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Key Points
In S&T(UK) Ltd v Grove[1], it was held that a payer (with respect to a construction contract) must comply with its immediate payment obligation for a notified sum, before it can commence or rely on a true value adjudication (“the Grove Principle”).
The TCC has now provided further clarification on the extent to which the Grove Principle will apply.
In the recent case of Lidl Great Britain v 3CL[2], it was held that the Grove principle will apply to any claims which could have been the subject of a payless notice served in respect of the particular notified sum in question, but not where the claims could not have been the subject of such payless notice.
Accordingly, Lidl was entitled to raise two separate adjudications, one relating to defect remedial costs and the other relating to 3CL’s extension of time entitlement. However, the adjudicator only had jurisdiction with respect to the specific matters that could not have been the subject of Lidl’s payless notice in relation to the unpaid notified sum.
Parties wishing to commence adjudication proceedings prior to making payment of a notified sum will need to consider the factual circumstances very carefully to avoid a situation whereby an adjudication award in their favour is either unenforceable or only partially enforceable.
Background
In our latest article, we discussed the implications of the decision in a former case between Lidl Great Britain v 3CL[3], which concerned the enforcement of a ‘smash and grab’ adjudication (“Adjudication No. 1”) and in which it was held:
The final date for payment must be a fixed period of time after the due date to be compliant with the Construction Act, as opposed to, for example, linking the final date for payment to the service of a VAT invoice; and
‘Hybrid’ payment and pay less notice are non-compliant with the Construction Act and thereby invalid. Damages and the like must be withheld in a subsequent pay less notice.
The same parties have appeared before the court again in relation to disputed matters under the same contract. This time, the court had to reach a determination on matters relating to two subsequent adjudications; “Adjudication No. 2” concerned 3CL’s liability for defect remedial costs incurred by Lidl and “Adjudication No. 3” concerned 3CL’s entitlement to an extension of time for completion.
The key matter arising out of this latest judgment concerns the extent to which the Grove Principle applies to subsequent adjudications commenced before the paying party has complied with its obligation to make payment of a notified sum.
Adjudication No. 2
Lidl applied to have the decision from Adjudication No. 2 enforced via summary judgment proceedings. The Adjudicator had found in Lidl’s favour, awarding a sum of £757,845.63 for costs incurred in relation to the remediation of 3CL’s defects, which 3CL refused to rectify.
3CL contested enforcement on the basis the adjudicator did not have jurisdiction and/or the decision was reached in breach of public policy. Lidl had commenced Adjudication No. 2 before it had complied with its immediate payment obligation with respect to the previous notified sum (see Adjudication No. 1). 3CL argued this offended the Grove Principle, namely that until a party has complied with its immediate payment obligation under section 111 of the Construction Act[4], it is not entitled to commence or rely on a true value adjudication under section 108.
Initially, 3CL asserted that Lidl was not entitled to commence any adjudication until Lidl had complied with its immediate payment obligation (“the any adjudication prohibition principle”). In response, Lidl contended that Grove only applied to true valuation adjudications in relation to the same payment cycle (“the same payment cycle true value adjudication prohibition”). However, 3CL later submitted the alternative argument that Lidl was only prevented from commencing a true value adjudication until the payment obligation had been discharged (“the true value adjudication prohibition principle”). At the same time, 3CL asserted there was a duplication of defect remedial claims between Adjudication No. 1 and Adjudication No. 2 as some of the alleged costs had been included in Lidl’s purported payment notice (PAY-7) with respect to the notified sum in Adjudication No. 1.
The court held there was no basis in principle or in case law for the wide ranging “any adjudication prohibition principle” and there was no rationale for precluding a party from raising any adjudication where a notified sum remains unpaid, even where the subsequent adjudication has no relation to that notified sum. Rather, with respect to the Grove Principle, the court held this would apply to matters which could have been the subject of a payless notice served in relation to the particular notified sum in question. If the claims could not have been the subject of such payless notice, then Grove did not apply.
Applying this to the facts, the court found that Lidl’s defects claim arose after practical completion, whereas the notified sum held payable under Adjudication No. 1 had become due before practical completion. Accordingly, Adjudication No. 2 did not seek to raise matters that could have been raised in a payless notice for that payment cycle. Lidl was not, therefore, prohibited from commencing Adjudication No. 2 and the adjudicator was not deprived of jurisdiction. However, the court did find that £260,899.61 of the sums awarded in Adjudication No. 2 was at least arguably awarded where the adjudicator had no jurisdiction (due to the overlap), so, Lidl was only entitled to summary judgment for the balance of £496,946.02 (that being the sum awarded by the adjudicator minus the sum that overlapped with Adjudication No. 1).
Adjudication No. 3
3CL raised Part 8 proceedings for a declaration that the decision in Adjudication No. 3 was also reached without jurisdiction and/or in breach of public policy, for the same reasons as Adjudication No.2 i.e. it offended the Grove Principle.
In relation to the notified sum from Adjudication No. 1, Lidl had sought, in its PAY-7, to withhold liquidated damages for the period of 18 June 2022 to 29 September 2022. In Adjudication No. 3, Lidl sought a determination that 3CL was not entitled to any extension of time from the contractual completion date of 25 May 2022 until practical completion was achieved on 26 October 2022. Lidl argued there was no overlap between the two adjudications because, in Adjudication No. 3, Lidl had not sought a decision that it was entitled to liquidated damages, only a determination as to what, if any, extension of time 3CL was entitled to. The court was not persuaded and said that, in substance, Lidl was seeking to undertake a true valuation of the claim for liquidated damages over that period and was therefore prohibited by the Grove Principle.
Accordingly, the court granted 3CL a declaration that the Adjudicator had no jurisdiction to determine that 3CL was not entitled to any extension of time over the period from 18 June 2022 to 29 September 2022, but did have jurisdiction to make such a declaration with respect to the period of 25 May 2022 to 18 June 2022 and 29 September 2022 to 26 October 2022.
Parties considering the commencement of adjudication proceedings where a notified sum remains unpaid should tread very carefully. Adjudication proceedings can involve significant time and expense and there is little point in obtaining an adjudication award in your favour, only for the same to be rendered unenforceable or partially enforceable by the court. Consideration should be given to whether it would be prudent to pay the notified sum first, or await the decision in any ongoing 'smash and grab' adjudication before commencing subsequent adjudication proceedings, particularly where there is any risk of an 'overlap' between the two.
[1] [2018] EWCA Civ 2448
[2] Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL [2023] EWHC 3051 (TCC)
[3] Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL [2023] EWHC 2243
[4] Housing Grants, Construction and Regeneration Act 1996 (as amended)