The end of 'smash and grab' adjudications or are they alive and kicking?

Grove Developments Limited -v- S&T (UK) Limited (27 February 2018)

Background

We are all by now very familiar with the phenomenon of ‘smash and grab’ adjudications which started back in 2014 following the decisions in the court ISG -v- Seevic  and Galliford Try -v- Estura. The key point in both those cases, in summary, was that where a paying a party (normally the employer) failed to serve a payment or pay less notice as to the sum due to the payee (normally the contractor) the sum in a contractor’s interim payment application as a default payment notice was effectively deemed to be valued by the employer as the sum due. Because of that deemed valuation the employer could not ask an adjudicator to value the interim application. Rather, the employer was stuck with the deemed valuation and to make payment of that sum. The employer had to hope that during the course of the later interim payments that any over payment could be recovered. This has led to a number of court decisions and numerous ‘smash and grab’ adjudications.

The courts’ apparent unease with the ‘smash and grab’ phenomenon was most recently highlighted in the decision of the case of ICI -v- Merit Merrell. In particular in that case, the court suggested that the courts might not now make the same decision as has been reached in ISG and Galliford Try. In its comments the court emphasised that those decisions were only about timing and not about the true value of the works.

In what is likely to be his last substantive decision in the Technology and Construction Court (TCC) in his decision on Grove Developments Limited -v- S&T (UK) Limited (27 February 2018) Coulson J intends to make an impact on the ‘smash and grab’ adjudication. The background to his decision was a line of three adjudication decisions ending up with a ‘smash and grab’ decision giving the contractor a right to be paid in excess of £14 million pounds. In order to try to avoid enforcement and payment of that decision the employer commenced Part 8 proceedings in the TCC. If you are not familiar with the Part 8 proceedings they might be described as an abbreviated procedure relating to issues mainly of law and not of fact.

The pay less notice 

Of those four issues that the court had to consider in Grove the focus of this article is the second and third issues. The third question before the court was whether the employer was entitled to commence a separate adjudication seeking a decision as to the ‘true’ value of the contractor’s interim application 22. On the face of it that would seem to be contrary to the decisions in ISG and Galliford Try. Whilst the employer had served a payment notice it was out of time. It was interesting to note that the valuation given by the employer was approximately £1.5 million as opposed to the £14 million claimed. Shortly thereafter the employer issued the pay less notice. There was no suggestion that the pay less was out of time. What was disputed was whether or not the pay less notice was compliant with the requirements of the contract (which reflected the requirements of the Act). The issue was that whilst the late payment notice had attached a spread sheet showing the build-up of the sum due the pay less notice did not attach the spread sheet but simply referred back to the schedule attached to the payment notice. The contractor said that was not good enough. The adjudicator had found that the pay less notice was invalid because of the fact that the calculation was set out in a separate document. The court found that was incorrect and the payless notice has in fact been valid. The court considered that the argument regarding the failure to attach the spread sheets was ‘artificial and contrived’. The court found that such an approach lacked common sense approach. There was nothing in the contract that required the resending of a document that had already been provided subject always that it was clear within the pay less notice as to what document has been referred to. The court did recognise, however, that there was a risk to proceeding on such a basis but the question turned on the fact in each case. The court found that a reasonable recipient would have known precisely what sum has been deducted and the basis of a calculation from the terms of the pay less notice. 

The court’s comments on ISG and Galliford Try

As there was a valid pay less notice there was need for the court to consider the third issue of valuation by way of second adjudication. Regardless, the court went on to give an opinion as to revaluation. As such, the courts comments in this regard are obiter. That means that it may not be considered binding as it was not an essential part of the court’s decision. However, given Coulson J’s seniority as a judge it is likely that his comments will be influential. His decision contains a detailed analysis for case law running from 1999 shortly after the commencement of the Construction Act up to date. In analysing the decisions he sought to distinguish between the sum due and the true value of the contractor’s works. The court found whilst the notified sum in the contractor’s interim application/default notice might be the sum due, as it is not a true valuation a second valuation adjudication can be commenced. There is no doubt that this is entirely contrary to the reasoning in ISG. 

By way of explanation of this approach Coulson J points out that a contractor who is unhappy with the employer’s valuation and employer’s pay less notice can go to adjudication and seek a valuation of the sum properly due. Coulson J could see no reason why an employer should not equally be able to challenge a contractor’s interim application. In the court’s reasoning, it is suggested that such an approach is ‘a one way street’. The court said there was ‘no justification for such radically different treatment’. 

It might be suggested that the basis for that radically different treatment is set out in the decisions of ISG and Galliford Try. The court explained in those cases that it is open to the employer to issue both a payment and/or pay less notice in order to defend itself from over payment. A contractor faced with a low valuing pay less notice has no counterpart power to issue a subsequent notice to defend itself from a low pay less notice. It must adjudicate for a valuation or accept the pay less notice as the value. 

On analysing the cases on this point Coulson J gave weight to the Court of Appeal decisions. Both ISG and Galliford Try were decisions of the TCC which is the lower level court. In conclusion Coulson J found that all of the Court of Appeal authorities pointed the same way, that is ‘an employer who has failed to serve its own payment notice or pay less notice has to pay the amount claimed by the contractor because that is ‘the sum stated as due’. The employer is then free to commence its own adjudication proceedings in which the dispute as to the true value of the application can be determined’. 

Comment

It is important to note that Coulson J accepted that the purpose of the Construction Act was to ensure the contractor was entitled to maintain proper cash flow. It was also accepted by the court that the contractor is entitled to be paid the full amount claimed in his interim application. However, the court accepted that a second adjudication could take place which could conclude that the contractor had over claimed and therefore been overpaid and that the contractor would have to repay the amount of the overpayment. So, it is not the end of ‘smash and grab’ adjudications. Where an employer has failed to issue payment and/or pay less notices the contractor will still have the right to adjudication and payment. The employer can seek a subsequent valuation but he may have the initial burden of proof that the sum paid to the contractor is not the true value. The employer will then have to recover any overpayment from the contractor. 

It seems clear that Coulson J wanted to issue his opinion as a matter of policy. He emphasised in his decision that he believes that the conclusions of his decision will ‘strengthen the system’. 

A number of decisions have followed ISG putting burdens upon the contractor in relation to the terms, timing and intent of the interim application given its ‘draconian’ effects. It will be interesting to see what impact this decision will have on those obligations. We wait to see whether or not the contractor in Grove appeals and if the Court of Appeal makes any comments of its own on ‘smash and grab’. 

In the meantime expect the arguments on this point to continue to rage and to be a continuing source of dispute in the construction industry.

If you have any questions about this article, Grove Developments Limited -v- S&T (UK) Limited (27 February 2018), or any construction related legal questions, please contact Tricia Morrison, or a member of the construction team.