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Where does the Construction Act's 'Pay Now, Argue Later' Regime stand, following Grove v S&T?

  • Market Insight 15 October 2020 15 October 2020
  • Projects & Construction

Three English Technology and Construction Court ("TCC") cases have recently examined the 'pay now, argue later' regime, which applies under the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the "Act"), following a 'smash and grab' adjudication, in which an adjudicator decides that a notified sum is due from an employer to a contractor (or from a contractor to a subcontractor), as previously explored by the Court of Appeal in its decision in Grove v S&T.

Where does the Construction Act's 'Pay Now, Argue Later' Regime stand, following Grove v S&T?

M Davenport Builders Ltd v Greer & Another, Broseley London Ltd v Prime Asset Management Ltd and Kew Holdings Ltd v Donald Insall Associates Ltd all grappled with the issue of whether an employer can bring a 'true value' claim, if they are yet to pay a notified sum which an adjudicator has decided is due to a contractor, and dispute that the contractor has in fact carried out work to the value of the notified sum.

Grove Development Limited v S&T (UK) Limited

In the landmark decision of Grove Developments Limited v S&T (UK) Limited [2018] EWHC 123 (TCC), Coulson J held that an employer is free to commence a second 'true value' adjudication to dispute the proper valuation of an interim payment application, provided it has paid the sum (i.e. the notified sum) stated as due by a contractor in the interim application first.

S&T subsequently appealed the first instance decision to the Court of Appeal and lost. The Court of Appeal agreed with Coulson J's judgment and confirmed that an employer who misses the deadline for both a payment and pay less notice becomes bound to pay the notified sum which the contractor applied for, but can subsequently adjudicate to have the 'true value' of an interim application assessed, provided it has paid the notified sum first. It is not deemed to have agreed the contractor's valuation because of its failure to serve a payment or pay less notice.

M Davenport Builders Ltd v Greer & Another

The meaning and effect of S&T v Grove was considered by the TCC in M Davenport Builders Ltd v Greer & Another [2019] EWHC 318 (TCC). Here, there was an application by a contractor to enforce a 'smash and grab' adjudication related to its final account, where the employer argued that it had a set-off or counterclaim because it could rely on a second adjudicator's 'true value' decision.

In deciding that Greer could not rely on the second adjudicator's decision by way of set-off or counterclaim, Stuart-Smith J suggested that contrary to S&T v Grove that there might be circumstances in which an employer would able to start a true value adjudication effectively to challenge the outcome of a 'smash and grab' adjudication, without having paid the notified sum due as a result of the 'smash and grab' adjudication first. Stuart-Smith J did not attempt to define those circumstances or when they might apply.

Broseley London Ltd v Prime Asset Management Ltd

Surprisingly, the judgment in Broseley did not refer to M Davenport Builders v Greer, which considered similar issues. However, it is worth noting that in Broseley, the TCC did not explore the extent of the Court's discretion to permit a 'true value' adjudication to proceed prior to payment of the notified sum found by an adjudicator to be due, in a previous 'smash and grab' adjudication. The TCC's reasoning should be understood in the context in which the issues arose, namely as part of an application for a stay of execution of a judgment, enforcing the adjudicator's 'smash and grab' decision.

The case concerned three adjudications. The first adjudication was a 'smash and grab' adjudication (Adjudication One) against Prime, in which Broseley obtained a decision for around £485,000 plus VAT (Valuation 19). Following Prime's failure to make payment in accordance with Adjudication One, Broseley commenced proceedings in the TCC to enforce the 'smash and grab' decision. Although Prime did not oppose the summary judgment to give effect to the decision in Adjudication One, it instead sought a stay of execution so as to allow it, as the employer, an opportunity to commence a 'true vale' adjudication to determine the proper valuation of the contractor's final account.

In finding that Prime could not commence a true value adjudication without first paying the amount of the 'smash and grab' decision in Adjudication One, the TCC pointed to the fact that Prime had "shown little previous enthusiasm" for grappling with the true value of the final account. The Judge confirmed that allowing a 'true value' adjudication without payment of the 'smash and grab' decision would be "a remarkable intrusion into the principle established in S&T" and was something that the Court of Appeal had confirmed should not happen.

Kew Holdings Limited v Donald Insall Associates Ltd

O'Farrell J relied on the judgment of S&T v Grove to once again show support for the Act's 'pay now, argue later' regime. The TCC confirmed that not only is a paying party unable to commence a new claim to determine the true value of the contractor's work and thus the parties' true entitlements, but also that any Court proceedings can be paused until the notified sum which is owed is paid.

In Kew Holdings Ltd v Donald Insall Associates Ltd [2020] EWHC 1862 (TCC), Donald obtained an adjudicator's decision against Kew which, following a 'smash and grab' adjudication, ordered payment of a notified sum of around £200,000 to be made to Donald. Following Kew's failure to pay the notified sum owed, Donald commenced proceedings in the TCC to enforce the adjudicator's 'smash and grab' decision, where once again Kew was ordered to pay the notified sum and a judgment was entered against it accordingly. However, Kew maintained that it had a claim against Donald, which should be set off against the notified sum which was owed and so commenced its own proceedings for damages. Donald argued that the litigation relating to Kew's claim should be paused until Kew had paid the amount of the 'smash and grab' decision.

In finding that Kew's litigation must be paused until it had paid the amount of the 'smash and grab' decision, the Court held that Kew's commencement of proceedings without paying the outstanding notified sum was in "flagrant disregard to the "pay now, argue later" regime" of the Act and amounted to "unreasonable and oppressive behaviour". However, the Judge noted that it would be "too draconian" at this stage to strike out Kew's claim, and confirmed that Kew would be able to pursue its 'true value' claim once it had paid the outstanding notified sum which was owed.

Conclusion

It has been suggested that the decisions in M Davenport Builders v Greer and Kew Holdings v Donald Insall Associates have weakened the Act's 'pay now, argue later' regime, by not insisting rigidly that an outstanding notified sum has to be paid by an employer, before it can commence any proceedings of its own to obtain a 'true value' of the contractor's work. However, the TCC has confirmed that the requirement to 'pay now' precedes the right to 'argue later' and as such it is difficult to see how the regime, which ensures that an adjudicator's decision is paid, has been significantly interfered with.

The current case law is particularly relevant in the current economic climate, which is likely to mean that 'smash and grab' adjudications are more frequently brought by contractors as means of enforcing payment rights and maintaining cash flow. The recent decisions from the TCC reinforce the importance of complying with all notice and payment provisions included a construction contract by the Act and of diarising key dates. Further, Broseley brings into focus the importance of avoiding delay in pursuing the 'true value' of a final account, a factor which was crucial in the TCC's analysis.

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