Executive Summary: The Court rejected a broad prohibition on adjudication, emphasising the flexibility for payers to adjudicate on specific issues even without a payless notice, with the Grove principle applying to claims subject to a payless notice but not those arising after its date. The summary judgment granted for Decision No 2 acknowledged an overlap, with £260,899.61 awarded arguably without jurisdiction. In Decision No 3, the Court declared lack of jurisdiction for certain claims, recognising a true valuation issue already addressed in PAY-7. The judgment navigates Grove's scope, considering enforceability and legal arguments, balancing prompt payment with adjudication rights.
Introduction
In the case of S&T(UK) Ltd v Grove [2018] EWCA Civ 2448 (‘Grove’), Sir Rupert Jackson concluded that, following a 'smash and grab adjudication,' a paying party was allowed to initiate a subsequent adjudication to ascertain the 'true value' of the works. The case also established a position whereby , the obligation to pay the notified sum under section 111 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (Construction Act) took precedence over the paying party’s right to adjudicate under section 108 of the Act.
The cases thereafter have acknowledged that if a paying party initiates a 'true value' adjudication before paying the notified sum, the adjudicator is likely to lack jurisdiction, however until this recent decision, there has been no guidance as to whether these principles were intended solely for determining the actual value of the works or if a broader interpretation should apply (such as to claims for damages brought by the employer. Thankfully, such guidance and clarification has now been offered.
Background
The dispute between Part 7 Claimant and Part 8 Defendant, Lidl ("Lidl"), a national retailer, and Closed Circuit Cooling Ltd (t/a 3cl) ("3CL"), an industrial refrigeration and air-conditioning contractor, originated from a framework agreement, focusing on the first order for refrigeration works at Lidl's Belvedere 2 Regional Distribution Centre in East London. 3CL initiated an adjudication to secure payment of a notified sum following an interim payment application, referred to as "AFP19" in the judgment (Notified Sum Adjudication). The TCC enforced the decision in the Lidl Great Britain Ltd -v- Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 2243 (TCC) case.
Key events leading to the litigation included three adjudications around the following:
- Practical Completion: Lidl, via a smash and grab adjudication, sought confirmation of the practical completion date for the project ("Adjudication 1");
- Defects: Lidl aimed to recover costs for defects/snagging, either as a debt or offset against amounts owed to 3CL ("Adjudication 2"); and
- Extension of Time (EOT): Lidl sought a declaration that 3CL was not entitled to any extension of time ("Adjudication 3").
Legal Arguments
- 3CL raised jurisdictional challenges in the Adjudications 2 and 3, arguing that, according to Grove, these adjudications lacked jurisdiction due to Lidl not having paid the AFP19 notified sum before commencing; and
- Lidl argued that Grove prohibited only "true value" adjudications within the same payment cycle.
Following the adjudication decisions, Lidl initiated Part 7 proceedings to enforce payments awarded in Adjudication 2. In response, 3CL commenced Part 8 proceedings, seeking declarations that the EOT and Defects decisions were unenforceable.
Court Decision
The Court ruled against a broad prohibition on adjudication which was argued by 3CL, in particular where it involves the payment of the notified sum. It held that the obligation to pay the notified sum only applies to what is due under the payment regime in question and there was no rationale for prohibiting any adjudication while the notified sum remains unpaid, especially if the adjudication's subject matter is unrelated to the notified sum.
Through Judge Davies' examination of the payment provisions of the Construction Act 1996, the important consideration was whether Grove could extend to true value disputes beyond the mere valuation of 'the works' to include employer cross-claims like Liquidated and Ascertained Damages (LADs) and defects (outlined below in paragraphs 39 and 40 from the judgment). On this, the Court emphasised that a payer can adjudicate not only on all matters (valuation, defects, delay claims) but also on specific issues and the Grove principle applies to claims that could have been subject to a payless notice in the relevant notified sum cycle.
The Court also distinguished between claims that could have been covered by a payless notice and those that could not. It held that if a payer fails to serve a valid payless notice, it cannot adjudicate on matters that could have been the subject of that notice. However, claims arising after the payless notice date and not covered by it are not subject to the Grove principle.
Application to Adjudication 2 and 3:
- Adjudication 2
- The Court found an overlap in claims, and £260,899.61 of the decision was arguably awarded without jurisdiction. Summary judgment was granted for the balance of £496,946.02.
- Adjudication 3
- The Court ruled that, despite the form, adjudication No. 3 sought a true valuation of an issue already addressed in PAY-7, triggering the Grove A declaration was granted for lack of jurisdiction on certain claims.
Together, the Court found that Adjudications 2 and 3 were, in part, commenced without jurisdiction as they amounted to an effective 'true value' that could have been the subject of a timely pay less notice
Key parts of judgment
“[39] It follows, in my judgment that, whilst a payer may well wish to bring a true value adjudication in relation to all such matters (i.e. valuation, defects and delay claims), it may also wish to bring a true value adjudication in relation to matters only of valuation, or only of defects claims, or only of delay claims. Often it will wish to do so in relation to defects claims or delay claims because it has omitted to serve an effective payless notice and, thus, will want to bring a true value adjudication in relation to such matters. In my judgment it must follow that such claims are covered by the Grove principle insofar as they are matters which could have been the subject of a payless notice served in respect of the particular notified sum in question. If, however, they are claims which could not have been the subject of such a payless notice, then it is difficult to see the justification for applying the Grove principle to them.
[40] To take examples similar to the facts of this case, if a payer has, at the time of the relevant payment cycle, a claim for defect related losses in respect of defects already in existence or a claim for delay related losses in respect of delay already suffered, but fails to serve a valid payless notice in respect of them, it cannot commence a true value adjudication in respect of such claims until it has paid the relevant notified sum. If, however, it subsequently has a claim in respect of defects or delay occurring after the pay less notice date in respect of the notified sum, then there can be no principled reason for prohibiting the payer from commencing an adjudication in respect of such matters. Of course, that does not mean that if it did so it could raise them as a defence to the payee’s adjudication enforcement claim. However, there is a fundamental difference between a prohibition against commencing an adjudication, where the penalty is that any decision would be made without jurisdiction and, hence, be unenforceable, and a prohibition against using any such claim as a defence to an adjudication enforcement claim.” (emphasis added)
Practical Takeaways:
There are a number of key practical takeaways from the case. These relate to the following:
- Flexibility in adjudication claims: Paying parties have the flexibility to adjudicate on specific issues like valuation, defects, or delay claims, even if they omitted to serve an effective payless notice.
- Cross claims: these can fall under Grove if they could have been the subject of a pay less notice.
- Grove principle application: The Grove principle applies to claims that could have been covered by a payless notice for the specific notified sum and paying parties must pay the notified sum to adjudicate on matters subject to the Grove principle, ensuring prompt payment.
- Avoiding undue hardship: Paying parties can avoid the Grove principle by paying the notified sum first and Disputes over the existence of a notified sum can be adjudicated or raised in defence during enforcement claims.
- Set off: An employer can initiate a 'true value' adjudication for items arising after the pay less notice but cannot use the award to set off against an unpaid notified sum during enforcement.
- Intent vs. Objective: The Court rejected the argument that the Grove principle is engaged based on the payer's intent and instead emphasised focusing on the objective nature of the adjudication sought.
Overall, the case will likely lead to further consideration of true value adjudication disputes and the role of payless notices within this.
Source
For ease of access, a link to the copy of the judgment, published on 29 November 2023, is below: https://www.bailii.org/ew/cases/EWHC/TCC/2023/3051.html
