Will we see an end to “smash and grab” adjudications?

Over the last few years the courts have seen an increase in what have become known as “smash and grab” adjudications. These adjudications arise when the employer has failed to serve a pay less notice at the appropriate time and they have been fuelled by the decisions in cases such as ISG v Seevic and Galliford Try v Estura.

In the absence of a valid pay less notice the sums set out in interim payment applications have been found to be payable and employers not allowed to challenge the amount of that payment by way of second adjudication. It was this issue which Coulson J had to address in Grove Developments Ltd v S&T (UK) Limited [2018] and which he described as having brought adjudication into “a certain amount of disrepute”.

The facts

Grove engaged S&T to design and build a new Premier Inn hotel. The contract incorporated the JCT Design and Build 2011 Contract.

After practical completion had been achieved but before the certificate had been issued, S&T submitted interim application 22 on 31 March 2017. The overall contract sum shown was £39,707,085.90. In the previous application the figure had been some £25 million.  The application was supported by a spreadsheet with a detailed breakdown of how the sum had been calculated.

Grove responded on 13 April. It provided an annotated copy of S&T’s spreadsheet detailing the figure which Grove considered was due. It was accepted that this was not served in time to be a payment notice.

On 18 April, Grove sent S&T a pay less notice. The notice stated that the sum which was due was £0. It went on to state that the basis on which the sum had been calculated was as set out in the payment certificate which had been issued on 13 April 2017. S&T did not argue that the pay less notice was out of time. Instead it argued that it was invalid because it referred back to the earlier payment notice rather than re-attaching the detailed breakdown of how the sum had been calculated. Its position was that the requirement to “specify” the calculation meant that simply referring to an earlier document without attaching it was not sufficient. S&T further argued that because the pay less notice was invalid, it was not now open to Grove to start a further adjudication to ascertain the true sum that was payable in respect of that application.

The dispute came before Coulson J in the Technology and Construction Court. Although he had to determine four issues, the two key issues were (1) whether the pay less notice complied with the terms of the contract and (2) whether Grove was entitled to commence an adjudication seeking a declaration as to the “true” value of interim application number 22.

The decision

On the question of validity of the pay less notice, Coulson J undertook a useful review of previous case law in relation to the content of such notices. He summarised that:

“A pay less notice will be construed by reference to its background, in order to see how a reasonable recipient would have understood it. The court will be unimpressed by nice points of textual analysis, or arguments which seek to condemn the notice on an artificial or contrived basis.”

He concluded that there was nothing to prevent the notice referring to a detailed calculation in another document provided that document was clearly identified. There was also nothing that required that document to be re-sent with the notice as long as it was clear (as it was here) to what document the notice referred. The pay less notice was therefore valid.

On the next issue Coulson J summarised the question to be addressed as follows:

“Can an employer, whose payment notice or pay less notice is deficient or non-existent, pay the contractor the sum stated as due in the contractor’s interim application and then seek, in a second adjudication, to dispute that the sum paid was the “true” value of the works for which the contractor has claimed?”

In ISG v Seevic and Galliford Try v Estura, Edwards-Stuart J had decided that the answer to this question was “no” as far as interim applications were concerned. His conclusion was that by failing to serve the appropriate pay less notice, the employer had either agreed or was deemed to have agreed that the amount claimed in the interim application was the “true” value of the application.

Coulson J set out six reasons why he considered that this position was incorrect and the answer to the question should be “yes”.

In summary his reasons were as follows:

  1. It is clear from case law that the court has the power to decide the “true” value of any certificate, notice or application. The court (and an adjudicator) therefore has the power to decide the “true” valuation of application number 22.
  2. There is no limitation within the Housing Grants, Construction and Regeneration Act 1996 or the Scheme for Construction Contracts which limits the nature, scope and extent of what either party can refer to adjudication.
  3. The dispute which the employer would wish to raise in a second adjudication (i.e. the “true” value of the application) is different to the question to be addressed in the first adjudication (i.e. is the pay less notice valid?).
  4. The contract distinguishes between “the sum due” and the “the sum stated as due”. This difference in wording was deliberate and there is a distinction between the “sum stated as due” in the interim application and the “sum due”. The failure to serve a pay less notice does not transform the amount stated as due into the sum due.
  5. If an employer serves a payment notice or pay less notice which is lower than the sum which the contractor thinks is due, it is open to the contractor to adjudicate the dispute and seek a declaration as to how much the “true” valuation should be. As a matter of equality and fairness it would be wrong to prohibit the employer from doing the same thing.
  6. There is nothing in the Act or the Scheme or in JCT contracts which draws a distinction between interim applications and final applications for the purposes of payment rights and obligations.

Having considered the above points, Coulson J compared his analysis to the previous case law. In doing so he addressed the decisions in ISG v Seevic and Galliford Try v Estura and concluded that they had been wrongly decided and he was not obliged to follow them.

Practical points

Coulson J gave short shrift to the arguments run in relation to the validity of the pay less notice and parties need to avoid trying to find ways round pay less notices on an “artificial or contrived basis”. Even so, employers and contractors alike nonetheless still need to ensure that notices or applications are clear to ensure that a reasonable recipient will understand what is being referred to in the notice or application.

As far as invalid pay less notices are concerned, the decision states that an employer who has failed to serve a valid payment notice or pay less notice in respect of an interim application must pay the amount claimed by the contractor. It is then open to the employer to commence an adjudication to have the “true” value of the interim application assessed if it wishes to do so. This leaves open the question of timing – when can the second adjudication be commenced and, if it is only after payment has been made, is this is a fetter on the right to adjudicate at any time?

As Coulson J highlighted, the cases in which “smash and grabs” have primarily been an issue have been in penultimate applications. The ISG and Galliford Try cases meant that the employer potentially had a long wait before it could readjust the position in the final payment.

It remains to be seen how this situation is now addressed in light of Coulson’s decision and whether this is the end of the “smash and grab” story or the start of a new chapter.

Article from Boyes Turner.

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