Smash and grab raiders sentenced: it’s still a fair cop
Back in February, in a momentous final outing as a TCC judge, Coulson J held that an employer that fails to serve a valid and timely pay less notice in response to an interim payment application, and who therefore becomes obliged to pay more than it thinks it should, can start a fresh adjudication to determine the true interim valuation.
Commentators thought the decision might spell the end of ‘smash-and-grab’ adjudications. However, the decision squarely opposed previous TCC authority on the point – chiefly ISG v Seevic College  EWHC 4007 (TCC), Galliford Try v Estura  EWHC 412 (TCC) and Kersfield Developments v Bray & Slaughter  EWHC 15 (TCC) – and so was ripe for appeal.
Now, in Sir Rupert Jackson’s keenly awaited judgment, the Court of Appeal has confirmed that an employer can indeed start a fresh adjudication, provided he pays the sum payable under the valuation first.
The decision below
The facts of the case before Coulson J were similar in form to countless others. The contractor sent the employer an interim valuation detailing an increase over the previous application of just over £14m. The employer missed the deadline for a payment notice, but sent one late, along with a marked-up spreadsheet that arrived at a much lower figure (about £1.5m) and a certificate for that lower sum. Four days later the employer sent an on-time pay less notice stating £nil was due because LADs were owed in excess of the employer’s valuation. The pay less notice referred to the earlier certificate and spreadsheet. An adjudicator held that the pay less notice was invalid and that the £14m was due. The employer asked the Court to declare first that the pay less was valid and, second and significantly, that if it wasn’t valid, the employer could start a fresh adjudication to determine the true valuation. (The contractor counterclaimed, disputing the entitlement to LADs – a point beyond discussion here.)
Coulson J found the pay less notice was valid. Following Mannai Investment v Eagle Star  AC 749, he thought a reasonable recipient would have understood the notice as a pay less notice.
His decision on the fresh adjudication point was therefore obiter, but for 6 reasons he decided the employer could adjudicate again.
- The Court has jurisdiction to determine the amount of a sum notified in an interim application for payment, and an adjudicator has the same power.
- There was no limit on the scope of a dispute that could be adjudicated.
- Where an adjudicator’s award on a valuation was based on the absence of a pay less notice, there had not been any adjudication on the value of the works.
- The “sum due” under the contract was different from the “sum stated as due” in a payment application.
- An employer should have the same entitlement to challenge a contractor’s valuation as a contractor has to challenge an employer’s payment notice through adjudication.
- There was no principled reason why interim and final applications should be treated differently.
The pay less notice
Sir Rupert reached the same conclusion as Coulson J on the validity of the pay less notice. It was valid because cross-referring to the certificate and spreadsheet “did not, and could not, give rise to any doubt or misunderstanding in the mind of a reasonable recipient” (para. 55). However, there “is no bright line rule” and it is “a question of fact and degree in each case” whether a pay less notice is specific enough to satisfy the requirement to “specify” the sum due and the basis for the calculation (para. 53).
Principles of a fresh adjudication
Though the fresh adjudication question became “academic“, Sir Rupert recognised it was “of great importance” to the industry.
He set off on an “Odyssey” through the competing authorities (paras. 62-85), in particular noting the doubts cast on ISG by Coulson J in this case and Fraser J in ICI v Merit Merrell (No. 2)  EWHC 1763.
Sir Rupert’s analysis began by reiterating that s. 111 of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA), as amended, imposed a directly-effective and “immediate” obligation to pay the notified sum where no timely payment notice or pay less had been issued (paras. 42, 86-87).
He then turned to Coulson J’s 6 reasons (paras. 90-98).
- First, on jurisdiction, Sir Rupert accepted the general proposition that “the wide powers of the court (and in consequence of the adjudicator)…permit opening up and revising the sums shown as due in an interim application in any case where the interim application determines what is payable.“
- Second, on the scope of adjudication, Sir Rupert agreed that valuation reviews were within the wide ambit of adjudication. He noted that there was no express power for a contractor to challenge a payment or pay less notice – but then “everyone accepts that such a power exists“.
- Third, on the effect of notices, Sir Rupert held that the HGCRA s. 111 obligation to pay “does not transmute the sum notified by [an interim application, payment notice or pay less notice] into a true valuation of the work done” – those documents have no magical quality.
- Fourth, on Coulson J’s distinction between the sum stated as due in a notice and the sum actually due, Sir Rupert found the distinction “a helpful one” because it differentiates the obligation to pay immediately from the “process for reviewing and adjusting the payments which have been made“.
- Fifth, on the employer’s opportunity to challenge via pay less notices, Sir Rupert considered that the “rushed process” of submitting pay less notices would not “sensibly lead to a definitive valuation” but only a “provisional calculation“. He considered that the adjudication provisions would “facilitate a more detailed valuation” – presumably a more accurate one, too.
- Sixth, on the possible distinction between interim and final payments, Sir Rupert held “it would be strange if the same form of words [in HGCRA s. 111] has a conclusive effect in relation to interim certificates which it does not have in final certificates.“
Drawing the threads together
And so Sir Rupert concluded: “the employer, having failed to serve a Payment Notice or Pay Less Notice, is nevertheless entitled to adjudicate to determine the true value of an interim application” (para. 99). While in many cases any overpayment can be adjusted at the next interim application, a fresh adjudicator “can order re-payment of the excess” that the true valuation generates (para. 100). Finally, because s. 111 creates an immediate obligation to pay, an employer is “prohibited from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation” (para. 107); the HGCRA’s adjudication regime cannot trump its prompt payment regime.
In a dictum that will provide welcome clarity, Sir Rupert said that although it was “impossible” to reconcile the first-instance cases, he came down (very politely) in favour of Coulson J’s and Fraser J’s analyses “in so far as [they] differed from the analyses in ISG, Galliford Try and Kersfield“.
The decision represents the Court’s latest attempt to “hack a pathway through a dense thicket” of legislation, case-law and standard forms.
It has certainly untied an unwelcome knot in the law that had begun to tighten since ISG – a knot that had tied up many employers whose eyes drifted from the clock and calendar. It also represents a further move towards assimilating interim and final payment regimes – continuing in the direction pointed by the Court in Adam Architecture v Halsbury Homes  EWCA Civ 1735.
Employers will no doubt continue to breathe easier knowing that they don’t have to wait until the final account stage to claw back perceived overpayments. They must pay now, but can argue only a little later. Nevertheless, as Sir Rupert advised, employers worried about their contractors’ solvency would be wise to ensure they stick to issuing pay less notices on time. One thing the judgment has not answered is whether a true valuation adjudication can run alongside an adjudication about the validity of a pay less notice – the latter, after all, is likely to determine whether there is an obligation to pay at all, and as Sir Rupert’s judgment made clear, that determination is always a question of fact and degree in each case.
The cash-flow advantages and commercial pressure of immediate payment and the fact-specific decisions about pay less notices may not spell the end of what many think are opportunistic raids on employers’ purses. But if contractors know there may (literally) be payback sooner rather than later, any ‘smash-and-grab’ mindset might gradually relax into a more ‘knock-and-take’ attitude.