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16 Nov 2018

Court of Appeal Decision: Grove Developments v S&T

by Mark Woodward-Smith, Group Managing Director -

The significant decision made by Coulson J in the Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) has now been tested by the Court of Appeal.

In the recent judgement given by Sir Rupert Jackson, the Court of Appeal dismissed the S&T appeal and has upheld the Coulson J decision that overturned the previous authorities flowing from ISG v Seevic.

The decisions reached by the Court of Appeal on each of the four issues considered are highly significant for the construction industry.

Issue 1: How should the basis of calculation of a Pay Less Notice be “specified”?
Whereas the Grove Pay Less Notice specified the sum stated to be due it did not set out the basis of the calculation of this sum, it only referred to the method of calculation as follows,

“The basis on which this sum is calculated is set out in the Payment Certificate 22 dated 13th April 2017”

S&T argued that the Pay Less Notice must expressly set out, on the face of that notice, the basis of calculation for it to comply with the 1996 Act and the contract.

Given the facts of the case the Court of Appeal upheld the Coulson J decision that the Pay Less Notice was valid and effective determining that it is a question of “fact and degree” and “how a reasonable recipient would have understood the notice”. In their opinion the calculations, even though sent five days earlier, were fully understood and there is no rule that precludes incorporation by reference to another clearly defined document.

This represents something of a softening of the high bar that is normally applied by the Courts when determining compliance with notice provisions.

Nevertheless, it is still recommended that care is taken to avoid any possibility of ambiguity and that the basis of calculation in Pay Less Notices is set out clearly such that factual disputes about whether the notice is valid can be avoided.

Issue 2: The “true” value of the sum due
Prior to Coulson J’s decision it was established that the sum to be paid by the employer under the JCT D&B 2011 (and similar forms) was the sum “stated as due” in the relevant Notice and where the employer failed to issue a valid Payment or Payless Notice it was bound to pay the amount stated in the contractor’s interim application. With significant consequences for the construction industry the Court of Appeal upheld the Coulson J decision effectively overturning this established position.

A key deciding factor was the interpretation that an important intention of the HGCRA and the Amended Act is to promote cashflow in the construction industry and therefore there should always be prompt payment followed by any necessary financial adjustments.

On that basis they held that, even in circumstances where the employer had failed to issue a valid payment Notice or Pay Less Notice and provided that the “notified sum” has been paid then an employer is entitled to commence an adjudication to obtain a re-valuation of the work to determine the “true” value of the interim payment.

However, it is unclear how this decision will be applied in practice as it raises several questions:

  • Will the ability to commence a “true value” adjudication be limited to JCT contracts or will the principle be applicable across other standard forms?
  • Is there a basis for prevention of “true value” adjudications until such times as the notified sum has been paid?
  • Does an adjudicator have any jurisdiction before the notified sum has been paid?
  • Can an injunction be obtained to prevent the adjudication until such time as the notified sum is paid?
  • Will this decision reduce the contractor’s opportunity for “smash and grab” adjudications?

These practical consequences will need to be tested through adjudications and the Courts before a definitive position can be determined.

Issue 3: Timing of notices for liquidated damages
This third issue raised important questions about the issue of notices relating to liquidated damages.

Clauses 2.28 and 2.29 of the JCT form provide that before liquidated damages can be deducted an employer is required to give three separate notices in a specified sequence:

  • A non-completion notice (Notice 1).
  • Notice that it “may require payment of, or may withhold or deduct, liquidated damages” (Notice 2 – Warning Notice).
  • Notice that it “requires” the contractor to pay liquidated damages or “will” withhold or deduct liquidated damages (Notice 3 – Deduction Notice).

Whereas Grove issued, by email, the warning notice and the deduction notice in the correct sequence it was in such quick succession that the warning notice had not even reached S&T’s inbox before the deduction notice was sent. The notices were received in the correct sequence but just seven seconds apart.

The Court of Appeal rejected S&T’s argument that the timing of the notices was invalid and that they had not been given enough time to see, read and digest the Warning Notice. In other words, S&T had not been “notified” by the Warning Notice before Grove “gave notice” in their Deduction Notice.

The Court of Appeal held that:

  • Provided both notices are received in the correct sequence that is sufficient to satisfy the requirements of clause 2.29.
  • It is impossible to identify any specific period of time which should elapse between serving the two notices.
  • The necessity for a reasonable lapse of time does not satisfy the requirements for an implied term and is unworkable.

The Court of Appeal did however acknowledge that the procedure set out in clause 2.29 provides “no obvious benefit to anyone”.

Following this decision, it is perhaps now inevitable that bespoke amendments to clause 2.29 will appear such that the Warning Notice becomes more than just a mere procedural hurdle, with condition precedent provisions being added to the requirement to issue a Warning Notice prior to deducting liquidated damages.

Issue 4: Recovery of Overpayments
Finally, the Court of Appeal has affirmed and arguably reinforced the existing position in relation to recovery of overpayments.

Coulson J did not see any difficulty with a repayment mechanism and relied on the decision of the Supreme Court in Aspect Contracts (Asbestos) Limited v Higgins Construction Limited plc [2015] UKSC 38. The Court of Appeal agreed with his view, based on Aspect, that recovery of an overpayment could be achieved based on an implied term or on the doctrine of restitution but went further in finding that “if an adjudicator finds that the employer has overpaid at an interim stage he can order repayment of the excess as the dispositive remedy flowing from the adjudicator’s re-evaluation.”

There is little doubt now that the Court, and therefore adjudicators, have the power to order the recovery of overpayments and this decision has gone a long way to clearing up this rather vague area of the law.

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