By way of background, Grove Developments Limited (“Grove”) engaged S&T (UK) Limited (“S&T”) to design and construct a hotel at Heathrow Airport under a standard JCT Design and Build Contract 2011, subject to certain amendments which were set out in a schedule. After a series of adjudications between the Parties, Grove brought a Part 8 Claim seeking declarations against S&T which were, in essence, asking the Court to declare that the Pay Less Notice was valid, and that Grove were therefore entitled to commence an adjudication in order to establish the true sum due. S&T, on the other hand, counterclaimed stating that Grove had not complied with the notice procedure set out in the Contract. The Court found in favour of Grove and so S&T appealed to the Court of Appeal contending that the judge had erred in reaching the decision.

Providing consideration first to the purported Pay Less Notice and its effectiveness, the Court of Appeal noted that section 111(4) of the amended Housing Grants, Construction and Regeneration Act 1996 requires that a Pay Less Notice given by the employer “shall specify” both the sum considered to be due and “the basis on which that sum is calculated”. It was common ground that Grove had sent a notice to S&T which complied with the first requirements, but the adjudicator had said that the notice did not specify upon what basis the sum had been calculated. However, LJ Jackson (giving the leading judgment) noted that this was clearly a reference to the spreadsheet which accompanied Payment Certificate 22 and that, when considering what a reasonable person would have known, S&T would have known “perfectly well” the detailed calculations Grove was referring to. 

The Court of Appeal judgment also provided a summary of the earlier court decisions leading to the “smash and grab” cases where employers had failed to serve timely Pay Less Notices which culminates in Mr Justice Coulson setting down six reasons as to why Grove was entitled to bring a separate adjudication in order to determine the correct value of the Interim Application 22. LJ Jackson agreed that the six reasons supported his view that the employer, having failed to serve a Payment Notice or Pay Less Notice, was nevertheless entitled to adjudicate to determine the true value of an interim application. Whilst LJ Jackson agreed with this proposition, like Mr Justice Coulson, he held that such right to bring the adjudication only accrued after payment of the notified sum.

Finally, consideration was given to the deduction of liquidated damages. Recounting the arguments before Mr Justice Coulson, LJ Jackson could “see force in this argument” however, he found it impossible to identify in the contract any specific period of time which should elapse between serving the second and third notices. 

Overall, the Court of Appeal dismissed the three aspects of S&T’s appeal and confirmed the judgment of Coulson J. It was held that the Pay Less Notice was valid but, in the event that it had not been valid, Grove would have been required to pay the £14 million due to S&T before starting an adjudication to determine the true value of the work done and recover any overpayment. 

This case provides important clarification as to how an employer can reclaim the difference between the notified sum and the true valuation. It helps to reassure employer that a failure to issue a timely Pay Less Notice is not in all cases determinative, but if they wish to contest it, they must first pay the notified sum.