Employer Can Adjudicate True Value Of An Interim Application

If you fail to serve a valid payment notice or pay less notice in response to an interim application, just how big is the hole you will find yourself in? That was what was at stake in the case of Grove Developments Limited v S&T (UK) Limited [2018] EWHC 123 (TCC) that was decided at the end of last month.

The Construction Act makes clear that in such circumstances you must pay the amount stated in the contractor’s application. Two previous decisions of the same court found that, under the standard forms generally used, the employer cannot then have determined by an adjudicator the true value of the works to which the relevant interim application relates until final account stage. That led to a rise in ‘smash and grab’ adjudications where contractors claimed large sums because the employer had failed to serve valid notices, particularly late in the job where the employer would be unable to correct the position in subsequent interim payment certificates. The court had held that, by failing to give notices to the contrary, the employer had agreed, or should be taken to have agreed, the amount stated in the application.

In the Grove Developments case, the court decided that its earlier decisions were wrong. It found that the failure to serve a valid payment notice or pay less notice does not mean the employer has agreed to the value of the interim application or should be taken to have done so. The Judge noted that it was accepted that a contractor can refer to adjudication the question of the true value of the works by way of challenge to an employer’s payment notice or pay less notice. Accordingly, the prohibition of an employer commencing an adjudication to determine the true value of an interim application was contrary to the principles of ‘equality and fairness’. He also concluded that there was nothing to justify the different treatment of interim application and final accounts, and added that this approach was supported by the Construction Act itself.

So where does this leave us? First, if the employer fails to serve a valid notice, he will have to pay the amount in the contractor’s application (or default notice, where applicable). The Grove decision does not get him out of that. That could be quite a deep hole. However, it is no longer an abyss; having paid, he can then refer the proper valuation to an adjudicator to recoup any overpayment.

One area that has not been completely cleared up by the courts is precisely what is required so as to constitute a valid payment or pay less notice. The Construction Act requires that the notices specify what the person considers to be due and the basis of on which it has been calculated. In Grove the payless notice set out the basis of calculation, in part by reference back to the content of the payment notice without repeating that content in the pay less notice itself. It was argued that the pay less notice did not therefore ‘specify’ the basis of calculation. The adjudicator had accepted that argument. ‘Wrong’ said the court. There is nothing wrong in principle with the approach of specifying by reference to another clearly identified document. The court found that the argument that the notice was invalid was “artificial and contrived”. Arguments to which that label can be applied are likely to be given short shrift by the courts.

The Judge said he thought that his decision will most likely cause a reduction of ‘smash and grab’ adjudications which, in his view, has brought adjudication into a certain amount of disrepute. As this case shows, the road ahead often has many twists and turns. While it is clear that the benefits of ‘smash and grab’ adjudications have been reduced, we will have to wait and see how the future unfolds.

This article first appeared in Construction Index on 6th March 2018.