Getting payment notices and “pay less” notices right

The Court of Appeal judgement in S & T (UK) Limited v Grove Developments has confirmed that an employer under a building contract is entitled to refer a dispute over the true value of a contractor’s interim payment to adjudication despite failing to serve a valid payment notice. However, the Court also stressed that this could only be done after the employer paid the sum due in the interim payment application.

Background

Grove engaged S&T to design and construct a hotel at Heathrow under an amended JCT D&B contract 2011. Works commenced but were delayed and practical completion took place five months after the scheduled date for completion.

After practical completion took place, S&T sent an interim application for payment to Grove for just under £40 million. Grove valued the works at around £26 million and sent a payment notice to S&T but it was eight days late.

Five days after the late payment notice, Grove sent S&T a pay less notice which also notified of Grove’s right to withhold liquidated damages. The same afternoon Grove notified S&T that it might require payment of and/or withhold or deduct liquidated damages. A few seconds later Grove sent a liquidated damages deduction notice to S&T. Relying on these notices, Grove did not pay S&T anything for the interim application.

The matter went to adjudication where Grove argued that:

• It’s pay less notice was valid.
• It was entitled to commence an adjudication for the true sum due to S&T.

S&T counterclaimed that Grove was not entitled to liquidated damages because it had not complied with the notice procedure.

The first instance judge, Mr Justice Coulson, found that:

• Grove’s pay less notice was valid (even though it referred to the (invalid) payment notice).
• Grove was entitled to commence an adjudication to determine the true value of S&T’s interim application.
• Grove had complied with the notice requirements under the contract for liquidated damages.

Appeal

S&T appealed the decision and the Court of Appeal agreed with the first instance judge on all three issues.

Among the key factors was that Grove’s pay less notice sent in response to the interim application complied with the contractual requirements.

Grove was entitled to pursue a claim in adjudication to determine the correct value of the works on the date of the interim application. The Court confirmed that the parties could argue later – just because a sum has become due under the Construction Act payment mechanism, does not mean it is the true sum. However, the Court also confirmed that the employer must pay first and then it can refer the valuation to adjudication.

Key Points

The decision in Grove confirms that:

• The employer is entitled to embark on a true value adjudication even in the absence of a valid payment notice or a pay less notice.
• However, this can only be done provided the employer has made the required payment under the interim payment application. In practice this means that a true value adjudication cannot be used as a mechanism to stall or withhold interim payments.