1 November 2018
The facts of Grove Developments Ltd v S&T (UK) Ltd  EWHC 123 (TCC) are relatively simple:
Before ISG Construction Ltd v Seevic College  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.
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.
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 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  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."
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:
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.
by multiple authors
by multiple authors