Beginning of the End of “Smash and Grab” Adjudications?

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In Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123, the Court re-examined the statutory regime governing payment mechanisms in construction contracts and provided guidance on a party’s ability to have the “value” of the payment application assessed in separate adjudication proceedings. Does this mean the end of “Smash and Grab” adjudications?  

The position since the decisions of ISG v Seevic and several others was that in adjudication proceeding, no defence would be available for a paying party who failed to serve a valid payment or pay less notice on time. This has resulted in many smash and grab adjudications and has proven costly for paying parties who may have valid arguments in defence of the sums claimed in relation to interim applications. 

In Grove Developments v S&T the Court reaffirmed this approach. However, it has provided clarification that an employer is still entitled to pursue separate adjudication proceedings to determine the true value of an interim application.  

Facts

S&T was engaged by Grove under an amended JCT 2011 Design and Build contract to design and construct a Premier Inn Hotel at Heathrow Airport. 

In March 2017, S&T sent Grove its interim payment application. Practical Completion had been achieved but not yet certified. This was therefore the final interim payment application prior to the final account being assessed under the contract. 

S&T valued the works at £39m and applied for an interim payment of £14m based on a detailed spreadsheet attached to its payment application. 

Grove returned a marked-up version of S&T’s spreadsheet with its own calculations and assessment of S&T’s claim. Grove also issued a separate payment notice stating a sum due of £1.4m. However, the payment notice was served late. 

Grove then issued a pay less notice to S&T, which was in time. The pay less notice made reference to the calculations set out in its payment notice. 

S&T argued that Grove’s pay less notice was invalid because it did not specifically state the sum considered to be due or how that sum had been calculated. When Grove refused to pay, S&T referred the claim to an adjudicator; a classic “smash and grab” adjudication. 

The Adjudicator decided that Grove’s pay less notice was invalid and that S&T was therefore entitled to the £14m claimed. 

Grove brought proceedings under Part 8 of CPR seeking several declarations from the Court. In particular, Grove requested the Court to consider the validity of its pay less notice and to determine whether, if the pay less notice was invalid, it could commence a separate adjudication as to the true value of S&T’s payment application. 

The Employer’s Right to adjudicate the True Value

The Court held that the pay less notice issued by Grove was valid on the basis that:

  • The calculation set out in Grove’s earlier document clearly set out how it had arrived at the sum it considered to be due
  • There was no reason why a pay less notice could not refer to a calculation set out in a separate document
  • It did not matter that the separate document was not actually attached to the pay less notice providing it was clear which document was being referred to

The Court then considered the hypothetical question: if the pay less notice was invalid, could Grove bring a separate adjudication on the true value of that interim payment application? 

The Court agreed that Grove would have a right to adjudicate the true value:

  • Just as the Court can decided on the true value of any payment certificate, application or notice, an adjudicator should have the same wide powers to decide all disputes, so long as the parties have agreed on the outset that this is the case
  • As far as the statutory framework is concerned, s.108(1) of the Construction Act 1996 and paragraph 20 of the Scheme for Construction Contracts 1998 both clearly identify that there is no limitation on the nature, scope and extent of a dispute that can be referred to adjudication.  As such, an adjudicator would have the power and jurisdiction to determine the true value of any payment certificate, application or notice
  • The dispute in S&T’s adjudication is materially different to Grove Developments’ intended adjudication on the true value of the interim payment application. Therefore, a subsequent adjudication would not conflict with the earlier Adjudicator’s decision 
  • There is a distinction between the “sum due” and “the sum stated as due” under the JCT Design and Build Contract. The “sum due” refers to the true value of an interim payment or application whereas the “sum stated as due” refers to the figure a contractor has stated in its payment application, which will become the “notified sum” and payable in the absence of any valid payment or pay less notice. A paying party is therefore entitled to request the adjudicator to make an assessment on the true value of an interim application based on the distinctions under the JCT Conditions

The Court, however, clarified that a paying party on the receiving end of a smash and grab adjudication will still have to pay the amount awarded before commencing its own adjudication proceedings. It is unable to withhold payment pending outcome of its counter adjudication.

Conclusion

Following decisions such as Paice v MJ Harding and Kilker Project v Purton it has been open to paying parties to counter adjudicate the value of the final account. However, the Court has now clarified the position in relation to interim payments. 

In practical terms, this decision is unlikely to see the demise of smash and grab adjudication; the paying party may still have to pay out a large sum, before seeking to claw it back through its own valuation adjudication proceedings. However, payees may think twice before embarking on such adjudications if it knows the paying party is likely to succeed in challenging the sum claimed.

The tactical key for the paying party is to commence its counter adjudication proceedings as soon as possible, but it will need to take into account the fact that it will need to collate substantive valuation evidence to have any chance of success.  

To avoid this scenario arising, paying parties should ensure that their notices are properly drafted and served within the relevant contractual timescales.  

The case can be found HERE