Hacking through the JCT Payment Mechanism and Adjudication?

In the leading judgment in the Court of Appeal’s decision in Grove Developments v S&T dealing with “smash and grab” adjudications, Sir Rupert Jackson observed:

“We are all trying to hack out a pathway through a dense thicket of amended legislation, burgeoning case law and ever-changing standard form contracts”.

But having hacked through this thicket, has Sir Rupert cleared the pathway only to find another thicket for the JCT interim payment mechanism?

A reminder of the facts

Grove engaged S&T under a JCT Design and Build Contract 2011 (with certain amendments).  Near the end of the works, an interim payment dispute arose and S&T commenced an Adjudication seeking payment of the applied for sum of c£14M.  S&T argued Grove had failed to issue a valid payless notice and therefore the sum applied for had become the certified sum and payable. 

Grove argued that it had served a valid payless notice – the first adjudicator decided it had not - but also commenced a second adjudication seeking a “true valuation” of the interim account. 

Grove refused to pay the £14M and sought declarations from the High Court that its payless notice was valid and that it could commence a second adjudication on the “true value” in any event.

Coulson J decided the payless notice was valid and therefore there was no obligation to pay the £14M.  Coulson J also went on to decide that even if there was no valid payless notice, Grove had the right under the Contract and the Housing Grants Construction and Regeneration Act 1996 as amended (the Act) to commence the second “true value” adjudication.

The Court of Appeal’s Decision

The Court of Appeal expressly endorsed Coulson J’s decision, confirming:

• Interim ‘certified sums’ were provisional and not conclusive as to the “true value” of work done;
• An adjudicator, arbitrator, judge has wide powers to open up any certified sums where those sums are disputed. 
• An employer could commence a second “true value” adjudication
• An employer may recover “any overpayment” made at an interim stage and the adjudicator must be able to “…give effect to the financial consequences of his decision.”
• The Act and the contract prohibit an employer from embarking on the “true value” adjudication before he has complied with the obligation to make payment.

Analysis / Comment

Whilst the implications of this case will still need to be worked through – including whether the judgment brings about the end of smash and grab adjudications – (my view is that it will not), the judgment arguably creates a potential conflict with the Act and interim payment mechanism of JCT contracts.

Under JCT interim payment mechanisms (unlike the NEC suite of contracts) there is no right or obligation on the Contractor to make an interim / balancing payment to the Employer where there is a negative interim certificate.

Where there had been previous overvaluations, the normal course is for the certificate to certify the negative sum and state there was a “nil” balance due that month.  The expectation was there would then be an adjustment in later certificates.

Although the Court of Appeal was not concerned with the recovery of potential historic overpayments (Grove acknowledged that c£276,000 was due to S&T), in deciding that an employer can recover “any overpayment” and that the adjudicator has the power to give effect to the financial consequences of his decision, it is arguable that the Court of Appeal’s decision does give employers a right of repayment for historic over certification and not just the overpayment arising from the failure to issue a payment or payless notice.

Whilst Sir Rupert Jackson acknowledged that there was no express provision under the JCT wording permitting negative interim payments, he noted that s111 of the Act (the obligation to pay the certified sum) applied to both interim and final payments.  Section 111 of the Act refers to “payers” and “payees” of interim and final payments and therefore a contractor could be a “payer” at both interim and final payment stages. 

He further noted that the Court of Appeal had determined in the case of Harding v Paice that an employer has the right to challenge the notified final payment (where he had failed to issue a payment or payless notice) commenting “…it would be strange if that same form of words [under section 111] has a conclusive effect in relation to interim certificates which it does not have in relation to final certificates…” and affirming the analysis that “If an adjudicator finds that the employer has overpaid at an interim stage, he can order re-payment of the excess…”

This analysis does appear to create a tension between the express wording (and agreement of the parties) under a JCT contract and the interpretation of payment obligations under the Act.  Perhaps more importantly it runs the risk of counteracting the Act’s widely acknowledged policy of promoting cashflow, although users of NEC suite of contracts will be well accustomed to this scenario.

It will be interesting to see how the courts and adjudicators, as well as the JCT drafting committee, hack away at this thicket in the future.