible to run parallel adjudications on (i) the validity of a payment / pay less notice; and (ii) the true value of an application. These two decisions could be made at a similar time and effectively cancel each other out.

The ISG v Seevic position immediately prior to Grove

In ISG v Seevic Edwards-Stuart J held that in the absence of a valid payment or pay less notice the employer had in effect accepted the value of the interim application. At paragraph 112 of Grove, Coulson J summarises Edwards-Stuart J's decision:

"Edwards-Stuart J followed the approach of Judge Lloyd in Watkin Jones. At paragraph 28 of his judgment, he said that he agreed with Judge Lloyd's conclusion "that if the employer fails to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong. In my judgment, therefore, in that situation the first adjudicator must be in principle taken to have decided the value of the work carried out by the contractor for the purposes of the interim application in question." This analysis comes towards the end of a section of the learned judge's judgment which has a heading "The Value Has Already Been Determined". The judge concluded that, in the absence of a Pay Less Notice from the employer, that employer has agreed (or must be taken to have agreed) the value stated in the contractor's payment application. In this way, he said, the true value of the application "has already been determined".

Accordingly, where an employer failed to dispute an interim application the employer was obliged to pay the application in full. The employer could not then challenge the value of the interim application through adjudication as "the employer has agreed, or must be deemed to have agreed, that the amount claimed was the 'true' value of the interim application." (paragraph 114 of Grove).

The 'disputed' application could only be contested by way of future applications or the final account. Many standard form contracts, such as the JCT, do not allow for negative valuations by an employer (which would require the contractor to pay money to the employer). Accordingly there may well not be sufficient applications remaining to "catch up" the overvalued amount, meaning that, under the rules established by ISG v Seevic, the employer may have to wait a substantial time, with his fingers crossed that the contractor did not become insolvent, until the final account before having recourse to recover the overvalued sums.

Coulson J's decision in Grove

In contrast to ISG v Seevic, in Grove Coulson J found that an employer (or contractor in the case of a subcontract) does not automatically accept the value of an interim application as a result of a failure to serve a valid payment or pay less notice. It therefore follows that the 'true' value of the interim payment can be challenged in a separate adjudication.

Coulson J considered gave six reasons why this was the case:

Coulson J considered previous dicta that "the court can decide the 'true' value of any certificate, notice or application and that, as part of that process, it has an inherent power to open up, review and revise any existing certificates, notices or applications" from Henry Boot Construction Limited v Alstom Combined Cycles Limited [2005] 1 WLR 3850 to be binding;
Coulson J considered that s108(1) of HGCRA did not limit the "nature, scope and extent" of a dispute which could be referred to adjudication;
The two disputes are separate: the first is simply whether procedurally the notices were issued correctly; the adjudicator would have no jurisdiction to decide the value of the application. The second dispute is then on the value and accordingly is entirely separate;
The contract deliberately distinguished between "the sum due" (after calculation) and "the sum stated to be due" in the parties' notices;
A contractor can adjudicate the 'true' value of an application where an employer serves a payment / pay less notice correctly. For the employer to be prohibited from adjudicating the 'true' value, the Scheme or the Contract would need to explicitly preclude this;
The only justification for the ISG v Seevic position is that "it doesn't really matter" because it can be sorted out in the final account, but again there is no justification for this unfair position.

Coulson J therefore decided that a lack of a valid payment / pay less notice is not of itself determinative of the value of the interim application and the true value of the interim application can then be adjudicated.

However, it appears, in our view quite rightly, that the employer's right to challenge the true value only arises after it has paid the disputed application. In this regard, Coulson J followed Jacob LJ's Court of Appeal decision from Rupert Morgan Building Services v Jervis [2003] EWCA Civ 1563, explaining at 93 that "On the face of it, Jacob LJ was expressly answering the question before me: without a valid Pay Less Notice, Grove, as the employer, must pay up, but if they have overpaid they "can raise the matter by way of adjudication."

The Court of Appeal

S&T's appeal of Coulson J's decision was heard on 12 October 2018; ironically 7 months after Coulson J had been elevated to the Court of Appeal. Judgement is expected on 7 November 2018 and there are four potential outcomes of the Court of Appeal's decision:

Coulson J's decision in Grove is upheld: employers must pay an application on which they have failed to issue a valid payment / pay less notice, but can subsequently launch an adjudication as to the true value;
Coulson J's decision in Grove is overturned and we return to the ISG v Seevic position: an adjudication as to the 'true' value of an application cannot be brought by an employer who has failed to issue a valid payment / pay less notice;
Coulson J's decision in Grove is partially upheld and employers can launch an adjudication as to the true value but the is no requirement to pay up first, and we return to the pre-ISG v Seevic position: an employer can bring an adjudication on the 'true' value of an application whilst adjudicating the validity of a payment / pay less notice.
The Court of Appeal departs from all previous decisions and there is a new, as yet unknown, outcome.

Comment

We consider that Coulson J's decision in Grove was rightly decided and that it finds the right balance between protecting a contractor's cash flow, whilst protecting an employer from the potentially drastic consequences of a procedural mistake. We also consider that the decision is in line with both the intent and the wording of the HGCRA and the Scheme.

Failing to issue a valid payment notice / pay less notice all too often occurs given the short timescales involved. If Coulson J's decision is upheld, an employer will have to pay the sum stated to be due on an unchallenged application, but would have recourse to challenge the value in adjudication rather than having to attempt to recover the money through later applications (which may or may not be possible), or having to wait until the Final Account. In an industry where contractors and subcontractors are, unfortunately, all too prone to insolvency, this decision will provide comfort to employers that they will not have to wait until the Final Account. Should the decision not be upheld we would expect to see amendments which allow employers to issue negative valuations and recover overpayments as a debt rather than having to wait until the final account.