Uncertainties after Grove v S&T

What appears to be the last case decided in the TCC by Coulson J prior to his elevation to the Court of Appeal has already attracted widespread comment. Louis Zvesper considers some of the uncertainties and practical implications arising from this decision, including whether payment of the notified sum is a necessary precondition to referring a dispute on the true value of the works to adjudication, and what tactics parties might now employ to seek to minimise further the impact of unwanted smash and grab adjudications.

Grove v S&T departs from the previous decisions of ISG vSeevic and Galliford Try v Estura (and those cases which rely upon them, such as Kersfield v Bray) by deciding that a party to a construction contract can refer the true value of an interim payment to adjudication, whether or not the appropriate notices have been served.

Previous position

Prior to Grove, the position had been that where an employer had failed to serve a payment notice or pay less notice, it could not adjudicate on the true value of that interim payment. It had to pay the sum set out in the contractor’s payment application, and could not revisit this amount until the next interim payment or in the final account. The reasoning behind this was that in the absence of any disagreement by way of notices from the employer, it was deemed to have agreed the notified sum, and so there was no dispute to be referred to adjudication.

An employer could, however, make up for overpayments on subsequent payment cycles – but towards the end of a contract there would be limited opportunities for the employer to recoup any overpayments especially where, as in many construction contracts, there was no provision for negative interim payments (that is, payments from the contractor to the employer).

The result of these decisions was that adjudications on the notified sum (so called ‘smash & grab’ adjudications) had enormous tactical power in particular towards the end of a contract, and could result in significant windfalls to the contractor if used adroitly.

Present departure

In Grove v S&T Coulson J departs from the previous reasoning, finding from first principles and from the relevant Court of Appeal authorities, that Seevic and the following cases had been wrongly decided. The deemed agreement principle is inherently uncertain, and is unsafe (at [117]):

“…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?”

Coulson J instead places emphasis on the actual words of the Housing Grants, Construction and Regeneration Act 1996 (the 1996 Act) and the Scheme for Construction Contracts (the Scheme), stressing the breadth of the statutory right to adjudicate:

“There is therefore no limitation on the nature, scope and extent of the dispute which either side can refer to an adjudicator. There is no qualification to the types of dispute encompassed by s.108 […] It seems to me that the first sentence of paragraph 20 of the Scheme could not be broader.”

The judgment appears to demonstrate a move away from perhaps slightly fuzzy reasoning to a stricter rationale more in keeping with the principles of contractual and statutory interpretation. The somewhat arcane rules of adjudication appear to have been simplified, and in so doing the tactical value of smash & grab adjudications has been reduced (although not, as others have pointed out, eliminated). Coulson J’s judgment is detailed and extensive – however, it does appear to leave certain questions unanswered, and certain practical consequences unclear. In particular:

• What is the rationale behind an employer being prohibited from raising the true value of an interim payment during a ‘smash & grab’ adjudication?
• When can an adjudication on the true value of an interim payment be referred? In particular, can one be run pre-emptively, or simultaneously with a smash & grab?

The answer to these questions affects the continuing tactical value of smash and grab adjudications, and, ultimately, the continuing significance of the notice regime at all. If a defence of true value could be raised in a smash & grab, there would be little point in the notice regime (as a number of authorities have pointed out – see below).

However, given the timings of adjudications and enforcements, it may be possible to achieve a similar effect. Adjudication decisions must be given within 28 days of the service of the Referral Notice, while it usually takes at least 28 days for an enforcement hearing to be listed by the TCC. A party losing a smash and grab who acts promptly may therefore be able to get an adjudication decision on the true value of an interim payment before an enforcement hearing is held. Obviously, the earlier a party can refer the true value to adjudication, the more likely it is that a decision will be reached pre-enforcement. The possible consequences of these points are considered in more detail below.

A defence of true value

It is abundantly clear (although not quite expressly stated) from the judgment in Grove that Coulson J does not envisage the true value of an interim payment being permitted as a defence to an adjudication on the notified sum. There are repeated references throughout the judgment to ‘subsequent’ adjudications considering the true value of an interim payment, but no reference to it being raised as a defence.

The reason for this at first blush appears to be Coulson J’s analysis of the difference between ‘the sum stated as due’ and the ‘sum due’ – that is, the notified sum and the true value (at [79]-[83] and [116]) (this distinction will be familiar from the case law prior to the 2009 amendments to the 1996 Act).

These are two ‘very different things’ that proceed along parallel tracks. It would appear therefore that an adjudicator deciding the sum stated to be due – that is the notified sum – will simply not fall to consider the true value, as the two are not related. The true value is outside the adjudicator’s jurisdiction.

The difficulty with this is that at first blush it appears to run counter to the position in Pilon v Breyer [2010] EWHC 837 (TCC), which says that a responding party is entitled to rely on any legitimate defence, including set-off, and that a referring party cannot limit the jurisdiction to exclude a valid defence (see paragraphs [25]-[26]):

“[…] subject to questions of withholding notices and the like, a responding party is entitled to defend himself against a claim for money due by reference to any legitimate available defence (including set-off) […] it would be absurd if the claiming party could, through some devious bit of drafting, put beyond the scope of the adjudication the defending party’s otherwise legitimate defence to the claim.”

Where a party can refer a dispute regarding the true value of an interim notice to adjudication at any time (stressing the breadth of the right to adjudicate, as Coulson J does), why does that true value not become a valid defence which can be set off against the notified sum. The answer lies further back in the case law. The ‘question of withholding notices’ was considered in more detail in Letchworth v Sterling [2009] EWHC 1119 (TCC) (also at [25]-[26]):

“Whilst there is no doubt that a defendant can raise whatever matters he likes by way of defence for the adjudicator to consider, that general principle does not permit a defendant to rely on a cross-claim which should have been the subject of a withholding notice, but was not. In other words, a defendant cannot avoid the absence of a valid withholding notice if, by reference to the contract and on the facts of the particular dispute, the raising of the cross-claim in question required such a notice. To hold otherwise would be to obviate the need for withholding notices at all […]”

The case of Harwood v Lantrode (Unreported, 24.11.00) cited in Letchworth held (at [9]):

“There has been consideration in a number of previous decisions of the question whether Section 111 excludes equitable rights of set-off. I do not take a view different to that of others in these courts which is that if a set-off was not excluded by Section 111 it is difficult to see how the scheme has any practical value. The argument to the contrary is extremely weak.”

So the position is as follows: any legitimate available defence – including set-off  – may be raised in an adjudication, but the obligation to pay the notified sum impliedly excludes equitable rights of set-off¹. It is not then that the adjudicator does not have jurisdiction to consider the question of true value because only the notified sum was referred – but because the true value cannot be set off against the notified sum in the same adjudication. It is not a valid defence.

This however leads us directly into the next question: if you can’t raise a defence of true value, when exactly is it possible to refer true value to adjudication? And what are the practical effects of that?

When to refer a dispute on true value

Coulson J deals with the practical consequences of his decision (at [140]-[143]), and seems to indicate that notified sum and true value adjudications must be dealt with ‘sequentially’ by both adjudicators and the courts:

“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.”

With respect, the exact meaning of this does not appear to be ‘crystal clear’:

• Is the paying of the notified sum by the employer a condition precedent to referring a dispute concerning the true value to adjudication?
• Can an adjudication on true value be referred while an adjudication on the notified sum is ongoing?
• Can an adjudication on true value be referred pre-emptively?
• Will the TCC refuse to enforce an otherwise valid adjudication decision on the true value prior to enforcing an adjudication on the notified sum?
• Will the TCC refuse to set-off the two decisions if they come before it at the same time?

These questions are considered briefly below – although as the title of this articles suggests, a number of the answers appear somewhat uncertain.

Timing of the adjudication

The first set of questions concerns the timing of a referral on true value. The above quotation could be taken to imply that there must be payment of the notified sum before the right to adjudicate on the true value can arise. This would mean that such payment (either with or without a smash & grab adjudication first) is effectively a condition precedent to a true value adjudication, and that there could be no true value adjudication prior to or simultaneously with a smash & grab¹.

However, this argument is not without its difficulties.

A sensible place to start is with the right to payment itself – how does the right to payment of the true value, as opposed to the notified sum, arise? Grove at first appears to express the reason clearly and without complications: that there is only a right to repayment once the notified sum has been paid – making it a condition precedent to adjudication on the true value (at [133]):

“I do not see any difficulty with a repayment mechanism. That was the subject matter of the Supreme Court’s decision in Aspect v Higgins. They found that, if it turned out that a contractor had been overpaid, the employer was entitled to recover the overpayment, either by way of an implied mechanism in the contract or by way of restitution. It seems to me that precisely the same analysis must apply here.”

However, Coulson J does not leave it there, but goes on (at [134]-[135]):

“An adjudicator must decide any dispute referred to him. Once the adjudicator has reached his or her decision, it might affect the parties’ rights and obligations (at least on a temporary basis) in all sorts of ways. It might mean, for example, that an extension of time has to be granted; or it might mean that an amount of liquidated damages has to be repaid; or it might mean an amount of loss and expense is due. The contractual provisions as to extension of time, liquidated damages and loss and expense, do not expressly cater for what happens when an adjudicator reaches a decision on a particular dispute. But they do not need to, because the parties have agreed to be bound by the adjudicator’s decision. Extra-contractual decisions and their consequences cannot all be exhaustively dealt with in the express terms of the contract: the JCT forms are long enough as it is. The parties’ over-arching obligation to comply with the adjudicator’s decision is enough.

In the same way, I can see no need for the interim payment provisions to deal expressly with what happens when or if an adjudicator decides that, on this premise, an employer is entitled to recover an overpayment. The adjudicator has decided that there has been an overpayment, and pursuant to the contractual obligation to comply with the adjudicator’s decision, the contractor must therefore repay the excess. Moreover, that does not affect or run counter to the common law rule that there is no general entitlement to interim payments; it is simply an adjustment – justified on the basis of implied terms or restitutionary principles – to the existing contractual mechanism.”

This reasoning appears to support at least an arguable possibility of a much wider right to payment – and it is easily possible to imagine such an argument being deployed successfully in an adjudication: an adjudicator must decide the dispute before him. The parties must comply with that decision. If that involves the adjustment of the contractual mechanism for interim payments so be it. That is enough to gives rise to an obligation to pay the true value². It is not entirely clear why this reasoning applies to interim payments where the notified sum has been paid, but not to interim payments where it has not. The most likely reason is that the wide language used does not change the fact that there is an implied term as to repayment, but not as to payment. However, this does not sit entirely well with the broad approach adopted by Coulson J in the above quotation.

Let us suppose, however, that this is correct – that there is only a right to repayment once the notified sum has been paid. What are the practical consequences of this? Does it prevent the true sum being adjudicated at all, for example for a declaration rather than for a direction to pay?

It appears unlikely that it would – as Coulson J makes clear, it is difficult to envisage a wider right than to refer ‘any dispute at any time’. If there is a crystallised dispute as to the true value, which would not be difficult to find where there can no longer be an argument as to deemed agreement, there must be a right to adjudicate for a declaration on that value, even if the adjudicator cannot yet order payment.

Further, even if an adjudicator cannot order payment immediately, it is unclear why an adjudicator could not decide the true value, and order repayment of the net sum as soon as payment of the notified sum has been paid: there is a contractual right to repayment, and under paragraph 20(c) of the Scheme an adjudicator can decide that any of the parties to the dispute is liable to make a payment under the contract, when that payment is due and the final date for payment. Why then could he or she not order that the repayment is due as soon as the notified sum is paid?

Alternatively, is there anything to prevent a declaratory adjudication as to the true value, followed by payment of the notified sum, and then a further adjudication seeking an order of repayment of any net sum? Given that the declarative adjudication would be binding on the subsequent directive adjudication, and there is Supreme Court authority stating that there is a right to repayment, it is difficult to imagine what defence could be run in such a subsequent adjudication, and what could prevent it from being decided extremely promptly. And if this can be done, it would seem a little absurd that the first option above could not – that two adjudications are necessary to achieve so simple an effect.

These methods would seem to be a practical way around the sequential requirement suggested in Grove – effectively allowing just the sort of Trojan horse Coulson J expressly refutes. It is not immediately apparent why the above tactics could not be employed – that is not to say that the TCC will not when given the opportunity explain precisely why they cannot be used. Until then, though, it appears likely that at least some parties will attempt to use such methods as a way of almost entirely depriving smash & grab adjudications of their tactical value, and effectively neutering the notification regime.

If, on the other hand, the TCC eventually decides that these tactics can be employed, the prohibition on raising a defence of true value in a smash & grab adjudication – and as a result the entire notification regime – begins to look a little like an absurd waste of time and money. If for no other reason than this, it seems likely that the TCC will eventually prevent parties from employing these tactics.

TCC’s approach

What then will be the TCC’s approach to these problems? Coulson J is crystal clear that the courts must approach serial adjudications on the notified sum and the true value sequentially. But what does that actually mean? What will the TCC do if and when it is confronted with two adjudications at the same time, one on the notified sum, and one on the true value?

The current position is that two adjudication decisions between the same parties will be set off against one another at an enforcement hearing, so long as the court can decide that they are both valid (HS Works v Enterprise Managed Services [2009] EWHC 729 (TCC)). This requires that the parties have had the opportunity to consider the validity of the second adjudication (YCMS Ltd v Grabiner [2009] EWHC 127 (TCC)).

It is not difficult to imagine a situation where a second adjudication has been decided for example a week prior to the enforcement of the first adjudication (either employing the tactics outlined above, or simply due to the timings of enforcement hearings and adjudications). As the law presently stands these decisions would be likely to be set off against each other. This would appear contrary to Coulson J’s ‘crystal clear’ commandment banning Hellenic equines.

It is not clear what the TCC will do in such a situation, and if it departs from the existing case law, what reason it will give for refusing to enforce the second adjudication. Will there be a stay of enforcement? For how long? And what would be its justification?

Other practical consequences

A couple of final points to consider. Coulson J states, quoted above, that there are unlikely to be many second adjudications on true value, because the employer can simply sort it out in the next payment cycle.

This ignores precisely the sort of situation that had been allowing windfalls in smash & grab adjudications, where there is not enough money left unpaid in the contract to right the situation in subsequent payment cycles; or where for example the employer wishes to terminate the contract so there will not be further interim payments.

It also ignores the value a number of clients place on actually having money in their pockets as opposed to having a right to recoup losses in the coming months – especially where (as recent events have shown) even the largest contractors can go into administration in quite a short space of time.

Given those considerations there may well be employers who are willing to spend some money rolling the dice on an adjudication on the true value, rather than pay what they feel is an overstated notified sum. This will be particularly so where the amounts involved are significant, and the costs of an adjudication are comparatively low.

These are all also good reasons for employers to attempt the tactics outlined above, at least until there is some further clarity from the courts on their effectiveness.

Conclusion

While the decision in Grove is detailed and analytical, and, in the view of many practitioners, restores a greater degree of sanity to the adjudication process, it does still leave a number of uncertainties that will have to be ironed out by the courts.

Until then, it appears likely that a wide range of tactical approaches will be attempted in adjudications – and it will be difficult to advise clients on the merits and likely outcomes of these.

Permission to appeal has been given in Grove, but it is perhaps unlikely that practical guidance will be given on all of these uncertainties. The industry may simply have to wait for the almost inevitable rash of new arguments to percolate their way up through adjudication and to the courts.

¹ A further unanswered question resulting from this conclusion is whether it precludes an adjudication on the true value if the employer refuses to comply with an adjudication decision to pay the notified sum – whether or not the employer can adjudicate prior to and during enforcement proceedings, potentially obviating the timing conditions outlined above. This would appear to deprive the employer of the right to contest an adjudication decision on what might be otherwise be a perfectly proper jurisdictional or natural justice argument, if it wants to adjudicate on the true value of the payment.

² The above reasoning is also supported by Coulson J’s comments on the wide meaning of paragraph 20 of the Scheme (at [74]-[75]).

This article was first published on the LexisNexis Purpose Built Construction Blog on 15 March 2018.