Payment in Construction Contracts – developments following the Court of Appeal decision in S&T(UK) Limited v Grove Developments Limited
Many individuals in the industry will be familiar with the on-going debate on the future of "smash and grab" adjudications following the first instance decision in Grove Developments Limited v S&T (UK) Limited. In particular, many where asking whether there is a future for smash and grab adjudications, or whether payment notice defaults are no longer a concern as the paying party can counter-adjudicate on the value of the relevant application.
Taking a step back to the position before the decision in Grove v S&T at first instance, many will recall that following the judgment in ISG Construction Ltd v Seevic College in 2014 it was accepted that where no valid payment and / or pay less notices had been served, the sum applied for would have to be paid by the final date for payment, and the paying party could not commence a subsequent or parallel adjudication requesting a determination on the value until the next payment cycle or the final account stage. This was upheld in many cases that followed, and was generally seen to enforce the specific requirements of the Housing Grants, Construction and Regeneration Act 1996 (commonly referred to as the Construction Act). In particular, ISG confirmed that the paying party's obligation to issue payment and pay less notices represented the two chances a paying party has to avoid paying the sum applied for within any payment cycle. If the paying party failed to issue the notices, it would be obliged to make payment of the applied sum in full, leaving any adjustment of that figure to be reassessed at the next payment cycle or final account stage.
The issue in Grove v S&T raised specific questions on the payment practices pursuant to a JCT Design and Build 2011 Contract for the design and construction of a 613 no. bedroom Premier Inn Hotel including a pedestrian link bridge at Heathrow Terminal 4. Although there were various issues in this case, of particular interest to the industry was the question of whether the employer (Grove) would be entitled to commence an adjudication (or other proceedings) to establish the sum actually due to the contractor (S&T) in respect of the application in absence of a valid payment or pay less notice.
The Court at first instance found that even where a paying party failed to issue a payment or pay less notice, once payment had been made in full, the paying party could then commence a value adjudication. At the time, some commentators suggested that this would be the end of what was termed "smash and grab". However, it remained unclear on what basis a party's statutory right to adjudicate at any time, could be subject to its obligation to pay first.
Following the first instance decision, S&T appealed to the Court of Appeal. The Court of Appeal agreed with the first instance decision, holding that an employer who had failed to serve a payment or pay less notice is nevertheless entitled to adjudicate to determine the value of an interim application, thereby, in essence, overturning the legal position following ISG.
The Court of Appeal reached its decision whilst at the same time emphasising that the employer was under a statutory obligation to first pay the "notified" sum i.e. the sum stated as due in the contractor's application where there is no valid payment or pay less notice. The Court of Appeal reached this decision by finding that both the Construction Act and the contract must be construed as prohibiting the paying party from embarking upon adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation. The Court of Appeal's decision in this respect has taken a step further than the decision at first instance by seeking to find a juridical basis for the proposition that a party must pay the notified sum first before commencing a valuation adjudication.
How this will work in practice, however, remains to be seen. Even since the decision in S&T v Grove, contractors continue to commence smash and grab adjudications. It may be, therefore, that we will see is a vast increase in adjudications, the first dispute being on notice defaults (i.e. the smash and grab adjudications) and then valuation adjudications following payment being made.
This article is taken from Building Interest - Winter 2019.