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Court of Appeal deals ‘smash and grab’ adjudication hefty blow – but employers must still pay first, argue later

November 12, 2018

The Court of Appeal, as predicted, has confirmed that employers do indeed have the right to challenge the 'true value' of a contractor's interim application in a subsequent adjudication.

It upheld a ruling made by Mr Justice (now Lord Justice) Coulson in the Technology and Construction Court earlier this year in the case of Grove Developments Ltd v S&T (UK) Ltd.

Importantly though, whilst backing Mr Justice Coulson's decision not to follow the line of cases starting with ISG Construction Ltd v Seevic College (2015), seen by many as unnecessarily draconian, the Court of Appeal explicitly ruled that that an employer must 'pay first, adjudicate later'.

And acknowledging just how murky this area of the law has become, in its decision the Court of Appeal stated: "We are all trying to hack out a pathway through a dense thicket of amended legislation, burgeoning case law and ever-changing standard form contracts".

Much anticipated judgement

The construction industry has been eagerly awaiting the Court of Appeal's decision in this case because of the controversial way so-called 'smash and grab' adjudications, which allow potential windfall payments to contractors as a result of procedural failures by their employers, have been handled.

Until recently, a party that failed to serve a valid payment or pay less notice within the specified time scales would:

Have to pay the full amount of the application;
Be deemed to have agreed that sum as the true value of works at that point;
Not be allowed to ask an adjudicator to open up, review and revise that valuation so that they could recover any overpayment.

This strict regime dates back to the cases of ISG v Seevic and Galliford Try Building Limited v Estura Ltd (2015) both decided by Mr Justice Edwards-Stuart.

Following these cases, many contractors would deliberately issue payment applications to unsuspecting employers to obtain a windfall that could not be challenged until much later.

More options for employers

The Court of Appeal's decision to back Mr Justice Coulson's ruling in Grove v S&T is a welcome one - it basically confirms that there should be certainty in the way the interim payment regime operates but it should also be fair. Where an unwitting employer has failed to adequately respond to a contractor's payment notice, there should be a sensible mechanism for putting it right.

It undoubtedly gives employers more options when facing a 'smash and grab' adjudication from a contractor but the fact that an employer must first pay the contractor the amount it has applied for, could see contractors continuing to pursue such claims in the future.

Contractors might do this for a number of reasons including:

To obtain the cash flow benefit and commercial leverage that full payment of their interim application brings;
To secure that payment - even if they later have to repay part of it post-adjudication.

The Court of Appeal has recognised that this could be harsh on employers left exposed to contractor insolvency but says the best form of protection is to be 'scrupulous' in issuing the right notices at precisely the right times.

To see what else we have written on this issue, please see:

Wards Solicitors' James Murray is a specialist in this area of the law. For more information, or help in relation to any construction and engineering dispute, please contact him directly.