Articles from the Silver Shemmings Ash Team on contractual matters, recent case law changes and items of interest in the construction and property world

Arbitration Club – Law Courts Branch – Discussion Topic

July 10, 2018 | Silver Shemmings

  1. Housing Grants, Construction and Regeneration Act 1996 – the birth of the withholding notice – the theory – pay now, argue later….morphed into argue now, pay later?
  1. Local Democracy, Economic Development and Construction Act 2009; Changes to – Housing Grants, Construction and Regeneration Act 1996; Commencement 1/10/2011 – the birth of statutory “Smash and grab”?
  1. The terms “Smash and Grab” – credited to James Bowling in CG Group Limited v Breyer Group PLC [2013] EWHC 2722 (TCC) Akenhead J

“Therefore, since no Payless Notice was served by 2 February 2013, in effect by default (or what he called the statutory “smash and grab” regime) CG was entitled to what it claimed

in the Draft Final Account”

  1. Pay now….and argue (if you’re lucky!) (ISG Construction Limited v Seevic College [2015] 2 All ER Comm 545 Edwards Stuart J

“The practical consequences if Seevic were right

    1. The statutory regime would be completely undermined if an employer, having failed to issue the necessary payment or pay less notice, could refer to adjudication the question of the value of the contractor’s work at the time of the interim application (or some later date) and then seek a decision requiring either a payment to the contractor or a repayment by the contractor based on the difference between the value of the work as determined by the adjudicator and the sums already paid under the contract.
    1. If this were permissible, any such decision by an adjudicator would trump the contractor’s interim application because the contractor would then be entitled to an amount representing the value of the work properly executed, as determined by the adjudicator, less the sums already paid. Of course, the amount determined by the adjudicator could be more than the amount claimed by the contractor in his last interim application, but in the nature of things this will not often be the case.
    1. But this would give rise to an anomaly. If, following such a referral, the contractor were to refer a further dispute to adjudication, namely the sum due on the last interim application, the adjudicator would have to decide it. If, having done so, the adjudicator were to conclude that the employer had failed to serve a valid payment or pay less notice, the sum due to the contractor would be the amount stated in the interim application and the adjudicator would have to decide accordingly. The employer would have to comply with that decision.
    1. This is because of the well-known rule, which was explained by Jackson J (as he then was) in Interserve v Cleveland Bridge [2006] EWHC 741 (QB), at paragraph 43, in the following terms:

“Where the parties to a construction contract engage in successive adjudications, each focused upon the parties’ current rights and remedies, in my view the correct approach is as follows. At the end of each adjudication, absent special circumstances, the losing party must comply with the adjudicator’s decision. He cannot withhold payment on the ground of his anticipated recovery in a future adjudication based upon different issues. I reach this conclusion both from the express terms of the Act, and also from the line of authority referred to earlier in this judgment …”

    1. If the outcome of the dispute about how much the contractor is entitled to be paid depends solely on the order in which the adjudications take place, then it looks as if something might have gone wrong. In my view it would have done.
    1. This is for the simple reason that there is no freestanding entitlement to payment under this form of contract outside the framework of interim applications and the final application. The contractor’s only entitlement to payment during the course of the project is by way of an interim application. Absent fraud, in the absence of a payment or pay less notice issued in time by the employer, the contractor becomes entitled to the amount stated in the interim application irrespective of the true value of the work actually carried out. The employer can defend itself by serving the notices provided for by the contractual provisions.
    1. Accordingly, if either the contractor or the employer asserts that the contractor’s right to payment at any particular time in the contract is a sum equal to the value of the work properly executed up to that time, less any sums already paid, that in my view would be to assert an entitlement that does not arise under the contract. In fact, it does not arise at all.
  1. The tide turns – Harding v Paice ([2014] EWHC 3824 TCC), Galliford Try Building Limited v Estura Limited (both Edwards-StuartJ) difference between final and interim?? Kilker Projects Limited v Purton [2016] EWHC 2616 (TCC) Kersfield v Bray and Slaughter Limited [2017] EWHC 15 (TCC). (both O’Farrell J)
  1. Reigning back? Imperial Chemical Industries Limited v Merit Merrell Technology Limited (No. 2) [2017] EWHC 1763 (TCC). (Fraser J)
  1. The final stub? Grove Developments Limited v S&T [2018] EWHC 123 (TCC) Coulson (L) J
  1. The Issue – “Whether Grove is, at this stage, entitled to commence a claim (whether by adjudication or litigation) for a financial adjustment in its favour on the basis of a fresh valuation (S&T’s formulation) / a finding as to the ‘true’ value of the sum due (Grove’s Formulation)?
  1. Answer – Yes

Disapproved ISG:

  1. Accordingly, the principal reason for the decisions in both ISG v Seevic, and in Galliford Try, was the judge’s conclusion that, by failing to serve a notice in time or with proper contents, the employer had agreed, or must be deemed to have agreed, that the amount claimed was the ‘true’ value of the interim application. For a number of reasons, I cannot agree with that analysis.
  1. First, there is usually no basis in fact for any alleged agreement. This case is typical. To say that Grove ever agreed the claim set out in interim application 22, in circumstances where they sent a spreadsheet to S&T showing a plethora of disagreements many of which had existed for months, flies in the face of reality.
  1. Secondly, there is no basis for deeming any such agreement either. What has happened, certainly, under the form of contract used here, is that the employer has failed to serve a proper pay less notice, and has therefore raised no effective challenge to “the sum stated as due”. So that stated sum is due under the contract. But the employer cannot be deemed to have agreed that that sum represents the ‘true’ value of the application; there is nothing in the Act, the Scheme or the words of the JCT contract which indicates any such deemed agreement.
  1. Furthermore, if the failure to serve a counter-notice is to be taken as a deemed agreement to the valuation in the interim application, then where would the deemed agreement stop? If the employer is taken to have agreed a figure for a particular element of the work in a particular application, merely because they have not provided an effective pay less notice, then what are the limits of that deemed agreement? What are its terms? How long does it last or have effect? Why is it not a binding agreement for all time?
  1. In my view, the concept of a deemed agreement, which lies at the root of ISG v Seevic and Galliford Try v Estura is not only unjustified, but it is also an unnecessary complication, given the clear distinction in the contract between ‘the sum due’, on the one hand, and ‘the sum stated as due’, on the other.
  1. This proposition is perhaps best demonstrated by the actual result in Galliford Try. Although that was an interim payment case (and on the judge’s reasoning, the value of that interim amount was deemed to be agreed), he recognised that, because of the likely delay until the final account, there was the risk of injustice

if the whole sum was paid over to the contractor. That led to a stay of execution in respect of more than half the sum which had been ‘agreed’ as due. The stay was an attempt to do justice (because the judge recognised the potentially draconian effect of refusing the employer an early chance to argue about the ‘true’ value), but it was still unsatisfactory: if the employer was to be deemed to have agreed the full amount claimed, how could they be entitled to a stay of execution in respect of any part of it? In my view, it is clearer and simpler (which, as Mr Speaight continually urged me, were the watchwords of the 1996 Act) to order payment of the sum stated as due, in order to maintain the contractor’s cashflow (subject to any arguments about the risk of a failure to repay, which is a different point) and then allow a second adjudication to proceed as to the ‘true’ value.

Approved ICI:

    1. The most recent judgment in the TCC on the issue of a second adjudication as to value can be found at paragraphs 195-212 of the judgment of Fraser J in Imperial Chemical Industries Limited v Merit Merrell Technology Limited (No. 2) [2017] EWHC 1763 (TCC). The case was largely concerned with termination/repudiation and the judge found in favour of Merit on these issues. However, an issue arose as to ICI’s right to recover overpayments for executed works at the time of the repudiation. That arose because Merit had had the benefit of an adjudicator’s decision on the last interim certificate before the termination/repudiation, which was decided on the absence of a pay less notice. Fraser J held that it was not correct to say that ICI did not have an accrued legal right to repayment until a later payment certificate was issued.
    1. In reaching his conclusion, Fraser J tackled the line of authorities which started with ISG v Seevic. He pointed out that the case was decided before Harding v Paice and Brown v Complete Building Solutions. At paragraph 204, he said that those two Court of Appeal authorities “cast some real doubt whether [ISG v Seevic] would be decided in the same way now.” He said that ISG v Seevic was a case concerned with timing rather than substantive underlying rights and he identified various passages in the judgment which he said made that plain. Having considered Galliford Try he said:

“In other words, the value of the works executed is not definitely determined by the figure in the interim assessment (or an adjudicator’s decision on that interim assessment). Nor could it sensibly be argued otherwise given the nature of adjudication.”

    1. Mr Speaight pointed out that the underlying contract in ICI was the NEC3 form, which contained, amongst other things, a right to issue a negative certificate (which is different to the JCT form). But that was immaterial to the analysis in the judgment because there had been a repudiation, so   the

right to a negative certificate had never arisen. That was why Fraser J had to analyse the ISG v Seevic line of cases.

    1. It follows, from the analysis already undertaken that I respectfully agree with the conclusions of Fraser J. I note that Merit sought permission to appeal on this one point, which was refused by Jackson LJ.
  1. The fall out/consequences Victory House General Partner Ltd v RGB P&C Ltd[2018] EWHC 1143 (Ch) (18 April 2018) Mr Justice Morgan Winding up petition – Enforcement case in Adjudication 1 (smash and grab)- unpaid judgment Victory House General Partner Ltd v RGB P&C Ltd[2018] EWHC 102 (TCC) (26 January 2018) (Joanna Smith QC sitting as a Deputy ) £682k + VAT AFP30 ; AFP31 – Adjudication 2 (value) – £1.5M overpaid, but did not order repayment – Adjudication 3 – no defects
  1. I now need to explain in a little more detail the basis of the cross-claim based upon Adjudication No.2. My task in doing has been made very much easier by the decision of Coulson J (as he then was) in Grove Developments Ltd v S&T (UK) Ltd. [2018] EWHC 123 (TCC). This decision discussed a number of issues arising as to adjudication under the 1996 Act and under the standard forms of contract. One issue in particular, which the judge called “Issue C”, is pertinent to the arguments before me. Indeed, the present case is stronger from the employer’s point of view than was the issue considered by Coulson J. In summary, the issue considered by Coulson J was in relation to a case where a contractor had served an interim application. That had gone to ad judication and, without a valuation of the works in accordance with the contract, the first adjudicator had determined that a certain sum was due and payable under the relevant provisions. Coulson J made it clear that when that happened the employer was obliged to pay the figure determined by the first adjudicator. The issue would then arise: could the employer ask for a second adjudication in which he asked the second adjudicator to carry out a valuation of the work which had been done in accordance with the contractual provisions? And, as a corollary to that, if the employer could ask for a second adjudication of that kind, what would happen if the second adjudicator determined that the valuation done that way resulted in a smaller figure being due by way of interim payment to the contractor?
  1. After a thorough review of the earlier authorities, both at first instance and in the Court of Appeal, and after considering the various elaborate arguments raised before him, the judge held that in the case I have hypothesised that the employer could ask for a second adjudication. He then said, starting at para.133 of his judgment, that if the figure determined in the second adjudication by way of interim payment was a smaller figure than had earlier been paid, in particular in accordance with the first adjudication, the employer would be entitled to ask for repayment of the figure appropriately calculated. That was, as I say, a case where there were two adjudications in relation to a single interim payment   application,

with one adjudication turning on the formal documents that had been exchanged, the other involving what was described as a “true” valuation of the same matter.

  1. Mr Chivers says the case is stronger on the facts before me because there has not been a second adjudication on the same certificate. There has been a subsequent adjudication in relation to a later certificate in which the earlier one was subsumed. No one says that Adjudication No.2 was invalid or outwith the powers of the adjudicator. Mr Chivers says, therefore, now that the second adjudicator has done a “true” valuation in accordance with the contractual provisions, in relation to an application for an interim payment, although not for a final payment, it emerges that no sum is payable. Mr Chivers, building on para.133 of the judgment of Coulson J, makes the submission that if the employer in the case before me was to pay the judgment debt there would immediately rise up, upon payment, a cause of action for repayment of that figure. That, he says, is the cross-claim or, as he describes it, a nascent cross-claim which I should reflect in a decision to prevent the contractor winding up the employer for non-payment of the judgment debt. I think Mr Chivers is entitled to say, on the facts that I have described, that it is bad enough for the employer that it has paid some £8.5 million when Adjudication No.2 has determined that the correct interim payment would be of the order of £7 million; it will be worse still if the employer had to, to avoid winding up, pay the further sum by way of the judgment debt.
  1. What struck me re: Grove –

1. The supervisory role of the Courts/TCC – disapproval of perceived poor practice.

  1. The second point is what might be called the “doomsday scenario” to which Edwards-Stuart J devotes some time at paragraphs 47-53 of his judgment in ISG v Seevic. The suggestion, which Mr Speaight argued fully before me, was to the effect that, if an employer could start a second adjudication as to the ‘true’ value, it would destroy the policy underlying the 1996 Act.
  1. I do not fully understand that submission: I certainly do not accept it. One of the purposes of the 1996 Act was to ensure that the contractor was entitled to maintain proper cash-flow. On my analysis, the contractor would not be prejudiced in respect of cash-flow at all, because he would be recovering the full amount for which he had claimed in his interim application. That amount would have to be paid by the employer. So there is no threat to cash-flow.
  1. If a second adjudication took place thereafter, which concluded that the contractor had over-claimed and therefore been overpaid, the contractor would have to repay the amount of the overpayment. What could 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 to which, on a proper analysis, he was not entitled. Cash-flow must not be confused with the contractor retaining monies to which he has no right.

  1. In any event, it is only in the sorts of cases which have come before the TCC so often since 2015, where the interim payment mechanism cannot deal with the problem (because it is a claim on the penultimate application), that this problem has arisen at all. The court cannot shy away from the fact that these cases have arisen in circumstances where, if the contractor is entitled to hang on to the money stated to be due, because of an absent or defective notice, it might be months or even years before there is a determination of the ‘true’ value of the application, as part of the final account process. It is that particular problem which has given rise to this case. I consider that it is better met by an analysis which, following payment of the relevant amount, allows a second adjudication as to the ‘true’ value, rather than some sort of ad hoc and partial stay of execution. In truth, the potential ‘doomsday scenario’ works the other way: if there is no right to obtain a decision on the ‘true’ value by way of a second adjudication, the risk is that, whilst an over-valued application may be capable of being put right at the next interim stage whilst the contract works are ongoing, an over-valued application at the last interim stage, almost always issued after practical completion, cannot be put right until the final account[13]. So at the very time when the cases show that the right to adjudicate as to the ‘true’ value is most needed, it will not be available.
  1. 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.
  1. 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.
  1. In addition, I note that the contractor has always had the right to raise the question of the true value of a pay less notice in a second adjudication, and

it has never been suggested that that is somehow contrary to policy or the operation of the 1996 Act. The sky has not fallen in, just because the contractor has a residual right to challenge the ‘true’ value of the sum stated as due in a pay less notice. I am confident that there will be no significant adverse consequences if the employer is able to exercise a similar right.

  1. For all these reasons, therefore, I do not consider that the conclusions which I have reached strike at the heart of the adjudication system. On the contrary, I believe that it 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.
  1. My theory re: the importance of the merits and advocacy
    1. Finally, as we shall see in Section 6.4 below, the only real justification which has been advanced in the cases for prohibiting an employer from commencing a second adjudication, to deal with the dispute about the ‘true’ value, has 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. Again, as a matter of first principles, there seems to me to be nothing whatsoever to justify this different treatment. There is nothing in the Act or the Scheme which draws any such distinction: on the contrary, s.110A, s.110B and s.111 of the 1996 Act apply to both interim and final payments.
    1. Moreover, there is no justification for such a distinction in the JCT form. As to interim applications, I have already pointed to Clause 4.9 of the contract, which identifies that what is payable in the case of a missing or deficient payment or Pay Less Notice is “the sum stated as due” by the contractor. I have differentiated that from Clause 4.7, which refers instead to “the sum due”. But this critical distinction between “the sum due” and “the sum stated as due” is also maintained in respect of the final account. Clause 4.12 deals with the final statement. Clause 4.12.2 refers to “the balance due”. But clause 4.12.7 addresses the position where there has been a payment notice and a failure to serve a timeous pay less notice and, again, what is due in that situation is “the sum stated as due” by the contractor, not “the sum (or balance) due”. So in respect of both interim and final applications and payments, the same distinction between “the sum due”, on the one hand, and “the sum stated as due”, on the other, is maintained. I conclude that there is no difference between the payment rights and obligations of the parties in respect of interim payments, and those arising in respect of the final payment.
    1. Mr Speaight noted that the final payment provisions in the JCT form were different to the interim payment provisions in one respect, because they

envisaged the possibility of a final payment from the contractor to the employer, which the interim provisions do not. But that is hardly surprising: without such a provision at the final account stage, the contractor may have been overpaid and never be obliged to repay the excess. So in my view, this additional provision makes no difference to the underlying principle, which is that there is no material difference between the valuation and payment regimes for interim and final payments.

    1. Accordingly, in my view, there is no contractual basis for treating interim and final applications/payments in different ways. The contract treats them in the same way. So too should the parties, the adjudicators and the courts. On that basis, therefore, whether what is in dispute is an interim payment or a final payment, the employer has the right in principle to refer to adjudication the dispute about the ‘true’ valuation.
  1. An Adjudicator has wide ranging powers (really??)

 “70 Henry Boot is therefore authority for the proposition that the court can decide the ‘true’ value of any certificate, notice or application and that, as part of that process, it has an inherent power to open up, review and revise any existing certificates, notices or applications.[9] Mr Speaight properly conceded that, if the court had the power to do something, then so too did an adjudicator. I agree: in any case where the parties have conferred upon an adjudicator the power to decide all disputes between them, the adjudicator has the same wide powers as the court. In this case, therefore, I consider that, in line with Henry Boot, the court (and/or an adjudicator) has the power to decide the ‘true’ valuation of interim application 22.”

  1. The same is also true of paragraph 20 of the Scheme. That provides:

“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 which the matters under the contract which he considers are necessary connected with the dispute. In particular, he may

    1. Open up, revise and review any decision taken or any certificate written by any person referred to in the contract unless the contract states that the decision or certificate is final and conclusive;
    2. Decide that any of the parties to the dispute is liable to make a payment under the contract (whether in sterling or some other currency) and, subject to section 11(9) of the Act, when that payment is due and the final date for payment;
    3. Having regard to any term of the contract relating to the payment of interest decide the circumstances in which, and the rates at which, and the periods for which simple or compound rates of interest shall be paid.”

It seems to me that the first sentence of paragraph 20 of the Scheme could not be broader.

  1. Practical issues: –
  1. Does the payer have to pay on smash and grab before merits based dispute? Grove suggest yes, Victory House suggests not
  1. Reduces attractiveness of smash and grab
  1. Restriction on referring two disputes at the same time may restrict smash and grab and merits based disputes being adjudicated by the same adjudicator at the same time

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