Lidl v Closed Circuit Cooling Ltd – Extending the 'Grove principle'

Parties to construction contracts will agree interim payment mechanisms setting out the payment process during the lifetime of the works until a final account is capable of being prepared.

Typically, this involves the payee applying for payment and a payer issuing a payment notice setting out the payer's own valuation of those works (the 'notified sum'). Subsequently, the payer has the opportunity of issuing a pay less notice taking into account other factors to be deducted such as damages for delay and defective work. If a valid pay less notice is issued the sum set out there in becomes the notified sum.

Either the contract or, if otherwise not agreed or falling foul of sections 109, 110 and 113 of the HGCRA, Part 2 of the Scheme, sets the timeframes for notices to be issued. It is important these dates are followed because, it is now trite law that a payee may 'smash and grab' the payer for the notified sum (which in the absence of a valid payment or pay less notice can be the sum stated in the payment application even if that sum is not the true value of the works carried out).

In S&T v Grove [2018] EWCA 2448, the Court of Appeal decided that a payer who loses a smash and grab adjudication can only commence an adjudication over the true value of those works after paying the notified sum. Further case law has emerged over these issues, for example the relevance of the intention of a payer when sending one notice to be followed by another (as was the issue in Downs Road Development v Laxmanbhai [2021] EWHC 2441 (TCC) and Advance JV v Enisca Limited [2022] EWHC 1152 (TCC)) and where an outcome is manifestly unjust in circumstances in which one party seeks to invoke the contractual payment mechanism to its advantage where an entirely different process had been followed previously (JRT Developments v TW Dixon (Developments) [2020]. 

But the Grove principle continues to apply, and there have been judgments handed down by the TCC since Grove which have clarified and extended the Grove principle to make it clear that a party cannot adjudicate on the true value of an application where it has not complied with its immediate payment obligations even where the payee has not obtained an adjudicator's decision (for instance Brexheat v Essex Services Group [2022] EWHC 936 (TCC), AM Construction v The Darul Amaan Trust [2022] EWHC 1478 (TCC) and, earlier this year, Henry Construction Ltd v Alu-Fix (UK) Ltd [2023] EWHC 2010 (TCC)).

The Grove principle has now been considered again in the recent case of Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 3051 (TCC) (29 November 2023). Here, 3CL agreed to carry out design, installation and maintenance works for the supermarket chain, Lidl. 3CL won a smash and grab adjudication over one of their payment applications and subsequently enforced it (Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 2243 (TCC) (11 September 2023)). In between the adjudicator's award and the enforcement, Lidl launched adjudications of their own relating to the date of practical completion of the works, the cost of remedying defects to be offset against the sum owed to 3CL and whether 3CL were entitled to an extension of time.

3CL argued the adjudicators didn’t have jurisdiction to hear the defects and time issues in circumstances where Lidl hadn't yet satisfied their payment obligations under the first adjudication. Following the defects adjudication, Lidl sought to enforce that decision and the Court therefore had to address whether the Grove principle was as wide as 3CL contended.

The TCC held there is not a wholesale ban on all adjudications being commenced without payment of the notified sum, but matters concerning valuation which could have been included in a pay less notice (such as the costs of rectifying defects and delay damages), cannot be adjudicated upon by the payer without first paying the notified sum.

However, the TCC confirmed a dividing line applies by reference to the date the pay less notice was due to be submitted, because "If, however, it [the payer] subsequently has a claim in respect of defects or delay occurring after the pay less notice date in respect of the notified sum, then there can be no principled reason for prohibiting the payer from commencing an adjudication in respect of such matters". In other words, if defects manifested after the deadline for a pay less notice passes, they may still be adjudicated upon without payment of the notified sum. HHJ Davies considered the date for the pay less to represent a dividing date – anything coming to light after that date to be outside of the Grove principle.

This decision could have ramifications for both Employers and Contractors alike – could a contractor prevent determination (outside of the Courts) of a genuine defects claim by not adjudicating on its smash and grab entitlement? Will Employers argue that defects only came to light after the final date for a pay less notice as a means of trying to reduce their smash and grab exposure? We have no doubt there is further clarification and arguments over the Grove principle to come but, in the meantime, the case serves as yet a further reminder to parties to comply with their contractual (and indeed statutory) notice requirements.