Immediate payment obligation and entitlement to commence (or rely upon) a “true value” adjudication – clarity at last…?
A few months on from Bexheat Limited v Essex Services Group Limited, which I discussed in my blog published in May 2022, we have another decision from the TCC on the paying party’s immediate payment obligation and entitlement to commence a “true value” adjudication.
In AM Construction Limited v The Darul Amaan Trust  EWHC 1478 (TCC), Mr Roger Ter Haar QC, sitting as a Deputy High Court Judge (the “Judge”), considered whether an employer was entitled to commence a “true value” adjudication in circumstances where it had failed to issue a pay less notice in respect of a default payment notice issued by the contractor (the validity of which notice the employer disputed), but where the contractor had not commenced “smash and grab” adjudication proceedings.
Read on for our thoughts…
AM Construction Limited v The Darul Amaan Trust
In July 2015, The Darul Amaan Trust (“DAT”), a charitable trust, entered into a contract with AM Construction Limited (“AMC”), a contractor, for the construction of a new three storey mosque in Colliers Wood, London.
The parties’ contract was a “construction contract” for the purposes of the Construction Act and made provision for monthly interim payments, allowing AMC to make monthly interim applications for payment. The contract further provided that if AMC had not made an interim application for payment but DAT’s Contract Administrator had subsequently failed to issue a payment notice within the requisite timeframe, AMC was then entitled to issue a default payment notice.
On 11 March 2020, AMC issued what it purported to be a default payment notice, valuing its works in the total sum of £809,259.97 plus VAT (the “First Default Notice”). No pay less notice was issued by DAT in respect of the First Default Notice.
Fast forward four months, and on 16 July 2020 AMC issued a further default payment notice, this time valuing its works in the total sum of £206,825.33 excluding VAT (the “Second Default Notice”). As with the First Default Notice, no pay less notice was issued by DAT in respect of the Second Default Notice.
Whilst DAT failed to issue a pay less notice in respect of either default payment notice, AMC did not commence “smash and grab” adjudication proceedings for payment. DAT later commenced a “true value” adjudication seeking a valuation of AMC’s works, and DAT was successful in that adjudication.
Subsequently, DAT brought proceedings to enforce the Adjudicator’s decision (the “Decision”). AMC resisted enforcement on a number of grounds, including that S&T v Grove and Bexheat provided that DAT’s entitlement to adjudicate for a true valuation of the sum due was subordinate to AMC’s right to payment of the notified sum set out in the Second Default Notice.
Judgment of Mr Roger Ter Haar QC
Disposing of the enforcement proceedings, the Judge found that the Notice of Adjudication had not been validly served by DAT on AMC prior to DAT’s application to the adjudicator nominating body, and, therefore, the adjudicator lacked jurisdiction to adjudicate the dispute. The Judge also found that AMC’s First Default Notice was invalid, and, as such – contrary to the argument of DAT – AMC had been entitled to issue the Second Default Notice, which he held to be valid.
However, and of particular interest to this Blog, the Judge then went on to consider whether DAT had been entitled to commence the true value adjudication in the first place.
In this regard, and as mentioned above, AMC’s position was that the judgments in S&T v Grove and Bexheat prevented DAT from starting a “true value” adjudication until it had made payment to AMC of the sums claimed in its Second Default Notice (in respect of which DAT had failed to issue a pay less notice).
DAT, however, asserted that AMC had misinterpreted the decisions in S&T v Grove and Bexheat. DAT disputed the validity of both of AMC’s default payment notices, and argued that whilst in Bexheat an adjudicator had conclusively determined that there was a valid application for payment and therefore that there was a “notified sum”, in this case AMC did not have an adjudication decision in its favour and so there was no conclusive determination that there was a “notified sum”.
The Judge characterised DAT’s position as amounting “to a submission that a contractor in the position of AMC cannot prevent the commencement of a ‘true value’ adjudication relying upon [the cases of S&T v Grove, Bexheat, and M Davenport v Greer] unless it has first obtained a monetary adjudication in its favour”. He rejected that submission on the basis that:
(i) No such limitation had been suggested by the Court at first instance or the Court of Appeal in S&T & Grove, Bexheat, or M Davenport v Greer;
(ii) It ran contrary to the requirement, summarised by O’Farrell J at paragraph 76 of her judgment in Bexheat, that unless and until an employer has complied with its immediate payment obligation under section 111 of the Construction Act, it is not entitled to commence or rely on a “true value” adjudication under section 108 (which entitlement is subjugated to the section 111 immediate payment obligation); and
(iii) It also ran contrary to the policy consideration underlying the above cases that where no pay less notice has been served, the Employer must pay before disputing the sum outstanding.
In light of the above, the Judge held that DAT was not entitled to commence a “true value” adjudication until it had paid the amount he had “found to be due”, being the sum claimed by AMC in the Second Default Notice.
As our regular readers will be aware,1 we have previously noted that following S&T v Grove and Bexheat the paying party will generally not be permitted to commence a “true value” adjudication until it has complied with its immediate payment obligation under section 111 of the Construction Act. We have also considered, however, that the point at which that immediate payment obligation arises is arguable.
For example, if the paying party has failed to issue the required notices but in defending smash and grab proceedings (commenced by the payee) it genuinely disputes the validity of the payee’s payment application, can it be said that the paying party’s immediate obligation to pay the “notified sum” has arisen – particularly given that, in line with S&T v Grove and O’Farrell J’s summary at paragraph 76 of her judgment in Bexheat, that obligation arises only where a valid application for payment has been made?
Following AMC v DAT, the answer to that question remains, in our view, less than clear. DAT disputed the validity of AMC’s default payment notices and, in essence, argued that in the absence of a conclusive determination as to their validity, it could not be said that there was a “notified sum”, and so no immediate payment obligation had or could have arisen. In such circumstances, DAT argued that it was entitled to commence a “true value” adjudication. The Judge rejected that argument, but at paragraph 106 of his judgment held that DAT could not commence a “true value” adjudication until it had paid the sum which he had found to be due given that he decided the Second Default Notice was valid.
Had the Judge found that there was no valid payment application or default notice, however, and that there was therefore no “notified sum” due for payment, there would have been no immediate payment obligation. Presumably, therefore, AMC would have been entitled to commence the “true value” adjudication when it did.
In our view it is then arguable, following the Judge’s decision, that where the validity of a payment application or default notice is genuinely disputed by the paying party, the immediate payment obligation can be said to have arisen only after there is a conclusive determination on whether there is a “notified sum”. On that basis, did DAT’s argument that it was entitled to commence a “true value” adjudication in the absence of such a conclusive determination have some merit? One to ponder…
In the meantime, some advice for our readers:
(i) If you are a payee who has issued a payment application in respect of which the paying party has failed to issue the requisite notices, and the paying party subsequently commences “true value” adjudication proceedings, we would suggest that you challenge the adjudicator’s jurisdiction at the earliest possible juncture in that adjudication on the basis that the paying party has failed to comply with its immediate payment obligation under section 111 and is not entitled to adjudicate on the “true value” of the sum due to the payee until it has done so. Thereafter, you should maintain and repeat your jurisdictional challenge in all correspondence and submissions issued in the adjudication;
(ii) On the other hand, if you are a paying party who has failed to issue the requisite notices in respect of a payment application and you intend to commence a “true value” adjudication, we would suggest that you do so as soon as possible – particularly if the payee has already commenced a “smash and grab” adjudication. However, to maximise the likelihood of obtaining an enforceable decision in the “true value” adjudication, in our view the paying party must have one or more genuine defences to the “smash and grab” adjudication. Whilst the paying party in these circumstances should be prepared for the payee to raise a jurisdictional challenge in the “true value” adjudication, in our view it remains arguable that it is only upon the “smash and grab” adjudicator deciding that the paying party’s defence (as to the validity of the disputed payment application) fails that the paying party’s section 111 immediate payment obligation arises.
- 1. See my blogs published on 22 December 2021 (Smash and grab” adjudications: when can the paying party commence a “true value” adjudication?”) and 16 May 2022 (Bexheat v ESG: a paying party’s immediate payment obligation trumps its entitlement to commence or rely upon a “true value” adjudication)