Good news for employers – the end of the road for ‘smash and grab’ adjudications?
In one of his last judgements before leaving the Technology and Construction Court for the Court of Appeal, Mr Justice Coulson has tackled this recurring issue head on, effectively overturning a line of important cases.
The recent case of Grove Developments Ltd v S&T (UK) Ltd (2018) may well mark a turning point in the way 'smash and grab' adjudications are handled.
Smash and Grab?
These types of adjudication award have been highly controversial within the construction industry for allowing potential windfall payments to contractors as a result of procedural failures by their employers.
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 Construction Ltd v Seevic College (2015) 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.
So what happened in Grove Developments Ltd v S&T (UK) Ltd (2018)?
Grove Developments employed S&T Ltd as the main contractor to build a new hotel at Heathrow Airport using a JCT Design and Build Contract 2011.
Towards the end of completion, S&T submitted an application for payment of £14,009,906. Grove Developments then served a payment notice stating the sum due was £1,407,748 but the notice was not served in time. Quickly realising its error, Grove Developments served a pay less notice within time. The pay less notice cross referenced the £1,407,748 stated as due in its payment notice although it did not reattach the calculation itself.
S&T argued the pay less notice was invalid because it failed to set out the basic sum due (as the calculation was not attached) and the adjudicator agreed. As the payment notice was out of time, the adjudicator required Grove Developments to pay S&T the sum of £14,009,906 in accordance with their application. ISV v Seevic stated that no adjudication could follow to establish the true value of the works performed to date.
Mr Justice Coulson's decision
Grove Developments issued Part 8 court proceedings to challenge the validity of the adjudicator's decision and Mr Justice Coulson overturned it. He held the pay less notice was valid and a reasonable recipient would have understood the basis of the calculation by reference to the other document. It did not matter that the other document was not physically attached because the reference was clear and there was no doubt that it had been received earlier..
The more important element of this case was that Grove Developments had also sought a declaration from the court that it should be able to have a second adjudication to establish the true value of the works. This was in direct conflict with the ISV v Seevic authority that by failing to serve the correct notice in time, the employer was seen to be in in agreement. In his comprehensive analysis, Mr Justice Coulson set out six reasons why he considered there could be a second adjudication on the true value of the works despite ISV v Seevic.
What does it mean for the future?
Contractors can still make speculative applications for payment and win adjudications in the first instance if the employer is not switched on to this potential loophole. This could be a useful tactic as it forces the employer to pay an (often) over-inflated sum before it can be challenged at a second adjudication.
The smash and grab adjudication is not dead but has been rendered virtually pointless as a quick and simple adjudication can reverse the damage almost immediately.
Mr Justice Coulson's judgment will still be seen by many as welcome. 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. The ISV v Seevic regime was unnecessarily draconian.
But the saga of smash and grabs may not yet be completely over - S&P has received permission to appeal so we will have to wait and see what happens next.
Sensible approach - ensure compliance
The sensible approach for all employers (and contractors) is to comply with the strict requirements of the contract with regards to interim payments. The applications and notices should be served in time, meet the specific contractual requirements, contain the requisite amount of detail to inform the recipient and be clear on the face of it, what these are.
To see what else we have written on this issue, please see:
- Stick to the terms of your contract says Technology and Construction Court
- Payment notices - some clarity at last
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