Recently, there has been a series of cases focused on failures of the payment process in construction contracts resulting in the so-called 'smash and grab' adjudications, including the much debated case of Grove Developments Ltd v S&T (UK) Ltd. This case was considered in our earlier blog, where Coulson J observed that there was no justification for treating interim and final payments differently and an employer was free to commence a second adjudication on the true value of an interim account, even where no valid Payment or Payless Notices have been served.
There was concern amongst many contractors that this decision would render 'smash and grab' adjudications worthless and strip the statutory payment mechanism of its intended purpose _ to maintain cash-flow.
The case was unsurprisingly appealed and the decision in that appeal was handed down by the Court of Appeal in England on 7 November 2018. The court held that the Payless Notice was valid and could refer to previously issued documents. The court also observed that a party does have the right to adjudicate on the true value of an interim application but only after payment has been made. So what does this mean for payment practices within the UK construction industry?
Payless Notices - No bright line rule
The court considered whether a Payless Notice could refer to previously issued documents to set out the basis of calculation, even if that document was not re-sent as an attachment to the Notice itself.
Coulson J held at first instance that reference in a Payless Notice to another document that had been previously issued would not render the Notice invalid. This has been upheld in the Court of Appeal.
The court stressed that there is no bright line rule on this issue. It will be a question of fact and degree in each case as to whether the Payless Notice achieves the necessary degree of specificity.
Whilst this clarifies the matter, it is unfortunate that the Court of Appeal did not take the opportunity here to elaborate and provide some guidance in relation to the actual content of a Payless Notice and the concept of a basis of calculation. It is therefore likely that further adjudications on this issue will arise.
True valuation of an interim account - s111 is not the philosopher's stone
Notwithstanding that the Payless Notice was held to be valid in this case, the Court of Appeal nevertheless addressed and agreed with Coulson J's obiter comment that a second adjudication could indeed be raised in relation to an Interim Application to determine the true value of the works.
The Court of Appeal outlined that either an Interim Application, Payment Notice or Payless Notice could set out the notified sum that must be paid at the final date for payment under s111 of the Construction Act. The court further observed however, that this should not make the Notified Sum conclusive of the true and proper valuation of the work done under the contract. It should remain open to a party to challenge the correctness of the Notified Sum by adjudication.
Timing of the second adjudication
The court further outlined that an employer may only exercise the right to raise an adjudication on the true valuation of an interim application after it has paid the Notified Sum.
The court reasoned that the Construction Act cannot sensibly be construed as permitting the adjudication regime to trump the prompt payment regime. One of the important policies behind the Construction Act was to promote cash flow and therefore there should be prompt payment, followed by any necessary financial adjustments.
It was acknowledged that this approach may provide an unsatisfactory result in a situation where the contractor is veering towards insolvency as sums of money paid over may be swallowed by secured creditors before a re-valuation of the works can be carried out. However, the court emphasised that in this situation, employers need to be scrupulous and protect themselves by serving timeous notices. The implications of insolvency may then be the subject to further challenges depending on the circumstances.
Conclusions and Implications
Although the court's observations in relation to a party's right to refer a dispute on the true valuation of an interim application to adjudication are not strictly binding, the decision has provided welcome clarity in respect of parties' rights and obligations under the statutory payment regime. The notion that payment is to be made before raising the second adjudication on valuation maintains cash flow, in keeping with the intentions of the Construction Act. It also avoids the logistical difficulties of two parallel adjudications.
The case does reinforce the need for employers to be meticulous when serving Payment and Payless Notices to ensure that they are served on time and in accordance with the contractual terms. However, the backstop is that if there has been a failure in the payment process, the issue of the true and proper valuation can be referred to adjudication.
This is an English decision and it is therefore only persuasive authority in Scotland. We must wait and see how the Scottish courts will approach this issue.
Whether, in practice, this will result in contractors not advancing a 'smash and grab' adjudication and instead seeking to adjudicate on the value of the notified sum remains to be seen. Indeed, it may well be the case that the 'smash and grab' remains the default practice with a second adjudication on valuation becoming the norm, resulting in a proliferation of adjudications. Only time will tell.
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