Teal blue header image

A Hierarchy in the Construction Act - New Court of Appeal Decision

The construction industry has been given another judgment on adjudication when there is no pay less notice.

The Court of Appeal has handed down its judgment in S&T (UK) Limited v Grove Developments Limited [2018] EWHC 123 (TCC), which is the appeal of Mr Justice Coulson's much remarked upon decision in the High Court.

One of the issues before the Court of Appeal was whether, in circumstances where an Employer has served neither payment nor pay less notices for an interim application, it is entitled to pursue a claim in adjudication to determine the correct value of the works for that interim application. 

Mr Justice Coulson's judgment at first instance was that an Employer is entitled to commence such an adjudication, but only after paying the "sum stated as due" (i.e. the notified sum).  Coulson J gave no reason for this pre-condition to the Employer's entitlement to adjudicate.

The Court of Appeal has upheld Coulson J's judgment, and has in addition provided reasoning as to why the Employer's entitlement to adjudicate arises only after it has paid the notified sum. 

The Court's reasoning is based on its finding that the Construction Act creates a "hierarchy of obligations", with the obligation to pay the notified sum (section 111) taking precedence over the right to adjudicate (section 108).

The Court held:

"Section 111 (unlike the adjudication provisions of the Act) is of direct effect.  It requires payment of a specific sum within a short period of time.  The Act has created both the prompt payment regime and the adjudication regime.  The Act cannot sensibly be construed as permitting the adjudication regime to trump the prompt payment regime.  Therefore, both the Act and the contract 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 Court is right to emphasise the importance of prompt payment.  The Construction Act is an instrument to ensure cash flow.  Adjudication, at least as originally conceived, was a means of ensuring cash flow by enforcing prompt payment provisions quickly.  Whether this requires a "hierarchy of obligations" is less clear.  Certainly it does not appear to have been necessary until now.

The judgment also raises interesting issues, some of which are highlighted in the judgment itself.  The Court acknowledges that the effective stay on an Employer bringing its own adjudication could operate "harshly" in a situation where a Contractor is entitled to be paid a windfall on a no pay less basis, but is nevertheless likely to become insolvent before the Employer can correct the account in adjudication.

Equally, whilst it is possible to follow the logic of the Court's "hierarchy of obligations" (whether or not you agree with it), the reasoning only appears to bite once the notified sum has been established.  This, in the circumstances considered by the Court, requires an adjudicator's decision.  It is only then that the parties know for certain whether there is a notified sum, and if so in what amount.  But of course there is a period of time during which there is a dispute concerning precisely these issues. 

It is not clear from the judgment whether, whilst such a dispute is ongoing:

  • the Employer has no entitlement to adjudicate, and therefore any adjudicator appointed will not have jurisdiction; or
  • the Employer is entitled to commence an adjudication, as the prohibition only comes into effect once a decision has been given on a no pay less basis.

If the former, there does not appear to be any justification in the Court's judgment for making the Employer wait during the period of dispute, other than on pure policy grounds. 

On a practical level, the following points arise.

  • The judgment highlights the importance for an Employer, or Main Contractor in respect of its supply chain, of serving valid payment and pay less notices.Whilst things have moved on (or back) a bit from ISG v Seevic, such that an Employer can now adjudicate the correct value of the works, the requirement to pay the notified sum first could be disadvantageous.This applies not only to the insolvency risk highlighted by the Court, but also more generally if settlement is sought, as the Contractor will be in a stronger position whilst holding the money.
  • For Contractors and Employers both, the risk is in the uncertainty highlighted above - what is the position whilst the dispute as to the notified sum is undecided?This could lead to challenges to an adjudicator's jurisdiction, and possibly further court action, as this continues to be an unsettled and developing area of law.
  • Employers/Main Contractors may also wish to consider the tactical options open to them when faced with a no pay less adjudication.It may be worth considering whether it is more advantageous to concede the point and make the payment, if this allows the Employer to get its own adjudication off the ground sooner.
  • For Contractors, the emphasis the Court has placed on paying the notified sum appears to be good news.The effective stay on adjudication as to the correct value, until the notified sum has been paid, means that this is not the end of no pay less notice adjudications (as a tool to achieve settlement, if nothing else).The additional challenge for Main Contractors will be to ensure that they do not open themselves up to claims from the supply chain.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions

Insights & events View all