When can an Employer adjudicate over the true value of its Contractor’s Works? - Bexheat Ltd v Essex Services Group Ltd

It’s been almost four years since the Court of Appeal decided, in S&T (UK) Ltd v Grove Developments Limited, that an Employer was prevented from embarking upon an adjudication to obtain a true valuation of the Contractor’s Works during a payment cycle, until it had complied with its “immediate obligation” to pay the “notified sum” due in the same cycle. The TCC decision in Bexheat Ltd v Essex Services Group Ltd provided another opportunity for the Court to address and clarify these circumstances.

In this respect, the Housing Grants, Construction and Regeneration Act 1996 was amended by the Local Democracy, Economic Development and Construction Act 2009 (collectively referred to as the “Act”), to require an Employer to pay its Contractor the “notified sum” in each payment cycle under the relevant Building Contract. The “notified sum” is the amount stated as being due to the Contractor in the Employer’s Payment Notice, or in the Employer’s Pay Less Notice (if the Employer opts to serve a timely Pay Less Notice), or (if the Employer fails to serve a timely Payment or Pay Less Notice) in a Default Payment Notice issued by the Contractor.

It will be recalled that it was the Contractor’s ability to deliver a Default Payment Notice to the Employer under this legislative regime which changed the payment landscape in the UK construction industry, and spawned the tactic of a Contractor launching a “smash and grab” adjudication, to claim a “notified sum” which had become due to it, irrespective of the true value of the Works which it had carried out by the valuation date in the relevant payment cycle.

The Court of Appeal’s decision in S&T v Grove was followed soon afterwards by the judgment of Mr Justice Stuart-Smith (as he then was) in the Technology and Construction Court (TCC) case of M Davenport Builders Limited v Greer[1]. Whilst Stuart-Smith J decided to follow the Court of Appeal’s decision, and prohibit a true value adjudication by the Employer until the relevant notified sum had been paid, he did suggest at paragraph 37 of his judgment that the ruling in S&T v Grove “does not mean that the Court will always restrain the commencement or progress of a true value adjudication commenced before the employer has discharged his immediate payment obligation”. The learned Judge did not, however, clarify in which circumstances a true value adjudication by an Employer would be allowed to proceed against the Contractor, before the Employer had paid the “notified sum” due to the Contractor.

Some three years after the S&T v Grove and Davenport cases, the TCC decision in Bexheat Ltd v Essex Services Group Ltd[2] provided another opportunity for the Court to address and clarify these circumstances.

Background to the Bexheat Case

In the Bexheat case, a Contractor called Bexheat Ltd (“Bexheat”) commenced proceedings in the TCC to the enforce an adjudicator’s decision made in its favour against its Employer, Essex Group Services Limited (“ESG”). The adjudicator’s decision comprised the outcome of a “smash and grab” adjudication by Bexheat against ESG in respect of its Payment Application No. 23 (the “Second Adjudication”). In the Second Adjudication, Bexheat successfully argued that its Payment Application No. 23 had become a Default Payment Notice and that it contained a “notified sum” which ESG had become legally liable to pay, but that ESG had failed to make that payment.

During the TCC enforcement proceedings, ESG sought to resist enforcement of the adjudicator’s decision in the Second Adjudication, on the basis that the parties had been involved in a previous adjudication (the “First Adjudication”), in which ESG had obtained an adjudicator’s decision as to the true valuation of Bexheat’s Works up to Payment Application 22. To resist enforcement of the adjudicator’s decision in the Second Adjudication, ESG submitted that the adjudicator’s decision in the First Adjudication was binding upon Bexheat as to the true value of Bexheat’s payment entitlement under Payment Application 23 and that, whilst S&T v Grove and Davenport both confirmed that a true value adjudication could not be commenced by an Employer until it had discharged its immediate obligation to pay the “notified sum”, the Bexheat case could be distinguished from those other cases because there had been a prior adjudication (i.e. the First Adjudication) and a binding decision from an adjudicator in it, which had the effect of determining the true value of the Works for which the Contractor could apply for payment under Payment Application 23.

The Bexheat Decision

In deciding in favour of Bexheat, and enforcing the adjudicator’s decision in the Second Adjudication against ESG, the Head Judge of the TCC, Mrs Justice O’Farrell, commented that ESG’s argument had a “superficial attraction” but failed for the following reasons:

• Firstly, the adjudicator’s decision in the First Adjudication was limited to the true valuation of Bexheat’s Works in respect of Payment Application 22 and, even though the true valuation of Bexheat’s Works in relation to Payment Application 23 may have been no different, the relevant period for the valuation was different and the issue as to whether the true valuation remained the same or not had not been adjudicated upon.
• Secondly, regardless of whether or not the true valuation was the same for both Payment Applications and was binding on the parties, ESG had failed to raise this argument as a defence in the Second Adjudication. ESG’s argument was considered “tantamount to an attack on [the] jurisdiction” of the adjudicator in the Second Adjudication because it sought to rely on the binding effect of the adjudicator’s decision in the First Adjudication to displace the adjudicator’s power in the Second Adjudication to determine whether ESG should be required to make payment of a notified sum. ESG had failed to reserve its position on this jurisdictional argument in the Second Adjudication and, accordingly, it was precluded from raising these jurisdictional arguments at the enforcement stage, which might otherwise have been open to it.
• Thirdly, ESG’s argument ignored the express provisions of Section 111 of the Act that a paying party had to pay the “notified sum” to the receiving party on or before the final date for payment and, if they intended to pay less than the “notified sum”, then they had to issue a timely Pay Less Notice, which identified the amount which they considered to be due to the receiving party, and the basis upon which that amount had been calculated. If ESG wished to rely on the true valuation of Payment Application 22, they should have issued a valid and timely Pay Less Notice to that effect. As they had failed to do so, Bexheat were entitled to adjudicate for payment of the “notified sum” and, having successfully done so, the TCC would enforce the adjudicator’s decision in the Second Adjudication, by way of summary judgment.

ESG also attempted to resist enforcement on the basis that clause 30.2 of the contract between the parties entitled ESG to set-off or make deductions against the adjudicator’s decision, and that clause 30.3 allowed ESG to elect to have the true value of Payment Application 23 determined at the same time as the “smash and grab” dispute in the Second Adjudication, which ESG alleged the adjudicator in the Second Adjudication wrongly refused to do.

Regarding ESG’s set-off submission, O’Farrell J rejected the argument on the basis that clause 30.2 “offends against the statutory requirement for immediate enforcement of an adjudicator's decision” as set out in Paragraph 21 of Part I of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended) (the “Scheme”).

O’Farrell J also rejected ESG’s argument that the adjudicator wrongfully refused to join the smash and grab adjudication dispute with the true value of Payment Application 23, on the basis that clause 30.3 was inconsistent with paragraphs 8 and 20 of the Scheme, which require the consent of all parties to a multi-dispute adjudication. Furthermore, O’Farrell J ruled that clause 30.3 was contrary to Section 111 of the Act which, as Jackson LJ held in S&T v Grove, “must be construed as prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation.”

The decision of Bexheat demonstrates that a “smash and grab” adjudication continues to be a powerful weapon in a contractor’s armoury, as the courts will enforce such an adjudicator’s decision even where an adjudicator’s true valuation of the contractor’s previous payment application is substantially the same.

The Bexheat case also serves as a useful reminder that Employers should ensure that their Payment and Pay Less Notices are issued on time, as, if they fail to do so, they will likely be required to pay the full amount stated as being due in the Contractor’s payment application, which normally stands as a Default Payment Notice, regardless of whether or not the amount applied for actually constitutes the true value of the Works carried out by the Contractor.