The recent TCC decision has sent shockwaves through the construction industry. In summary, it has established that if a paying party under a construction contract fails to issue a valid pay less notice in relation to an interim payment, they may commence adjudication in order to determine the true value of the payment to be made under the relevant payment notice. This has the potential to radically alter the tactics of a payment dispute under a construction contract.
Under the terms of a JCT Design & Build Contract 2011, Grove Developments ("Grove") retained S&T to design and construct a Premier Inn Hotel at Heathrow Terminal 4.
Following Practical Completion there were three adjudications. The third adjudication concerned the validity of Grove's pay less notice in respect of the final interim payment.
The landmark case of ISG v Seevic in 2014 established that, if an employer fails to issue a valid pay less notice, the employer is deemed to have agreed the valuation stated in the contractor's application, regardless of the true value. This meant that if an employer failed to serve a valid pay less notice, they would have to pay the amount stated as due by the contractor and either issue a pay less notice for the following payment cycle or wait until the final account process had concluded under the contract to recoup any alleged overpayment. Importantly, the Courts subsequently confirmed that it was not open to an employer to commence an adjudication as to the true value of the interim account, because it was deemed to have agreed by default to the contractor's valuation - even if the employer's true position was that it disagreed substantially.
The third adjudication decided that Grove's pay less notice was invalid which meant that S&T were entitled to be paid £14 million under its payment notice, a vast increase on the amount claimed by the contractor in the previous payment notice. Given that the final account process would not be concluded for perhaps over a year following practical completion, Grove wanted to challenge the value of the payment application as soon as possible to avoid being so significantly out of pocket for a substantial period of time.
Despite having a clear decision from the third adjudication that the pay less notice was invalid (which therefore meant that, pursuant to ISG v Seevic, Grove were bound to pay the full amount of S&T's application) Grove issued Part 8 proceedings for the Court to determine,amongst other things,whether Grove was "entitled to commence a second adjudication seeking a decision as to the 'true' value of interim [the] application". This second adjudication would, in effect, give Grove a second bite of the cherry.
Coulson J decided that where an employer has failed to issue a valid pay less notice they are entitled to commence an adjudication to determine the ‘true’ value of the interim account. In doing so, he overruled the position set out in many of the most significant decisions of the TCC from the last few years.
In explaining the decision, he stated it was clear that the Court, and indeed an adjudicator, has the power to open up, review, and revise certificates issued. It was clear that both the Housing Grants, Construction and Regeneration Act 1996 and the Scheme for Construction Contracts Regulations 1998 do not preclude an adjudicator from subsequently deciding whether the sum paid was the true value.
This is a welcome decision for employers as it arguably balances the position between employer and contractor. Certainly until the appeal of this decision is heard (the date of which is yet to be confirmed by the Court), employers will rely upon it as authority to commence adjudication, or potentially a second adjudication, following a first adjudication commenced by the contractor for the payment of the relevant sum, to challenge whether the sum applied for is the true value, even where they have failed to issue a valid pay less notice – a sort of judicial get out of jail free card.
Possible Industry Effects
The decision nullifies, to a degree, the draconian position that used to prevail, whereby an employer who had failed to issue a valid pay less notice on time was deemed to agree to the contractor's valuation in respect of that interim payment. However, Coulson J did make clear that his decision did not mean that employers in this position were not required to pay the full amount applied for. The old adage of "pay now, argue later", long cited as the backbone of the payment provisions in the 1996 Act, still applies.
If that is the case, we may ask "what has changed"? The full implications of the case remain to be seen. At the very least, it means that employers who fail to issue a pay less notice following the final interim application for payment now have a remedy (an adjudication on valuation) which can prevent them from having to suffer a cashflow disadvantage for several months.
But more radically, some employers may be emboldened to disregard Coulson's statement that the employer in default is still required to pay the amount of the application in full. In such a scenario, the contractor is usually bound to commence adjudication for the full amount of its application, on the basis that no pay less notice has been served. In a pre-Grove era, an employer would have no practical defence against such an adjudication. But now, the employer might commence their own adjudication immediately to obtain a decision on the issue of the true amount payable. In doing so, they would seek to avoid entirely the cashflow disadvantage accruing from having failed to serve a pay less notice on time. It remains to be seen what judicial attitudes to such an approach would be.
To Take Away
It is important to remember that the scenarios described above only ever become relevant if an employer fails to issue a valid pay less notice on time in accordance with the provisions of the building contract. Therefore, our advice will always be that employers and/or their agents should be clear about the relevant deadlines for issuing pay less notices under the contract. The pay less notice must also be in the correct form and served in accordance with the contract.
However, in the event of a mishap, it may well be that in certain scenarios the post-Grove landscape enables employers to escape some of the more draconian consequences that previously applied.