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‘Smash and grab raiders nicked – it’s a fair cop’ Grove Developments Ltd v S&T(UK) Ltd [2018] EWHC 123 TCC

By David Sears QC

In this case, the Adjudicator had decided that the Employer’s pay less notice was invalid because it did not comply with the requirements of the contract. The Employer therefore became liable to pay over £14 million against an application which it believed had a true value of only £1.4 million.

A number of issues arose for the court, including (a) whether the pay less notice was indeed defective and (b) assuming that it was, whether the Employer was entitled to commence a separate adjudication seeking a decision as to the ‘true value’ of the payment application.

As to the former, there was no suggestion that the pay less notice was served out of time. The complaint was that it was defective because it stated the sum which the Employer considered to be due by reference to a detailed spreadsheet sent under separate cover five days previously. The Contractor argued that, in order to be valid, the annotated spreadsheet had to be attached to the pay less notice itself. The Adjudicator agreed. He said the notice was invalid because the basis of calculation was set out in a separate document.

Coulson J gave short shrift to that argument. He said that notices of this kind have to be construed in a similar way to the underlying contract. The issue is how a reasonable recipient would have understood the notice which, therefore, has to be construed by reference to its background. There could be no doubt that the detailed calculation sent five days earlier would have permitted the reasonable recipient to understand precisely how the Employer’s valuation was calculated. There could be no possible objection in principle to a notice referring to a detailed calculation set out in another, clearly identified, document.

As to the question whether, assuming the pay less notice was invalid, the Employer could nevertheless commence a second adjudication to determine the true value of the sum due, the Judge decided, emphatically, that it could. He gave a number of reasons, not all of which are considered here.

Amongst others, he drew attention to the fact that the contract differentiated between ‘the sum due’ as an Interim Payment (under clause 4.7.2) and ‘the sum stated to be due’ in the Interim Application (under clause 4.9). He said the reason for the differentiation was obvious. The ‘sum due’ is identified in clause 4.7 because that is the result of the contractual mechanism designed to calculate the Contractor’s precise entitlement, which is a very different thing to ‘the sum stated as due’ on an Interim Application.

The ‘sum stated to be due’ will almost certainly be different to the sum carefully calculated under clause 4.7 but, because of the Employer’s failure to serve a valid pay less notice, it is the ‘sum stated to be due’ that has to be paid. But, as the Judge said, that does not mean that ‘the sum stated to be due’ has somehow magically been transformed into a clause 4.7 valuation and become the ‘sum due’.

The Judge noted that the only real justification for prohibiting an employer from commencing a second adjudication to determine the ‘true’ value had been ‘the mantra’ that it does not really matter, because the prohibition only applies to interim applications and does not apply to the final application. He said that, as a matter of first principles, there was no justification for the distinction.

Specifically, and most importantly, the Judge said that the cases of ISG v Seevig and Galliford Try v Estura, on which that distinction has been founded, were wrongly decided. In both those cases, Edwards-Stuart J held that, by failing to serve a pay less notice on time, ‘an employer was to be deemed to have agreed that the amount claimed was the ‘true’ value of the interim application’ and could not therefore commence a second adjudication to decide what the true value was.

Coulson J said that he could not agree that analysis. He said that not only was there usually no basis in fact for any alleged agreement, there is also no basis for deeming any such agreement either. All that has happened is that the employer has failed to serve a valid pay les notice and thus become liable, as a matter of contract, to pay the sum ‘stated to be due’. He cannot be taken to have agreed that the sum represents the ‘true’ value of the application. He therefore concluded that the two cases are contrary to first principles, contrary to the adjudication authorities and should not be followed.

Comment

In all the many talks I have given on Harding v Paice, I have consistently argued that the ‘deemed agreement’ approach was wrong for all the reasons explained by the Judge in this case, albeit in rather more felicitous language than I might have used.

This is clearly an important decision, both for employers and contractors. For employers, because it makes it clear that, even if they fail to serve a valid pay less notice, all is not lost; they can still commence an adjudication to determine the ‘true’ value of the application. However, as the Judge made plain, they will have to pay the amount ‘stated to be due’ on the interim application before doing so.

For contractors, the decision is important because it means that a successful adjudication on the basis of an invalid pay less notice is likely to lead to only a short term gain. It will mean they obtain cash in hand (and therefore a potential advantage in any subsequent negotiation) but only until the subsequent adjudication is decided.

Contractors often complain that adjudications founded on invalid pay less notices are pejoratively known as ‘smash and grab adjudications’, protesting that, by bringing such claims, they are only seeking to safeguard their cash-flow which was, after all, one of the principal aims of the payment regime introduced by the Housing Grants, Construction and Regeneration Act 1996.

However, as the Judge observed, his decision does not constitute any threat to cash-flow because the amount ‘stated to be due’ still has to be paid. But, as the Judge said, if a second adjudication then takes place which determines the contractor has been overpaid and he has to make a repayment, what can possibly be wrong with that? It was not one of the policies underlying the Act that the contractor was entitled to hang on for lengthy periods to sums which, on proper analysis, he was not entitled.

As a result of this decision, it therefore looks certain that any ‘smash and grab’ raiders are likely to be apprehended very much sooner than they have in recent times.



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