November 4, 2019

Payment for Construction Works

Do "true value arguments" trump the duty to pay the sum due? Is "Smash and Grab Adjudication" still open?

Grove Developments Limited v S&T (UK) Limited [2018]

At the end of last year, there was much comment about the Court of Appeal's decision in Grove, which was supposed to provide clarity regarding payment for construction works under the Amended Construction Act. This had previously been shrouded in uncertainty. The Supreme Court had given permission for the Court of Appeal's decision to be appealed to it, and the construction industry was waiting with bated-breath for the Supreme Court's ruling. Well, you can breathe again because in spectacularly anticlimactic style, the case has settled and the appeal will not be proceeding to the Supreme Court.

To the facts … Grove engaged S&T to design and build a hotel at Heathrow. Under their contract S&T would periodically send interim payment applications to Grove, the problematic application being Interim Application 22. Application 22 far exceeded Grove's valuation of the work and Grove therefore elected to withhold payment. However, Grove failed to send a payment notice in time and instead relied on a pay less notice sent to S&T. An adjudicator decided that this pay less notice was invalid and that S&T was therefore entitled to be paid the sum that it had applied for in Application 22. At first instance, Grove sought declarations from the TCC that its pay less notice was valid and that it was entitled to adjudicate to determine the true value of Application 22. Coulson J (as he then was) granted these declarations and held that the contractor was not entitled to the interim payment.

Regarding the need to serve valid and timely payment and pay less notices, Coulson J ruled that 'an employer who has failed to serve its own payment notice or pay less notice has to pay the amount claimed [by the contractor] because that is "the sum stated as due", but the employer is then free to commence its own adjudication proceedings in which the 'true' value of the application can be determined'. However, Coulson J stressed that the entitlement to bring 'true value' adjudication proceedings could only be exercised by the employer once it had paid the sum due in the interim payment application.

Coulson J's reasoning was followed by Jackson LJ, who gave the judgment of the Court of Appeal in Grove. The Court of Appeal's judgment therefore confirmed the first instance outcome. In light of recent the development that there will be no Supreme Court judgement on this, this means that Grove remains the law.

Does this in fact mean that the right to refer a dispute to adjudication, in this case a "true value" adjudication, "at any time" has been fettered? The more recent case of M Davenport Builders Ltd v Greer and another [2019] may spell the start of peeling away this fetter. In Davenport, a "true value" adjudication decision could not be enforced (but had been commenced and concluded) until the payment which had become due had been made. Stuart-Smith J referred to Grove and went on to say 'that does not mean that the Court will always restrain the commencement or progress of a true value adjudication commenced before the employer has discharged his immediate obligation'. Whether, and the circumstances in which, the courts will continue to take this view, remains to be seen.

The contractor was entitled to pursue the payment which had become due, and it could continue to use a "smash and grab" adjudication to do so. A "true value" adjudication could be raised by the employer but not until the payment which had become due had been made. 

Either way paying parties under construction contracts would be well-advised to serve valid and timely payment and pay less notices, in response to applications for payment, to avoid the threat of "smash and grab" adjudication claims seeking payment of sums which have become due (to then have to go through and enforce a "true value" adjudication).

Negligence – Recoverability of Pure Economic Loss

Thomas & Another v Taylor Wimpey Developments Ltd & Another [2019]

The TCC's decision in the case of Thomas has confirmed the general rule that pure economic loss is irrecoverable in an action in the tort of negligence. The rule originated in the  House of Lords' judgment in  Murphy v Brentwood in 1990. In Murphy, it was held that the recovery of pure economic loss should not be allowed in negligence actions, because this would open the floodgates and result in an unacceptably wide exposure to liability for negligent defendants. It was therefore decided that negligence claims could only be made where the negligence had caused personal injury or physical damage to other property. That said, in obiter remarks in Murphy, Lord Bridge proposed a possible exception to this rule. He suggested that if a building stood so close to neighbouring property or the highway that a defect in it posed a serious risk of injury to persons or property on the neighbouring land or the highway then the owner ought be able to recover the cost of alleviating the danger from the negligent party who had caused it. This possible scenario was rejected by HHJ Keyser QC in Thomas, who found no legal basis for it in his judgment. 

In Thomas, a negligence claim for pure economic loss by homeowner claimants against their builder was dismissed by HHJ Keyser. He held that the builder did not owe a duty of care to the homeowners in tort to avoid causing them pure economic loss. The homeowners alleged that log retaining walls at the rear of their property were defective and dangerous. Because the limitation period for a contractual claim had expired, they decided to bring a negligence claim against the builder .They claimed their pure economic losses, relying on the possible exception for averting a danger suggested by Lord Bridge. The homeowners asserted that the defective wall posed a threat to their neighbour's property and that this entitled them to recover the costs of alleviating the danger.

In his judgement, HHJ Keyser reviewed the relevant authorities regarding the possible recovery of pure economic loss in negligence cases. He commented that there were no cases which supported Lord Bridge's possible exception and that the decision in Robinson v PE Jones  was inconsistent with it. The Learned Judge therefore confirmed that the only basis for recovery of pure economic loss in a negligence action would be in the exceptional case, where there had been a special "relationship of proximity" between the parties, which would justify an "assumption of responsibility" by the defendant to avoid causing economic losses.

The Thomas decision therefore clarifies a couple of important points regarding actions for the recovery of pure economic loss in the tort of negligence, i.e.:

  1. The rule in Murphy is being applied, and Lord Bridge's suggestion that there could be an exception for the cost of alleviating dangers to neighbours and highway users has been rejected. Therefore, generally speaking, pure economic losses will not be recoverable via negligence actions; and
  2. The rejection of Lord Bridge's possible exception serves as a reminder to potential claimants of the importance of securing appropriate contractual rights from designers and builders of construction works.

Following this judgement, it is to be expected that that there will be fewer negligence claims for pure economic losses. Such claims will only be open in exceptional cases, where there is a special relationship of proximity between the parties, which will be rare.

The Thomas case is also notable because the TCC spoke disparagingly about the quality of expert evidence before the Court. This serves as a reminder that expert opinions should be the product of detailed analysis, and robust.