The construction industry is now well acquainted with the payment mechanisms that operate under the Housing Grants Act; in particular, the need for an employer to issue a valid and timeous Payment Notice or Payless Notice in response to a contractor's Application for Payment. Most are also now accustomed to the "Smash and Grab" Adjudications which arise following an employer's failure to do so - the contractor adjudicating for payment of the full amount claimed in the Application. The result of this is an employer who has failed to issue valid notices is faced with the prospect of paying the full sum claimed by the contractor, regardless of whether it represents a true valuation of the work.
Two key questions this scenario has regularly presented are: (1) when is a Payless Notice valid? and (2) can an employer who has failed to issue a valid Payless Notice, and unsuccessfully defended the resulting Smash and Grab Adjudication, then immediately raise their own Adjudication seeking a decision as to the 'true' value of the Application?
After almost 14 years as a judge, Justice Coulson has issued what may be his last substantial judgement, which considers in detail these two questions. The case, Grove Developments Ltd v S&T (UK) Ltd, arises from the new Premier Inn at Heathrow Airport; Grove Developments Ltd ("Grove") having employed S&T (UK) Ltd ("S&T") to design and build the hotel.
In the case S&T argued that the Payless Notice issued by Grove in response to their Interim Application was invalid and hence the Adjudication decision in their favour should be enforced, resulting in a payment of £14 million by Grove to S&T. Grove in response not only argued that their Payless Notice was valid, but also sought a decision from the court as to whether an employer could in principle raise a second Adjudication, to decide the true value of an Interim Application.
Validity of a Payless Notice
On the question of what constitutes a valid Payless Notice, the usual general guidance that the notice needs to clearly set out the sum which is due and/or to be deducted, and the basis on which that sum is calculated, was given. However, in going against the decision of the Adjudicator, the court held that the Payless Notice could refer to another document previously issued, even if that document was not re-sent as an attachment to the Payless Notice. Therefore a failure to re-issue a document referred to within a Payless Notice does not make the notice invalid, so long as the Payless Notice is clear on the face of it where the calculation behind the sum due can be found.
As such, Grove's Payless Notice was held to be valid, meaning S&T had no default right to payment.
A Second Adjudication to consider the true value
Notwithstanding that the Payless Notice had been held to be valid, the court went on to consider Grove's second question. Having reviewed all the relevant authority, Justice Coulson concluded that whether it is a Final or Interim Application, an employer whose Pay Less Notice is deficient or non-existent must pay the contractor the sum due stated in the Application. However, in contrast to earlier cases, he concluded that an employer can then seek, in a second Adjudication, to dispute that the sum paid is the 'true' value of the works, seek to have the works re-valued and repayment of any amount overpaid.
Practical Applications
Although Justice Coulson's decision on the second issue is only obiter, if followed in other cases, it will mean that an employer who has failed to issue a valid Payless Notice, and is now faced with a Smash and Grab Adjudication decision against them, will nevertheless be able to commence its own Adjudication to determine the true value of the Application. In practice the conclusion of this Adjudication should be possible before any Smash and Grab Adjudication can be enforced, at least in Scotland. Therefore if the decision is applied and followed, the impact is likely to be a significant reduction in the number of Smash and Grab Adjudications. Contractors may now need to think twice before raising a Smash and Grab Adjudication; and consider whether, when faced with either an invalid Payless Notice or no notice at all, it may be better to raise an Adjudication themselves, based on the value of their Application, rather than seeking payment of the full sum applied for, based on a default basis.
Overall, whilst this may be Justice Coulson's last substantive judgement, this is not going to be the last we hear from the courts on this issue; indeed S&T has been given leave to appeal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
