Case Update: Pay Less Notices, Smash and Grab Adjudications, and the Levying of Liquidated Damages
The latest decision by the Hon Mr Justice Coulson in Grove Developments Ltd v S&T (UK) Ltd1 in the TCC provided valuable clarification on Pay Less Notices, ‘smash and grab’ adjudications and liquidated damages under JCT contracts.
The claimant, ‘Grove’, employed the defendant, ‘S&T’, under a JCT Design and Build 2011 contract for the design and construction of a new hotel at Heathrow.
During their employment, three adjudications were referred. The first was regarding incorporation of a schedule of amendments into the contract; the second concerned entitlement to extension of time and the third was in relation to the timing of a Pay Less Notice. The present decision relates to the third adjudication.
The Third Adjudication
Communicating the amount due and the basis upon which it is calculated
S&T submitted an interim application. Grove then issued a Payment Notice which was out of time but contained appropriate information to ascertain the basis of valuation. Grove then issued a Pay Less Notice in the correct timescale but did not append the basis of its calculation which it had previously issued to S&T.
S&T alleged the Pay Less Notice issued by Grove was invalid as the basis of its calculation had not been attached. Grove maintained that the basis of calculation had been included by way of reference to that issued previously.
The adjudicator found in favour of S&T; that a Pay Less Notice issued by Grove at interim application 22 was invalid. The Hon Mr Justice Coulson summarised the adjudicator’s decision as follows:
‘The Pay Less Notice was invalid because the basis of the calculation of Grove’s figure was set out in a separate document’. He [The adjudicator] said that the word ‘specify’ in Clause 18.104.22.168 meant that the basis of calculation had to be provided within the Pay Less Notice itself.’
Requirements of a Pay Less Notice
Contrary to the adjudicator, the Hon Mr Justice Coulson found that the Pay Less Notice ‘did properly set out the basis of calculation so that, contrary to the adjudicator’s decision, it was a valid Pay Less Notice’.
The reasoning provided was that the Pay Less Notice referred to a ‘clearly-identifiable document’ in a manner that is recognised and upheld as a common process across industries. Moreover, there was no contractual obligation for repeating the process of attaching documents.
The case also determined the adjudicator’s reliance on the word ‘specify’ under clause 22.214.171.124 which underpinned the adjudicator’s decision in favour of S&T. The Hon Mr Justice Coulson applied use of the Oxford English Dictionary which defines ‘specify’ as to ‘speak or treat of a matter etc in detail; gives details or particulars’ and concluded that by the Pay Less Notice referencing the spreadsheet, it did just this. Reference to another document therefore did not deviate from this definition in any way. Furthermore, the definition provided no basis for prohibiting referencing.
The decision has clarified that documents in support of a Pay Less Notice can be incorporated by reference and will undoubtedly influence the way Pay Less Notices are issued in the future.
‘Smash and Grab’
Smash and grab adjudications, defined by the Hon Mr Justice Coulson as ‘large payment applications made at the end of the works but before the final account’, is a term which should be familiar to those in the construction industry. Specifically, they refer to a scenario where the payer fails to provide a valid Payment Notice or Pay Less Notice, meaning that the payee is entitled to payment in default. Often, this is the amount included in the application for payment made by the payee.
Until now, the position was as ISG Construction Ltd v Seevic College2 which held that following the failure of a party to issue a Payment/Pay Less Notice within the appropriate timescale, or it not possessing the required contents, the employer was deemed to have agreed that the amount applied for was the ‘true’ value of the interim payment.
This case addressed whether:
‘An employer, whose payment notice or pay less notice is deficient or non-existent, pays the contractor the sum stated as due in the contractor’s interim application can then seek, in a second adjudication, to dispute that the sum paid was the ‘true’ value of the works for which the contractor had claimed.’
It was held, based on the following six reasons, that the employer can pursue a second adjudication to dispute the sum paid to establish the ‘true’ value:
- In line with Henry Boot Construction Ltd v Alstom Combined Cycles Ltd3, the court has the power to decide the ‘true’ value of any certificate. Adjudicators weald this same authority to open, review and revise certificates.
- In support of this, the judgment utilises reference to paragraph 20 of the Scheme for Construction Contracts:
‘The adjudicator shall decide the matters in dispute. He may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication or which are matters under the contract which he considers are necessarily connected with the dispute.’
- The Hon Mr Justice Coulson provided further reasoning for his decision by distinguishing between the original adjudication that had been previously decided and a further adjudication. The first adjudication revolved around the timing of a Pay Less Notice, whilst it was clarified that a second adjudication would be on a separate jurisdictional matter of valuation. It was found that to prohibit this second adjudication ‘would be an unwarranted restriction on Grove’s ability to adjudicate any dispute ‘at any time’, in accordance with s.108(2)(a) of the 1996 Act’.
- The JCT contract provides for the terms ‘the sum due’ (Clause 4.7.2) and ‘the sum stated as due’ (Clause 4.9). ‘The sum due’ or the ‘true’ value is the precise value of the contractor’s entitlement. This is displaced by ‘the sum stated as due’, which is a consequence of a Payment Notice and/or Pay Less Notice which is in almost all cases likely to be different to ‘the sum due’, and where a Pay Less Notice is not issued, the ‘sum stated as due’ is to be paid. Subsequently, having paid ‘the sum stated as due’, the employer can seek to adjudicate the ‘true’ valuation of the works.
- The decision found that the employer is entitled to a second adjudication to ascertain the ‘true’ value out of equality and fairness. Previously, a contractor could interrogate ‘the sum stated as due’ in a Pay Less Notice, though an employer would not be afforded such opportunity.
- In consideration of the argument that to prohibit the employer from referring a second adjudication regarding the ‘true’ value would be inconsequential as this would only be applicable to interim applications, not final applications, the decision found there to be no contractual founding for interim and final applications being treated differently. The Hon Mr Justice Coulson highlighted no difference between payment rights and obligations between interim and final applications. Accordingly, an employer can refer a dispute to ascertain the ‘true’ value.
Contrary to the position held in previous judgments, most notably ISG Construction Ltd v Seevic College, the Hon Mr Justice Coulson formed the opinion that following a defaulted Payment Notice and/or Pay Less Notice, the employer was not deemed to have agreed that the amount applied for was the ‘true’ value of the interim payment. Furthermore, the decision found that no detail contained within the Act, Scheme or the relevant JCT contract supported the notion held in ISG Construction Ltd v Seevic College.
The judgment will have consequences for those in the construction industry, providing a remedy for employers dealing with smash and grab adjudications in the event that the correct notice was not issued, and a fall-back position for the same party in being able to quickly recuperate overpayment via a separate adjudication process.
The case does represent a shift for smash and grab adjudications from previous decisions reached in the TCC in what the Hon Mr Justice Coulson says:
‘will strengthen the system, because it will reduce the number of ‘smash and grab’ claims which, in my view, have brought adjudication into a certain amount of disrepute.’
To uphold this as the end of smash and grab adjudications however could be a step too far, as there is nothing preventing these types of adjudications from being referred. That said, the case does provide the basis for a remedy against smash and grabs, albeit at a cost of a second adjudication, allowing for an employer to speed up recovery of resulting overpaid sums.
Liquidated damages notices
The decision also provided further clarity on the interpretation of the levying of liquidated damages under JCT contracts and may give comfort to employers.
Chronological contractual steps under JCT Design and Build 2011 facilitating the levying of liquidated damages are as follows:
- Non-completion notice (Clause 126.96.36.199).
- Notice outlining that the employer may require payment/withhold liquidated damages (Clause 188.8.131.52).
- A second notice from the employer that the contractor is required to pay/the employer will withhold liquidated damages (Clause 2.29.2).
S&T disputed the sequence of Grove’s issuing of the latter two notices, arguing they were not afforded the necessary time to read and understand the notice and the sequencing as issued by Grove therefore rendered liquidated damages invalid.
It was held in favour of Grove that the three notices were issued in the correct sequence and that was sufficient.
Tudor Rose has been actively involved with numerous cases relevant to this issue. Should you wish to find out more about this, please do not hesitate to get in touch with us.
1 EWHC 123 (TCC)
2 EWHC 4007 (TCC)
3 1 WLR 3850
Whilst Tudor Rose has made every effort to ensure that the information contained within this article is correct at the date of publication, this article has been prepared as guidance only and does not constitute legal advice.