On 7 November 2018, the Court of Appeal confirmed the decision reached by the High Court earlier this year in Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) (27 February 2018) that an employer who had not served a valid “pay less” notice (setting out its own calculation of sums due) against a contractor’s application for payment under a construction contract may still seek to challenge the “true” value of sums claimed at a later adjudication after making payment.

We considered the first instance decision of the High Court in our e-bulletin and insight in March 2018 in respect of “pay less” notices.

In brief, S&T (the construction company engaged by Grove Developments under a JCT Design & Build Contract 2011 to design and build a new Premier Inn Hotel at Heathrow Terminal 4) brought an appeal against the High Court’s judgment, which had favoured Grove Developments’ ability to challenge S&T’s interim payment application retrospectively.

Dismissing S&T’s appeal, the Court of Appeal has held that:

  • the employer has very little time to carry out a complex valuation and prepare a pay less notice;
  • the employer has a right to dispute by adjudication the valuation contained in an interim application, despite the absence of a pay less notice;
  • the employer can only exercise that right after he has paid the notified sum to the contractor; and
  • if an adjudication finds that the employer has overpaid at an interim stage, the adjudicator can order re-payment of the excess.

What’s the impact?

On one view, the Court of Appeal’s decision to confirm the earlier High Court judgment provides reassurance for both contractors and employers who anticipate payment disputes arising from construction contracts. Where a valid pay less notice is not served by an employer in response to a contractor’s application for payment, the contractor is entitled to receive the payment demanded, protecting its cash flow, however, the employer can reserve its right to refer the dispute to adjudication to determine the “true” value of sums claimed and recover any overpayment at a later date. The adjudication regime is designed for early resolution of disputes, to assist with cash flow during the project - often nicknamed the “pay now, argue later” mechanism for resolving construction disputes. In most situations, it will avoid formal arbitration or litigation.

On the other hand, the decision means that employers who do not serve a valid and timely pay less notice in accordance with contractual requirements will be required to pay sums upfront which they may not consider are properly due; waiting to reclaim such sums could be frustrating and impact upon the parties’ commercial relationship. Contractors may also find that they have less certainty in respect of sums which have been paid and used but then later reclaimed at adjudication, particularly where there is a risk of insolvency.

Why is it significant?

The judgment is significant in that it overturns previous case law (ISG v Seevic; Galliford Try v Estura) which had held that an employer who had failed to issue a valid pay less notice was not able to subsequently challenge the contractor’s valuation through adjudication. The practical consequences of this decision will, no doubt, be tried and tested in adjudications and in the Courts in the not too distant future.

Our advice

The best course of action for employers in the light of this case law is to know your contract and act promptly to issue the correct notices in response to a contractor’s payment applications; familiarity with the procedure and often short timescales for serving a pay less notice could avoid possible frustration and uncertainty later.

If you would like assistance with understanding your contractual obligations, or with any contractual disputes, please contact Jane Barker, Jade Carey or Jayne Moyle.