UK: Contract Procedure Matters: Serve Those Notices To Protect Your Payment Position

Last Updated: 17 May 2019
Article by Akin Akinbode and Tracey Summerell

Parties to a construction contract who have not been paid have a right to refer their payment claims to adjudication under the Housing Grants, Construction and Regeneration Act 1996 (as amended in 2011) (the Act). Adjudication is an essential tool for parties to enforce their contractual payment rights. 

However, if payers do not comply with the notice procedures prescribed by the Act, the payee can start adjudication proceedings to recover – swiftly – payments they have applied for in what have become known as "smash and grab" proceedings. Payers can therefore end up having to make payments they do not consider due to a payee. 

The question of whether (and when) such payers can start another adjudication to ascertain the true value owed to the payee (and recover any overpayment) has been considered at length by both the Technology and Construction Court (TCC) and the Court of Appeal (CA) recently in important decisions involving Grove Developments Ltd and S&T (UK) Ltd and, more recently, M Davenport Builders Ltd and Mr and Mrs Greer.

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Payers who haven't served payment/pay less notices must pay up first (the TCC's decision in Grove)

In his first instance decision in Grove Developments Ltd v. S&T (UK) Ltd [2018] EWHC 123 (TCC), (Grove TCC), which we reviewed here Smash and grab adjudications – redressing the balance, Coulson J (as he then was) decided that:

  • if the paying party does not serve a pay less notice on time or at all, the payee is entitled to be paid the sum stated as due in its payment application. If the payer does not pay up, the payee can start an adjudication to recover the sum due. An adjudicator will likely uphold that claim and the court will likely enforce the adjudicator's decision;
  • a payer who disagrees with the payee's valuation (and the adjudicator's decision) but who has failed to serve a pay less or payment notice can start a fresh adjudication to determine the true value payable but must first pay the sum stated as/found to be due.

The payee contractor appealed on various issues, including whether the payer's pay less notice was valid and (the issue of most interest to the construction industry) whether the payer was entitled to pursue a claim in adjudication to ascertain the true value of the works as at the date of the payee's interim payment application.

The Court of Appeal's decision in S&T (UK) Ltd v. Grove 

On appeal, Coulson J's decision was upheld by the Court of Appeal: S&T (UK) Ltd v. Grove Developments Ltd [2018] EWCA Civ 2448. The appeal judges found that the employer's pay less notice had in fact complied with the contract and was valid. Strictly speaking, there was therefore no need for the court to deal with the issue of whether the employer could start another "true value" adjudication. However, in light of the conflicting decisions on the point and acknowledging the importance of the issue to the construction industry as a whole, the court proceeded anyway.    

Overturning ISG v. Seevic, the Court of Appeal confirmed that the employer/payer could start another adjudication to dispute the true value of the works whether or not it had served a payment or pay less notice. Further, a payer's failure to serve a payment or pay less notice was not to be treated as deemed agreement to the payee's valuation. 

Importantly, the Court of Appeal agreed with Coulson J that the employer/payer could start a true value adjudication but only once it had paid up on the contractor's/payee's valuation. This conclusion effectively amounts to a fetter on the right to adjudicate at any time (under section 108 of the Act). The adjudication provisions are subordinate to the payment provisions in section 111.

Jackson LJ summed up the policy behind the Act succinctly: "One important policy of the HGCRA and the Amended Act is to promote cashflow in the construction industry. In other words, there should be prompt payment followed by any necessary financial adjustments." (See paragraph 108 of the judgment.)

Jackson LJ was well aware of the context of such payments and payers' concerns that their money might not be recoverable should the payee be/become insolvent: the requirement that the employer/payer pay up before seeking a true value adjudication decision arguably: 

"operates harshly in situations where the contractor is veering towards insolvency ... The employer may pay out a large sum ... which is then swallowed up by secured creditors before there is any re-valuation of the works." 

Jackson LJ's guidance to an employer/payer in cases where there is a perceived risk of insolvency was to be scrupulous in protecting itself by serving timeous payment notices or pay less notices. 

At first flush, you might think that Grove would dissuade contractors from starting smash and grab adjudications, knowing that they might have to engage in a further, possibly costly and time consuming, adjudication and pay back some or all of the funds to the payer in a short timescale. This might especially be the case where the employer has already disputed the figures and a second, expensive, "true value" adjudication is likely. However, Grove has not quite acted as the death knell on smash and grab adjudications: we continue to see parties starting this type of adjudication.

Grove applied: M Davenport Builders Ltd v. Greer & another

Since the Court of Appeal's decision in Grove, the TCC has applied the principles in Grove in its decision in M Davenport Builders Ltd v. Greer and another [2019] EWHC 318 (TCC). 

You can read our review of the Davenport decision and a summary of the issues parties should consider when facing a payment dispute here: " Grove confirmed as correct approach to starting true value adjudications". 

Note that the TCC in Davenport left open the possibility of a paying party starting a true value adjudication before making payment, relying on the decision in Harding v. Paice. This option will only be available in unspecified circumstances – which, unfortunately, the TCC did not expand on.

How to avoid similar payment disputes (serve those notices!)

There is one clear and relatively easy way for payers to avoid falling foul of the principles set down in Grove TCC, Grove CA and Davenport: put in place tightly-run notice procedures – and stick to them. 

Failure to serve notices on time or at all gives contractors a right to adjudicate and recover the payment applied for regardless of whether the sum applied for is correct.

Does the Construction Act need to be amended to reflect Grove?

Note that Jackson LJ pointed out that if his conclusion was wrong, i.e. that "if an employer can commence a 'true value' adjudication without troubling to meet its payment obligation under section 111", then that "would be unfortunate for the construction industry and it would indicate a need for statutory amendment [to the Construction Act]". 

But should the Act be amended anyway to reflect the decision in Grove? This was a question considered by Laura Lintott in her recent editorial for Construction Law, which you can read here: Is new legislation needed for adjudication?

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

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