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Court of Appeal upholds right to begin 'true value' adjudication

A developer who had failed to serve a valid payment or pay less notice was entitled to begin a separate adjudication to determine the true value of the sum due, the Court of Appeal has confirmed.

In a unanimous judgment, the appeal court endorsed the in-depth reasoning of specialist construction disputes judge Mr Justice Coulson in his first instance decision. The judgment also provides useful guidance on the timing of a 'true value' adjudication, even though the question was not fully argued before the Court of Appeal.

Construction disputes expert Lawrence Davies of Pinsent Masons, the law firm behind Out-Law.com, said that the judgment provided some clarity on critical issues for contractors. However, there were still "many unanswered questions", he said.

"It seems doubtful that this is the final chapter in the case law and there may be a risk in the meantime that the number of adjudications will increase," he said.

"The Court of Appeal's dismissal of the appeal and upholding of Mr Justice Coulson's first instance decision does not come as a great surprise. The [Technology and Construction Court] had been signalling its disapproval of the ISG v Seevic decision and reasoning for some time and Mr Justice Coulson's comprehensive judgment was fairly compelling. It is now confirmed that, contrary to ISG v Seevic, a payer is obliged to pay the notified sum but it can adjudicate the correctness of the value," he said.

Grove Developments Ltd employed S&T (UK) Ltd to design and build a new Premier Inn hotel at Heathrow Airport under a JCT Design and Build 2011 contract. Disputes arose about S&T's interim application for payment as well as Grove's application for liquidated damages. Over the course of three adjudications, the adjudicator decided that Grove had failed to serve a valid pay less notice. This meant that, on the face of it, S&T was entitled to over £14 million under its interim application.

In his February High Court judgment, Mr Justice Coulson ruled that Grove had in fact served a valid pay less notice. However, more importantly, he also found that Grove was entitled to begin a second adjudication disputing that the sum paid was the 'true value' of the works for which S&T had claimed, regardless of whether or not it had served a valid pay less notice. Notably, the judge suggested that the 2014 case of ISG v Seevic, in which the unsuccessful party was prevented from challenging the underlying value of an interim payment in the absence of a pay less notice, was wrongly decided.

Finally, the judge held that Grove was entitled to recover liquidated damages for delay.

The Court of Appeal agreed with Mr Justice Coulson on all points. In finding that Grove's pay less notice was valid, it was not strictly required to address the question of timing in relation to the second adjudication. However, Sir Rupert Jackson opted to do so due as an issue of "great importance to the construction industry", and so that his reasoning was clear should S&T seek to appeal further.

After concluding that Grove was entitled to separately adjudicate the true value, Sir Rupert Jackson went on to consider the correct timing of such a notice. Mr Justice Coulson had suggested that it was not open to a payer who fails to serve a payment or pay less notice to immediately start a true value adjudication without first paying the notified sum. However, his reasons for reaching that conclusion were "not convincing", according to construction disputes expert Lawrence Davies.

Although the issue was not fully argued before the Court of Appeal, Sir Rupert Jackson also concluded that a payer was not entitled to commence a value adjudication until it had paid the notified sum. He did so "by means of a purposive interpretation" of the amended Housing Grants, Construction and Regeneration Act (HGCRA), based on a "hierarchy of obligations" in which the adjudication provisions were "subordinate to the payment provisions".

"The Act has created both the prompt payment regime and the adjudication regime," the judge said. "The Act cannot sensibly be construed as permitting the adjudication regime to trump the prompt payment regime. Therefore, both the Act and the contract must be construed as prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation."

"One important policy of [the HGCRA] is to promote cashflow in the construction industry. In other words, there should be prompt payment followed by any necessary financial adjustments," he said.

"The uncertainty about timing of the value adjudication had the potential to undermine the effectiveness of the amendments to the payment provisions of the Act because it might be open to the payer to start a value adjudication and get a decision in his favour as quickly as the payee could enforce his right to payment of the notified sum," said Lawrence Davies.

"We now have some clarity on this critical issue, but there are many unanswered questions and it remains to be seen how this will work in practice. The judgment seems to assume that the notified sum has been established in adjudication, but what if there is uncertainty about whether a valid payment or pay less notice has been served – what is to stop the payer referring the true value dispute to adjudication before the payee starts a notified sum adjudication or before it is completed? In other words, could the payer commence a true value adjudication before the immediate payment obligation actually arises?" he said.

"It is also unclear how, in practice, a potentially premature adjudication about value would be stopped – is it a point that goes to jurisdiction of the adjudicator, or will the court grant an injunction?" he said.

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