The true value of something in this industry is very hard to determine. It's all smoke and mirrors.

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The true value of something in this industry is very hard to determine. It's all smoke and mirrors.

August, 2018
John Riches

Forgive me Mark Ruffalo (American actor) for slightly amending your quote to suit my purposes.

The something in our industry is simply a payment.

The Local Democracy Economic Development and Construction Act 2009 introduced a new payment procedure. Although the drafting of the Act is unnecessarily complicated, the bit I am interested in is simple.

The Payee (usually the Contractor or a Sub-Contractor) makes an Application for Payment.

The Payer (usually the Employer or a Contractor) has two chances to agree with or dispute the amount claimed. To issue a Payment Notice which says I will pay a different sum or later to issue a Pay Less Notice which says I will pay less than your application or I will pay less than the sum I would have paid in my preceding Payment Notice.

What happens if there is no Payment Notice or Pay Less Notice is that the payer has to pay the sum applied for, it becomes the sum due and must be paid.

The whole idea of this was to improve cash flow in the industry and as described above it is simple and it works.

A very effective system, ‘pipe up’ or pay up. 

All was well until we had the first enforcement of this system. ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) (03 December 2014) caused a furore in the trade press and the pseudo legal pages. 

There was outcry of ‘smash and grab’. Well, sorry it can’t be theft because it reflected exactly what parliament had intended.

In Adjudication No 1 Seevic College had failed to issue a Payment Notice or a Pay Less Notice. ISG claimed the amount in its Application for Payment. It succeeded.  The decision, made by a quantity surveyor, expressly said that he had not valued the works.  To do so was unnecessary to arrive at the amount due. 

Well that was the whole point of this legislation. The works were valued as the Application for Payment. If the process had continued as intended there would have been a subsequent valuation, Payment Notice and the opportunity for a further Pay Less Notice.

The notices and, where the Application for Payment becomes a notice by default, confirm the sum that is due. The sum due is required to be paid under the Construction Act. That’s the system, end of story.

However it wasn’t the end of the story. Seevic commenced a second adjudication to arrive at what it saw as the value of the works rather than the sum established as being due by default.

The same adjudicator made his decision and came up with a different figure in adjudication No 2. Seevic would not pay the amount decided in adjudication No.1 and ISG commenced enforcement proceedings.

At an early stage in those proceedings it was identified that there was no defence to enforcement of the decision in adjudication No 1. The question was, had the subject matter in adjudication No 2 already been decided in adjudication No 1? If that was the case there was no jurisdiction to make the decision in adjudication No 2 at all.

It was decided that there was no jurisdiction to make the decision in adjudication No 2 because the matter had already been disposed of in adjudication No 1.

The sum due is the value of the works as established under the payment procedure. In Seevic’s case the default position of its application for payment. That’s what the legislation says and that was applied in ISG and Seevic.

ISG and Seevic could not shake off the epithet of ‘the smash and grab case’. The effect of a failure to follow the payment procedure was at one point described as draconian.

What developed was a whole system to scrutinise applications and notices, probably in the cold light of day, beyond anything ever contemplated in the Construction Act.

As the implications of a failure to follow the rules were draconian they had to be adhered to strictly in order for an application to succeed. There had to be form, substance and intent. Is this the smoke and mirrors bit?

The whole of this has come to a head recently in a case called Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC)(27 February 2018). The judgement is quite long and deals with whether or not the ‘sum due’ is distinguishable from the ‘true value’.

This is the very point that was settled in ISG and Seevic. Instead, in the case of Grove Developments the court decided that the two were distinguishable and parties could opt for one approach or the other, pursuing the sum due through want of Payment Notice or Pay Less Notice or the true value can be adjudicated on separately and this can occur after a ‘smash and grab’ type decision has been made.

It might take ten of these articles to explore every aspect and delve into every nook and cranny of this particular case. The relevant part for present purposes is does the default position survive where there has been an Application for Payment and no Payment Notice or Pay Less Notice? Secondly can there be a further adjudication to deal with the true value?

At paragraph 77 the court said:

77.  Thirdly, on the premise noted in paragraph 67 above, the dispute which the employer would wish to raise in the second adjudication is a different dispute to that which was determined in the first.  In the first adjudication, the issue would be whether or not the employer’s payment notice and/or pay less notice was deficient or out of time.  If the adjudicator in the first adjudication found that the employer’s notice(s) was deficient or out of time, then the contractor would have an unanswerable right to be paid the sum stated in its own application or payment notice[1]. In the present case, as a result of Mr Eyre’s decision in the third adjudication, S&T were entitled to be paid the sum stated in interim application 22.  

For the issue ‘whether or not the employer’s payment notice and/or pay less notice was deficient or out of time’ add into the equation whether these notices were in existence.

The court’s conclusion was if these points went against the employer the contractor would have an unanswerable right to be paid. That follows exactly the logic of ISG and Seevic and of course the Construction Act.

The court also picked up that the adjudicator in this case did not address any question of valuation but simply proceeded on the basis of the notice points.

It now gets difficult. Look at paragraphs 80 to 82 of the judgment:

80.  Here, the words in the contract expressly differentiate between “the sum due” (Clause 4.7.2) on the one hand, and “the sum stated as due” in the payment notice or the pay less notice (Clause 4.9), on the other. The contract deliberately uses different terms. Why?  

81.   In my view, the answer is obvious.  “The sum due” is identified in Clause 4.7 because that is the result of the contractual mechanism designed to calculate the contractor’s precise entitlement (the ‘true’ valuation).  It is the process by which the correct amount, calculated to the penny, is arrived at. That is a very different thing to “the sum stated as due”, which is the phrase used twice in Clause 4.9.  Clause 4.9 recognises that the contractor’s application/payment notice will identify the sum which the contractor has “stated to be due” and it provides that, in the absence of a payment notice and/or a Pay Less Notice from the employer, it is “the sum stated as due” which will be payable. Similarly, if there was a valid pay less notice, then it would be “the sum stated as due” in that notice that would be payable. 

82.  In neither case would it be “the sum due” (ie the ‘true’ valuation) that was payable (save in the most unlikely of coincidences, where the contractor or employer got it 100% right in their particular application or notice). In this scenario, the mechanism in Clause 4.7, designed to arrive at the precise “sum due”, has been displaced by the notice regime, where all that matters is the sum “stated to be due” in the relevant notice. There is a fundamental difference between these two concepts. “The sum stated as due” will almost certainly be different to the sum carefully calculated under Clause 4.7, but (for example) because of the employer’s failure to serve a proper or timeous pay less notice, it is “the sum stated as due” that has to be paid.  That does not mean that “the sum stated as due” has somehow magically been transformed into a Clause 4.7 valuation, and “the sum due”.  

I find all of this rather tortuous. The distinction is between the ‘sum due’ and the’ sum stated as due’.

The sum ‘stated as due’ is the bit that goes in the Payment Notice or Pay Less Notice. The sum that ‘is due’ is the true value.

The true value is the sum calculated down to the last penny, see paragraph 81.

The source of the sum due or the source of the sum stated to be due is one and the same, the valuation of work in accordance with the contract. 

The judgement does envisage at paragraph 82 a situation where both the contractor and the employer got it a hundred percent right in their particular application or notice. If they ever did (and they never will) there wouldn’t be a dispute and we wouldn’t be discussing this here.

Part of the argument here is that the sum stated as due as opposed to the sum due is arrived at by a different process. Therefore they will always be different and distinguishable in law.

I find this difficult to swallow. Firstly, nothing in our industry ever works to 100% and particularly in terms of an interim valuation. There is not time to value works to that degree of accuracy. If you tried to do it would go on ad infinitum because as you are valuing one piece of the work another piece of the work would be progressing. The job simply does not stop because the QS is on site doing a valuation.

Secondly, there is too much room for judgement. Contracts recognise this. I don’t mean judgment of the exacting kind, I mean ordinary every day judgement on what percentage of a particular operation is complete.  Under the valuation rules of variations the correct answer is the answer I come up with ‘near as dammit’ as to what a variation is worth.

The ‘calculated to a penny’ concept in paragraph 81 of the judgement is a unicorn, a complete myth. It never has existed, and it never will.

The reason under the Construction Act and in this particular case the JCT contract, for the sum ‘stated to be due’ concept is a simple and pragmatic one and it is also enshrined in the Construction Act.

Look at s110B (4), this is what it says;

(4)    If—

(a)     the contract permits or requires the payee, before the date on which the notice referred to in subsection (1)(a) is required by the contract to be given, to notify the payer or a specified person of—

(i)            the sum that the payee considers will become due on thepayment due date in respect of the payment, and

(ii)            the basis on which that sum is calculated, and

The process requires the application process to commence before the Payment Notice date, there is an element of forecasting that is why the ‘considers will become due’ qualifier is there.

It is not only here, it is the parameter for every notice under the Construction Act.

Clause 4.7 is the mechanism by which you calculate the sum due that is the starting point for the Application for Payment except that the Application for Payment requires an element of forecasting that addresses the time lapse of having to do the whole thing in advance. The concepts of the ‘sum due’ and the ‘sum stated as due’ are indistinguishable, my view not the Courts.

The Courts’ view is the law, mine is not. 

So we move on, we have the two processes in ISG and Seevic. The ‘sum due’ on the notice point versus the ‘sum actually due’ now given the status of the ‘true value’.

True value can be run as a separate dispute to surmount the sum arrived at and paid based on what paragraph 77 says. 

Move on in the judgment at paragraph 103:

103. In my view, the Court of Appeal authorities all point the same way. An employer who has failed to serve its own payment notice or pay less notice has to pay the amount claimed by the contractor because that is “the sum stated as due”.  But the employer is then free to commence its own adjudication proceedings in which the dispute as to the ‘true’ value of the application can be determined. 

Does this mean that the stated sum due must be paid before the true value Adjudication can commence?

What is clear is that the Court is still resolute that the valid smash and grab Adjudication must be paid.

Look at paragraph 141;

104.  Even if we assume that the relationship between the employer and the contractor is poor, so that there is a second adjudication in any event, the adjudications will still be dealt with, by the adjudicators and by the courts, in strict sequence. The second adjudication cannot act as some sort of Trojan Horse to avoid paying the sum stated as due. I have made that crystal clear. And as I have said, if the interim payment cycle is coming to an end, then the risk of injustice to the employer increases and an adjudication as to the ‘true’ value becomes an important remedy. In my judgment, none of that threatens the whole edifice of construction adjudication.  

So, we now have two clear regimes the default one, that must be paid in any event and then the true value one.

The pundits have said loudly ISG and Seevic is dead. Not so it is just injured and slightly sick and now it has a competitor. 

Can the true value Adjudication commence before the default Adjudication has been paid? Here comes the next set of challenges to Jurisdiction!

Notes:
[1] Subject to an (entirely separate) argument by the employer for a stay of execution, relief which is usually difficult to obtain.

By John L Riches of Henry Cooper Consultants Ltd

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