Where Next for Construction Litigation?

Since the introduction of the statutory scheme through the Housing Grants, Construction and Regeneration Act 1996, adjudication has provided a cost and time effective remedy for contractors seeking payment from employers.

A form of alternative dispute resolution, an adjudication can be concluded in as little as 28 days with a decision that can be enforced through the Court in a similar way to a judgment. With the average civil claim taking over 58 weeks to trial, adjudication has historically offered an important lifeline to contractors dependent on payment during the course of a construction contract. With the recent decision of the High Court in Grove Developments Ltd v S&T (UK) Ltd that does, however, look set to change.

The significant majority of construction contracts provide for payment of the contract sum to be made to the contractor on an interim basis during the course of the contract works. Typically, each interim payment will be determined by reference to a valuation of the works undertaken by the contractor at that time.

By following a complicated documentary procedure (whether contractually or under the 1996 Act), the parties should arrive at a position where an application for payment is made by the contractor or a payment notice issued by the employer. In either case, the employer has the opportunity to issue a payless notice, a form of withholding notice, to justify non-payment of the relevant sum to the contractor whether wholly or in part.

The problem that has plagued employers is that a minor discrepancy in the formatting of a payless notice or a failure to comply with the relevant deadline for issuing the payless notice will result in the notice being ineffective. As a consequence, the contractor will be entitled to enforce payment of the full valuation sum; even if the employer has a legitimate complaint as to the calculation of the valuation or the condition of the works to which the valuation relates.

To its significant disadvantage, the employer will be unlikely to have any remedy against the contractor until the conclusion of the contract. In the meantime, the contractor can enforce payment through adjudication; further increasing the cost to which the employer is exposed.

The proliferation of “smash and grab” adjudications in such situations has been tacitly endorsed by the Court through a number of recent decisions whereby the Court suggested a failure by an employer to issue a pay less notice, whether at all, in time or in the correct format, amounted to a “deemed” acceptance of the valuation sum.

In the unprecedented decision in Grove Developments, however, the High Court has signalled an end to the culture of “smash and grab” adjudications. In determining the validity of a pay less notice served by an employer and associated issues relating to an application for an interim payment, the Court concluded that the employer was entitled to commence a counter adjudication to determine the true value of the works to which the interim payment related; a remedy generally reserved until the conclusion of the contract.

The Court rejected the concept of “deemed acceptance”, stating that it has no place under the 1996 Act or the mechanisms for payment commonly found in standard form construction contracts.

It follows that even in circumstances where there has been a failure by an employer to issue a pay less notice, whether at all, in time or in the correct format and notwithstanding the ability of the contractor to enforce payment through adjudication, the employer may nevertheless commence its own adjudication to determine the value of the works undertaken by the contractor at that time.

Indeed, a favourable decision in the employer’s adjudication may mean the employer is entitled to a refund from the contractor in respect of any overpayment, by which time the contractor will have been exposed to the cost of both sets of proceedings; thereby limiting the cost-effectiveness of adjudication as a cashflow remedy (being the purpose for which the statutory scheme under the 1996 Act was introduced).

The Judgment in Grove Developments has paved the way for a dramatic increase in the number of disputes between employers, main and sub-contractors. Although adjudication remains an attractive option for a contractor seeking an immediate payment, the cost of the first proceedings in light of the risk that the contractor may be exposed to a second adjudication brought by the employer may mean that in many cases it is preferable to seek a final determination through arbitration or the Court.

Please contact us if you would like more information about the issues raised in this article or any other aspect of construction litigation law at 02920345511 or ghoccom@berrysmith

Gavin Hoccom is a Senior Associate in the Dispute Resolution team at Berry Smith