You may be forgiven for thinking that as of Friday (27 February 2015), the Housing Grants, Construction and Regeneration Act 1996 (the Act), has little effect in terms of its payment and adjudication provisions - courtesy of Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC).

Stripped down to its basics, consider the following:

  • Contractor Galliford Try was engaged by Employer Estura under an amended form of JCT Design and Build Contract 2011.
  • The Contractor issued Interim Application 60 (IA 60) stating that the anticipated Final Account was £12.66 million (around £5 million more than the contract value) and that the value of the work was only about £4,000 less than the amount of the anticipated Final Account.
  • The Employer did not serve a payment notice; the amount payable under the IA 60 therefore crystallised at the amount stated in the Application.
  • The Employer did not serve a pay less notice.
  • On adjudication, the Employer was ordered to pay £3,928,227 plus VAT and interest to the Contractor reflecting the amount sought by the Contractor under IA 60.
  • The Employer failed to pay and understandably, the Contractor applied for summary judgment to enforce the adjudicator's decision.
  • The Technology and Construction Court (TCC) considered the Employer had no available defence and awarded summary judgment for the Contractor in the full amount claimed of £3,928,227 plus VAT (where applicable) and interest.

Job done as intended by the Act?  You might have thought so, but no - despite there being judgment in full for the Contractor, the Court stayed enforcement of the judgment above the sum of £1.5 million.

The full factual background is of course far more complex.

There was a second adjudication in which the Employer challenged IA 60, arguing that the amount of the gross valuation stated in IA 60 should have been much lower and that the sum therefore due for payment following IA 60 should be around £1.3 million.

In fact, that second adjudication stalled, as the adjudicator declined to proceed on the basis that he lacked jurisdiction. He stated that neither party could now revisit the question of the value of the works at the time of IA 60 - IA 60 had not been challenged by the Employer by service either of a payment notice or of a pay less notice. The amount due had therefore crystallised as the amount applied for in IA 60.

A key point in submissions on behalf of the Employer, and consequently addressed in the Judgment, centred around this question of a later challenge to IA 60. This issue highlighted the case of ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC), a case decided in fact by the same judge as in Galliford Try v Estura and one we reviewed in our alert in December.

It was stated in ISG v Seevic that if an employer fails to serve the relevant notice then it will be deemed to have agreed the valuation stated in the relevant interim application. Thus, it will not then be possible for that employer to bring a second adjudication to determine the value of the work at the valuation date of the same interim application.

In the Galliford Try Judgment, the Judge emphasised that his Judgment in Seevic did not go beyond this i.e. the value of the work could be challenged on the next application, even if the amount then contended for was less than in the previous application.

He also felt that Part 8 proceedings might be available to the Employer but it is hard to see how Part 8 proceedings can be used to undertake a detailed final account determination.

In Galliford Try v Estura, the Judge re-emphasised the point made by the Court of Appeal in Rupert Morgan Building Services (LLC) Ltd v Jervis [2004] 1 WLR 1867 i.e. that "an interim application is not a statement of the correct value of the work, it is a statement of what the contractor considers to be due to him based on the Gross Valuation of the work".

The employer can challenge the application by serving the correct notices but in the absence of doing so, the contractor is entitled to payment - it is the fact that the application is unchallenged that crystallises the sum due for payment at that time. As Lord Justice Jacob stated in Rupert Morgan, "section 111(1) [of the Act] is a provision about cashflow. It is not a provision which seeks to make any certificate, interim or final, conclusive".

It was argued on behalf of the Employer that despite the failure to serve notices, Estura here faced exceptional circumstances bearing in mind:

  1. this contract wording did not allow for a negative valuation;
  2. the very high amount of IA 60; and
  3. timing, in that IA 60 was likely to be one of the last interim applications to be made - thus, it was argued, affording the Employer no opportunity to correct the position.

Another adjudication is now underway, commenced by the Employer against its agents for breaches of contract and/or negligence in failing to issue the key notices which would have prevented the crystallisation of IA 60.

To summarise the Court's reasoning behind granting the partial stay, full enforcement "would be likely to stifle further pursuit by Estura of its rights". Estura argued that it would be unable to pay the full amount ordered by the adjudicator and would subsequently be unable to fund proceedings to recover amounts (it argued) that were never due to the Contractor based on a proper valuation of the works.

The initial evidence submitted by the Employer to prove its impecuniosity was described by the Judge as "manifestly inadequate". The Court gave the Employer another chance, further evidence was submitted and the Judge accepted that the Employer could not pay (save through funding by others).  The Court did not agree however that the Employer's lack of funds resulted from any fault of the Contractor...

"It would not be fair to Estura to enforce the judgment in full..." concluded the Court, with the Judge stating that he was "concerned to ensure that [the Contractor] has the necessary incentive to achieve practical completion and submit its Final Statement...". 

Fair enough, the Court did emphasise that a case such as this justifying a partial stay would be "exceptional... and... rare" but even so, it might strike you as highly ironic that at one stage, Counsel for the Employer argued one of its points by referring to an adverse outcome driving "a coach and horses through the Act".

A successful day for the Employer then… but what of the dust cloud that the coach has left in its wake?