RIP - Cash Flow?

The recent decision of Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) 

The case is of interest in that the court considered some of the common problems that case law has attempted to address in relation to the Housing Grants  Construction and Regeneration Act 1996(as amended) (‘the Construction Act’) and is of vital importance to the approach of the courts to the competing interests of payer and payee.

The point about the Construction Act, which the courts have supported in many ways, is that its purpose is to provide cash flow. That is the industry’s life blood. The Construction Act does that by requiring someone to produce a valuation and to notify the payee of the amount to be paid ‘the notified sum’. The notified sum can be corrected in a later valuation. If the payer does not produce the notified sum then the payee can produce the notified sum. If you want to pay less than the notified sum you have to serve a pay less notice. Rights of set off and to make counterclaims as a defence to the claim for the notified sum are lost if the payer does not serve the requisite notice.

The issue which the courts have grappled with is whether there is a right to assert a ‘true value’ where the payee asserts that it does not accept the notified sum but has not served a pay less notice or whether that right is lost in perpetuity or simply postponed.

The courts have suggested to date that there is a distinction to be drawn between the right to contest a final valuation based upon a notified sum and an interim valuation based upon a notified sum.

The case law that has  developed in this regard is complex.  The distinction between the circumstances where  the notified sum can be contested and true valuation sought, and not, has sometimes been based upon the nature of the valuation process (in a final account or contract termination context), or on the basis of a deemed agreement by the payee to the notified sum when the payee has not served a valid pay less notice in the context of interim payments or finally, on a restriction imposed by the Construction Act on interim payment challenges.

If the right to challenge on a valuation basis arises in a valuation mechanism at the end of the contract (absent insolvency) the interest of the payer is protected and the cash flow mechanism works.

This decision now provides that there is a right to assert and to adjudicate the true value of the works in response to a notified sum at an interim payment stage. It rejects the suggestion that the payee is deemed to have agreed the notified sum.

Depending on the nature of that right to a true valuation and when it arises, there is a possibility of two competing interests being recognised by the law, the payee’s right to the notified sum and the payer’s right to the true valuation.

If those rights are of equal standing and arise concurrently then, as some commentators have suggested, when faced with a claim for the notified sum the payee will simply assert the true value and if that is less than the notified sum use that to negate the claim for a notified sum.

If that is the result of this decision then the courts will have effectively emasculated the Construction Act to such an extent that payees will be in a worse position than they were before the Construction Act. The Construction Act is already very procedural and trips up payees (leaving them without an entitlement).  Indeed central to the decision is a discussion about the validity of the pay less notice which reflects the increasingly procedural nature of the payment process. Both payees and payers fail to comply with the Construction Act and it is sometimes suggested that a different standard of compliance is required of payees to that required of payers. For payees it will be welcome that the judgment rejects that, Mr Justice Coulson stating;

“There was a hint in one or two of the authorities, reflected in Mr Nissen’ s submissions on behalf of  Grove that an employer’s pay less notice might be construed “more generously” than the contractor’s interim application/payment notice because, whilst the former might be regarded as merely defensive, the latter can give rise to draconian consequences if they are not responded to in time (as this case demonstrates). However, I do not consider that the courts should generally adopt a different approach to the construction of the two different kinds of notices: that would be potentially contrary to Mannai. That said, the particularly adverse consequences for an employer that follow from, say a contractor’s unanswered application/payment notice are relevant to the test of the reasonable recipient: would that recipient have realised that the document in question was an application or payment notice, with contractual force, and with all the consequences that that may entail?”

The judge also rejected the suggestion that the decision undermines the Construction Act by now permitting a payer to assert a true valuation. The judgment deals with at para 140 onwards;

” There is also the suggestion that, if this analysis is right, the notice regime under the 1996 Act and/or this form of contract will be undermined, because every employer who misses the relevant deadline for the pay less notice will simply start a second adjudication as to the true value. But why would they? In most cases,such a course would be inefficient and costly: the employer will still have to pay the sum stated as due in the interim application. If the employer can then resolve the alleged over-valuation point in the next interim payment round, no second adjudication would be necessary.

 Even if we assume that the relationship between the employer and the contractor is poor, so that there is a second adjudication in any   event, the adjudications will still be dealt with, by the adjudicators and by the courts, in strict sequence. The second adjudication cannot act as some sort of Trojan Horse to avoid paying the sum stated as due. I have made that crystal clear. And as I have said if the interim payment cycle is coming to an end, then the risk of injustice to the employer increases and an adjudication as to the ‘true’ value becomes an important remedy. In my judgment, none of that threatens the whole edifice of construction adjudication.”

Therefore the courts will not permit the second adjudication to act as some sort of Trojan Horse to avoid paying the sum stated as due.

What is clear is that an employer who has not complied with the Construction Act will still have to pay the sum due. The right to a valuation does not trump the right to payment.

However, some commentators remain sceptical.

“One issue not clearly dealt with in the present decision is whether a “smash and grab” adjudication can be immediately countered by a parallel adjudication commenced by the employer. If commenced quickly (and permitted by the relevant adjudication rules), such an adjudication should mean that the true valuation of the contractor’s payment application is determined at around the same time as the “smash and grab” adjudication is decided. This in turn may avoid the employer needing first to pay any amount awarded in the “smash and grab” adjudication before receiving a decision as to the true valuation of the contractor’s application. This tactic would apply equally to contractors on the receiving end of “smash and grab” adjudications from sub-contractors.

In this regard, Coulson J noted that a second adjudication would “still be dealt with, by the adjudicators and by the courts, in strict sequence. The second adjudication cannot act as some sort of Trojan Horse to avoid paying the sum stated as due.”

This comment may, however, be directed to the facts in the present case, where Grove had only sought to commence a second adjudication after the result in the “smash and grab” adjudication. Where parallel adjudications are concerned, both adjudication decisions would come before the court on an enforcement hearing at the same time.

CMS Cameron McKenna Nabarro Olswang LLP – Matthew Taylor and Aidan Steensma

The final part of the analysis, that suggests that a second adjudication is possible to negate a first adjudication, seems perhaps too pessimistic ?

Is the concern that the judges of the TCC who control the court process with a strong view to giving effect to the ‘pay now argue later ‘ ethos, do not have the scope within the procedure to prevent such an approach ? 

The acid test is how will the payee’s rights be protected in the face of such an approach.  The simplest way would be for the courts to treat the ‘true valuation’ as a right to recover an overpayment. For the right to arise payment must have been made.

Further it might be argued if the payee wants to contest the validity of the notified sum the doctrine of election might apply so that it cannot concurrently assert its right to a true valuation and deny the validity of the notified sum as payable.

The courts have also used injunctive relief as a means to prevent adjudications that seek to abrogate the ‘pay now argue later’ ethos. In one unreported case the court was open to granting injunctive relief  to prevent a second adjudication while a sum was still unpaid by the party seeking further payment in adjudication. The party paid up so no injunction was needed. Further the courts award  indemnity costs against those who seek to resist enforcement of adjudicators’ decisions in order to postpone payment. The courts may well be able to ensure that the scenario of concurrent rights negating each other does not arise. Clearly Mr Justice Couslon was alive to the issue. Leave to appeal has been granted to S&T so we may hear more of this case. If the right to assert a true valuation is supported in the Court of Appeal, it is to be hoped that the court will  provide more detail to warn off those who consider that a second adjudication can be used as some sort of Trojan Horse  to avoid paying the notified sum. Procedural loopholes for the recalcitrant payer will not assist the need for cash flow in the industry.