The Housing Grants, Construction and Regeneration Act 1996 was intended to make it quicker and easier for parties to construction contracts to be paid. The Act requires all relevant construction contracts to contain provisions regarding payment and the service of notices.
Section 111 deals with pay less (formerly withholding) notices. A pay less notice is needed where a paying party disputes the amount claimed or certified. This raises the question of what happens if the paying party has failed either to serve a notice at all, or to serve one that complies with the section 111 requirements.
The law
The position in relation to amounts certified under construction contracts was made clear by the Court of Appeal in Rupert Morgan Building Services (LLC) Ltd v Jervis and another [2003] EWCA Civ 1563; [2003] PLSCS 257. In the absence of a pay less notice, the amount certified was payable. And ever since the Act was updated in relation to contracts entered into on or after 1 October 2011, the position has arguably been the same in relation to amounts claimed in contracts (such as a consultant’s appointment) without a certification process. In the absence of a pay less notice, the amount claimed is payable.
However, the Court of Appeal in Rupert Morgan had stressed that the amount certified or claimed was only payable on an interim basis. Once it had been paid, the paying party could commence fresh adjudication or other proceedings to resolve the issue. This meant that, in practice, a party that had failed to serve a section 111 notice would wait to receive an adjudication notice for the unpaid amount and then immediately commence a second set of proceedings on the merits of the underlying claim (as opposed to the missing notice). Since both decisions would be reached on or about the same time, there was little practical advantage to be gained from the failure to serve the pay less notice (assuming that there was merit to the underlying arguments as to why the amount claimed was not due) apart from the receiving party having more money in its bank account than it was entitled to for a short period of time.
However, more recently, the decisions of Edwards-Stuart J in ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC); [2015] PLSCS 72 and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC); [2015] EGLR 30 (which were then followed in a number of other TCC judgments) brought about a sea change in approach. Parties felt (despite a suggestion by the judge that they had been misconstrued) that these cases were authority for the proposition that a failure to serve a pay less notice constituted the paying party’s deemed agreement to the amount claimed or certified. The Act, and the various statutory instruments that underpin it, have always forbidden a second adjudicator from considering a dispute that is the “same or substantially the same” as a previous one. This led adjudicators to refuse to act in the second adjudications brought by paying parties on the basis that they lacked the jurisdiction to consider the issue, since the paying party had been deemed to agree to the amount claimed or certified.
In turn, this led to what became known as “smash and grab adjudications”, with claiming parties taking advantage of the failure to serve a valid pay less notice to claim money to which they might not otherwise be entitled.
Judicial doubts
Many commentators felt this was unsatisfactory. We have previously reported (“No more smash and grab”, EG, 27 February 2016, p101) on two Court of Appeal decisions – Harding (t/a MJ Harding Contractors) v Paice and another [2015] EWCA Civ 1231; [2015] PLSCS 342 and Brown and another v Complete Building Solutions Ltd [2015] EWCA Civ 1; [2016] PLSCS 13 – which cast doubt on ISG and Galliford Try and, more recently, Fraser J expressed his concerns in Imperial Chemical Industries Ltd v Merrit Merrell Technology Ltd [2017] EWHC 1763 (TCC).
However, none of the judgments overturned (which only the Court of Appeal could do) or expressly disagreed with either case.
Therefore, Coulson J’s decision in Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) marks a change in judicial approach. Although acutely aware that it is rare for one High Court judge to disagree with another (strictly speaking, the judgments of one High Court judge are only persuasive authority and not binding on another) and having gone back to first principles and considered a wide range of authority, Coulson J stressed that it was open to Grove, having paid the amount awarded by a previous adjudicator on the basis that its purported pay less notice was invalid, to commence a fresh adjudication as to the correct value of the work carried out.
The judge gave a number of reasons for his decision. The key ones are that the courts had an inherent power to open up and review certificates under building contracts (see, for example, Beaufort Developments (NI) Ltd v Gilbert-Ash (NI) Ltd [1998] UKHL 19) and that, under the wording of the Act, there was no actual restriction on the power of an adjudicator to assess the true value of a dispute which had previously been decided on the basis of a missing section 111 notice.
This decision is hugely welcome. ISG and Galliford Try attributed too much legal importance to one party’s mistake and gave the other an unfair windfall. Although it is of no greater legal precedence than Edwards-Stuart J’s decisions, it will hopefully be followed by the TCC and other courts going forward.
Stuart Pemble is a partner at Mills & Reeve LLP
