“True value” adjudications and subsequent “smash and grab” adjudications

Michael Comba and Victoria Okafor summarise the case of Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC) (19 April 2022).

Overview

A recent decision from the TCC relating to a ‘smash and grab’ adjudication has clarified that although a payee may seek a true value adjudication in respect of a notified sum, it can only do this after they have complied with Section 111 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”), which mandates immediate payment of a Payment Notice when the Defendant has failed to submit a Payless Notice.

Facts

Bexheat Limited (“BHL) and Essex Services Group Limited (“ESG”) entered into a construction contract for the former to carry out works on a project. Like all construction contracts, the contract underlying their relationship contained provisions for interim payments to be made on specific dates. BHL would submit a Payment Notice stating the value of their work, to which ESG would respond either by either:

1. paying the requested sum; or
2. by submitting a Payless Notice indicating their intention to dispute the value of BHL’s work.

When disputes arose between the parties relating to the payments which were due to the contractor, two adjudications followed relating to the true value of the work carried out for the payment periods in July and August 2021.

In the first adjudication the adjudicator established that there were no issues with ESG’s Payless Notice and that ‘the difference between the parties valuations mainly result[ed] from differing valuations of the variations and BHL’s claims in the form of direct additional costs’. The decision saw that the ‘True Value’ to which BHL were entitled was a payment of £141,646.35 plus VAT alongside interest.

In the second adjudication, the true value of the work carried out by ESG was again disputed but on this occasion ESG failed to submit a Pay Less Notice in time: missing the deadline by one day. ESG claimed that a document submitted on 13 October 2021 was equivalent to a Payless Notice but the Adjudicator disagreed and ESG were directed to fulfil BHL’s Payment Notice of £706,029.62 plus VAT as well as the adjudication fees and expenses. However, ESG failed to pay this award.

When BHL issued enforcement proceedings at the TCC, ESG argued that payment was not due because

1. the ‘true value’ of the second Payment Notice had been determined in the first adjudication, meaning that the second adjudicator had no jurisdiction to determine the payment; and
2. that they were contractually entitled to elect to have the ‘true value’ of the application payment in dispute determined.

Considering these issues in turn, the court found that ‘the…the subject of the First Adjudication was not the same or substantially the same as the dispute or difference in the Second Adjudication’. Therefore, the second adjudicator did have jurisdiction.

In addition, it was held that the First Adjudication Award was limited to the ‘true value’ of the works in covered by the first Payment Notice, for the valuation period up to 31 July 2021. The second adjudication dealt with payment of works for the valuation period up to 31 August 2021 and so the ‘True Value’ of the Payment Notice had not been determined and ESG were to pay the sum submitted by BHL.

Although it was held that a sub-contractor, such as ESG, could challenge the ‘true value’ of a sub-sub-contractor’s work, this must be done through a Payless Notice submitted by the appropriate date. However, the ‘entitlement to commence a ‘true value’ adjudication under section 108 is subjugated to the immediate payment obligation in Section 111’ of the Construction Act BHL were entitled to £724,827.88 plus interests and costs.

Comments

This case demonstrates that a paying party will not usually be permitted to commence a true value adjudication before it has complied with its immediate payment obligation under s.111 of the Construction Act.

Furthermore, the case also reaffirmed the well-established position that failing to comply with this obligation will also preclude the paying party from relying on an earlier true value adjudication.

This is example of the crucial importance of complying with the stringent timescales of interim payment regimes and the need to issue a Payless Notice on time. Should an Employer believe that a Contractor deserves less it is of paramount importance that a Payless Notice is issued on time. Failure to do so makes any subsequent true value adjudication significantly more complex, costly and time-consuming.

Michael Comba is a Solicitor and Victoria Okafor is a Paralegal at Sharpe Pritchard LLP.

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