Construction Update: The end of smash and grab culture in Adjudication?

In the recent case of Grove Developments Limited v S&T (UK) Limited [2018] EWHC 123 (TCC), Mr Justice Coulson has held that an employer can start a second (counter) adjudication to dispute the value of the work the contractor claimed for in an interim application for payment.

Background

By a JCT Design and Build Contract 2011, Grove engaged S&T to design and build a new hotel at Heathrow Terminal 4.

The following issues came before Coulson J in a combined Part 8 hearing:

There were three adjudications between the parties and, in the third adjudication, Grove’s payless notice was held to be invalid, which meant that S&T was entitled to be paid £14m under its interim application without interrogation into its account. In other words, the contractor was successful in a so-called “smash and grab” technical adjudication.

The following issues came before Coulson J in a combined Part 8 hearing:

• Issue A: did Grove’s payless notice comply with the requirements of the contract?
• Issue B: if the payless notice did comply, should the result in the third adjudication be enforced?
• Issue C: was Grove entitled to commence a separate adjudication seeking a decision as to the “true” value of the interim application?
• Issue D: were Grove’s notices in respect of liquidated damages properly issued?

For the purposes of this short note, we will concentrate on Issue C - given it is the most significant aspect of the decision for the wider Construction Industry.

Issue C

In a significant departure from previous authorities, Coulson J held that an employer is entitled to commence a second adjudication to determine the “true” value of an interim application, even if it failed to issue a valid payment notice or payless notice.

Coulson J went back to “first principles” and gave six reasons for his decision:

1. Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850 and Beaufort v Gilbert Ash [1999] 1 AC 266 - it had always been open to the Court to open up, review, and revise certificates issued by the architect - there was “no essential difference” between these certificates and the payment notices. Accordingly, the courts (and thus adjudicators) could decide the “true” value of an application.
2. Section 108(1) of the Housing Grants, Construction and Regeneration Act 1996 permits a party to refer “a dispute arising under the contract for adjudication” and paragraph 20 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 provides that the adjudicator “shall decide the matters in dispute”. There was “no limitation on the nature, scope and extent of the dispute which either side can refer to an adjudicator” and “no limit on the power or jurisdiction of an adjudicator which would prevent him or her” from deciding a subsequent dispute as to the “true” valuation.
3. A dispute about valuation is different from a dispute about the sum stated in a notice. Therefore, the true valuation was not considered or decided in the earlier adjudication about notices.
4. The words of the contract distinguish between “the sum due” and “the sum stated as due”. The former were designed “to calculate the contractor’s precise entitlement” whilst the latter regulates payment due to failure to serve a valid payless notice. Having paid the amount claimed by the contractor because that is “the sum stated as due”, the employer can then commence an adjudication to determine the “true” valuation of application.
5. Coulson J invoked “equality and fairness” in balancing the employer’s ability to commence a valuation adjudication with the uncontroversial ability for a contractor to do so, as envisaged by sections 111(8) and (9) of the 1996 Act.
6. Coulson J did not accept there was a distinction in the JCT form between interim and final payments in terms of obtaining a “true” valuation.

Conclusion

This decision is likely to send some shockwaves around the construction industry, which has become used to the phenomenon of so-called “smash and grab” adjudications – it expressly rejected the finding in ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) where an employer under a building contract who had failed to serve a payless note was deemed to have agreed the sum in the contractor’s application for payment and not only had to pay it but could not subsequently challenge the amount. The decision will particularly be welcomed by employers, who will now be able to refer interim payment disputes to adjudication, even where they have failed to comply with the notices provisions in contracts.

That said, Coulson J gave S&T permission to appeal against his decision on this point. It will be interesting to see how the Court of Appeal will approach this, although in our opinion Coulson J’s decision is not only correct in law but is a welcome return to the previous position where an employer has the option to commence a “valuation” adjudication in the event it failed to serve timely payment notices.