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Three Bites at the Construction Payment Cherry - a Review of Grove Developments Limited v S&T (UK) Limited [2018]

on Wednesday, 04 July 2018.

The amendments to the Housing Grants, Construction and Regeneration Act 1996 (the Act), introduced by the Local Democracy, Economic Development and Construction Act 2009, set out the current process used to deal with payments in construction contracts.

Commonly, a contractor will submit an application for payment to its employer. The employer will issue a payment notice detailing how much it is willing to pay for the works undertaken or, failing to do this in the necessary timescale, it will issue a pay less notice to a similar effect. An employer has two opportunities under the Act to contest and challenge the value of the works performed which a contractor which will have assessed itself.

However, the recent decision in Grove Developments has given employers a third bite at the cherry.

The 'Two-Bite' Approach - ISG Construction Ltd -v- Seevic College 2015 BLR 233

  • The case concerned an application for payment, submitted by the contractor, with no payment notice or pay less notice having been issued by the employer.
  • Seevic, as employer, commenced an adjudication to dispute the payment.
  • The adjudicator found in favour of the contractor and Seevic was require to pay the sum set out in ISG's application for payment.
  • Seevic then commenced a second adjudication to contest the value of the works in the original application for payment. ISG disputed the validity of this adjudication.

Held:     The court found that the second adjudication was invalid as the issue of ISG’s entitlement had already been determined in the first adjudication.

The Seevic approach was generally approved by the courts but not without some reluctance on occasions. There was always the temptation on the part of the contractor to inflate its claims for payment, which would have to be paid if there were oversight on the part of the employer. Generally the consensus was that any further assessments of the value of the works could be resolved in the next application for payment, rather than by a second adjudication. The problem would be if there were a limited opportunity for the recovering of an overpayment previously made. The employer only had two opportunities to dispute the application for payment, either by a payment notice or a pay less notice.

The Third Bite - Grove Developments Limited v S&T (UK) Limited [2018] EWHC 123 (TCC) (This judgment was delivered only on 27 February)

Coulson J in Grove Developments disagreed with the Seevic decision.

  • Following an application for payment, Grove issued a pay less notice to S&T.
  • The pay less notice did not include a breakdown of how Grove's value had been calculated, it merely referred to a separate document with the calculation. Adjudication proceedings were started by Grove.
  • The adjudicator found the pay less notice to be invalid with reference to the requirements under the Act to include the calculation within the pay less notice.
  • Grove brought two claims to court. Firstly, that the pay less notice was valid and, secondly, if it was invalid, whether they could apply to adjudicate on the "true" value of the works.

Held:     Coulson J found the pay-less notice to be valid. Both parties were aware of the other document which contained the calculation and “On the facts of this case, the reasonable recipient would have known precisely what sum was being deducted and the basis of its calculation” [para 41].

Notwithstanding his assessment of the status of the pay less notice (which made the second claim unnecessary), Coulson J gave his view on whether Grove was entitled to adjudicate on the “true” value of the works. His answer was yes, for the following six reasons:

  • the decision in Henry Boot Construction Limited v Alstom Combined Cycles Limited [2005] 1 WLR 3850: “if the …decision is not binding, it can be reviewed by…the court” [para 68]. If the Court has the power, so does an adjudicator.
  • S.108(1) HGCR Act 1996: “A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section.” [para 72].
  • “The dispute which the employer would wish to raise in the second adjudication is a different dispute to that which was determined in the first” [para 77]. A dispute about the deficiency of a notice is a separate dispute from the value of the work.
  • “The words in the contract expressly differentiate between 'the sum due'… and 'the sum stated as due' in the payment notice or the pay less notice” [para 80].
  • “As a matter of general principle, I consider that the employer can refer the dispute about the true valuation to adjudication, once he has paid the sum stated to be due, arises from considerations of equality and fairness.” [para 84].
  • “there is no difference between the payment rights and obligations of the parties in respect of interim payments, and those arising in respect of the final payment.” [para 87]. There is a right at any time to determine the true valuation.

The decision in Grove has given employers a third opportunity to contest the value of the works performed by the contractor, despite their failure to comply with the Act. The Seevic case originally argued that this approach was contrary to the legislature's intentions. This decision stated, in summary, that the issue of the valuation of the work was a different dispute which could be referred to an adjudicator at any time.

What Next?

Coulson J's decision in Grove is currently being appealed. We will have to wait until February 2019 to see if it will be upheld by the Court of Appeal. He has recently himself been elevated and now sits as a Lord Justice in that same court. It is assumed he will not be entitled to try this case again to prove his earlier decision was correct!

In the meantime, it is important that contracts make clear how and when payments are to be decided and when they are to be made - these provisions also need to comply with the Act. The key is to understand your obligations and liabilities as a party to a construction contract and to have systems in place to ensure deadlines are not missed.


For more information please contact Huw Morgan in our Construction Law team on 0117 314 5293.

 

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