The end of “Smash and Grab” construction adjudications?

Construction contract employers who are aggrieved at having to pay out an interim application in full (because they forgot or made mistakes with their payment notices) may now no longer be stuck with that outcome for long, following the recent decision of Grove Developments Ltd v S & T (UK) Ltd handed down recently by Coulson J.  Tim Mould, Head of Construction at Goodman Derrick, explains.

For the past 20 years or so it has not been possible for construction contract employers to avoid for long an obligation to pay by simply failing to issue payment notices. This is because of statutory payment provisions put in place – the Housing Grants, Construction and Regeneration Act 1996 – which include the ability to conduct a swift adjudication if those provisions are not followed. In summary, if the employer fails to certify a payment application, it will have to pay the full amount of the application, subject to the employer being able to salvage its position by subsequently issuing a pay less notice.  There are strict time limits to issuing such a deduction notice.

The term “smash and grab” adjudications refers to the scenario where the employer has overlooked issuing payment notices at all, or done so but inadvertently missed a time limit or prepared a defective notice, and the contractor exploits that mistake by commencing swiftly an adjudication for the full amount of its application. Typically such an adjudication will be in relation to an interim application at the tail end of a project. This is because most construction contracts provide for a monthly cycle of payments. Therefore, if the contractor is successful in seising on technical errors for one interim application, that success can be swiftly reversed out in the next valuation.

The Downside of Losing a “Smash and Grab” Adjudication

Whilst ultimately any overpayments in the interim payment process can be addressed at final account stage there can be a period of many months between the last interim application and the final account being agreed. From an employer’s perspective this is far from ideal where there is a genuine and significant dispute over the true value of the works. This is not just because of the obvious cashflow cost the employer will have to incur. It is also because, potentially, there may be a perceived or actual risk that in that period the contractor will become insolvent.

Whilst paying parties have successfully applied for a judgment enforcing an adjudicator’s decision to be suspended in part or whole as a result of the financial position of the contractor, the high hurdles to be cleared to gain that protection mean that full payment normally has to be made coupled with a long nervous wait.

The Change in the Ability to Challenge Valuations

The line of cases in recent years that an employer aggrieved at having to pay out an interim application in full (because it forgot or made mistakes with its payment notices) is stuck with that result until the stage of the contract’s final account, has now been reversed. This has come about due to the decision of Grove Developments Ltd v S & T (UK) Ltd handed down recently by Coulson J.  In theory that judgment is not binding on other Judges at first instance and it is subject to appeal.  However, it is expected that it will be followed pending the appeal’s outcome. It was one of the last judgments of Coulson J before he was elevated to the Court of Appeal. The decision of Coulson J was that a party is entitled to adjudicate on the true value of a payment application even if its payment notices have been invalid.

The facts of Grove v S&T illustrate how potentially extremely unfair results can flow from there being no opportunity to challenge for months the true value of an interim application once there has been a failure to issue compliant payment notices. The facts were as follows.  Grove engaged S&T to design and build a new Premier Inn hotel at Heathrow Terminal 4.  The contract was on the basis of the JCT Design & Build Contract 2011.  The original contract sum was £26,393,730.04.  After practical completion had been achieved but before it was certified, S&T sent Grove an interim application no. 22 by which it claimed an additional £14,009,906.58 as compared to interim certificate 21.

The Judge was at pains to point out that this was not a case where there had been a sudden last-minute increase in the total amount of S&T’s claims, rather the big (and growing) difference between the parties’ valuations had been apparent for months. Nonetheless, the effect if the Grove pay less notice was invalid, and there was no right to adjudicate on the true value of the application before the final account, would be that Grove would have to pay £14 million immediately without the ability to challenge in the meantime its ultimate liability to pay that amount.

The Strong Reasoning Behind Grove v S & T

There is a strong common sense and policy thread running through the reasons Coulson J gave for his decision. Those include that:

  1. When an adjudicator has the power to decide all disputes between the parties, the adjudicator will have the same wide powers as the court;
  2. A dispute over the true value is different from a dispute as to whether or not an employer’s payment notice and/or pay less notice is deficient or out of time (and so therefore ought to be able to be separately adjudicated).

A particular focus of the Judge was that it was unfair that an employer should be fettered on what payment issues it can refer to an adjudication when this is not the case for a contractor. Coulson J noted that a contractor is entitled to launch an immediate attack on the “sums stated to be due” in a pay less notice and rejected that payment adjudications were a one-way street.  The Judge also rejected the notion that there should be a different treatment of interim applications as compared to final applications, such that disputed interim applications cannot be adjudicated at the time the dispute arises.

The key rationale for earlier Court decisions, that a “smash and grab” adjudication success cannot be unpicked by a later adjudication on the true value of the works, was an analysis of the employer having consented to the [unchallenged] valuation. Coulson J disagreed. He said that failing to serve a notice in time, or with proper contents, did not equate to the employer having agreed, or that it must be deemed to have agreed, that the amount claimed was the “true” value of the interim application.

Why “Smash and Grab” Adjudications are Unlikely to Stop

It is well know that one of the main purposes of the 1996 Act is to maintain proper cash-flow in the construction industry. S&T made the argument that to accept Grove’s position would destroy that policy.  That was rejected as an unjustified doomsday scenario.  This was because, on the Judge’s reasoning, the entitlement to commence a second adjudication would only arise after the employer had paid the amount required under the first adjudication.  Coulson J expressly noted that “the second adjudication cannot act as some sort of Trojan Horse to avoid paying a sum stated as due. I have made that crystal clear.”  This means that where there is likely to be a significant period before an employer can prepare a second valuation adjudication, it could still be in the contractor’s favour to “smash and grab”. Preparing an adjudication in respect of true value of works is a much more time and document intensive exercise than one brought on the basis of non compliant or no payment notices having been served.

If there is not a very large sum in issue on a true valuation basis, then, for a disappointed employer who has failed to address notices properly, the irrecoverable costs of adjudicating will make a second adjudication an unattractive prospect.

“Smash and grab” adjudications are however likely to reduce markedly in number for at least larger scale disputes. A contractor will surely assume that if significant parts of its application are vulnerable to being challenged, the employer is bound to launch a second adjudication if caught out initially on a technicality.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.