“Smash and Grab” adjudications - too good to be ‘true’?

  • Insight

08 March 2018

The construction industry has been working with statutory adjudications for over 20 years since they were introduced by the Housing Grants, Construction & Regeneration Act 1996 (“the 1996 Act”). 

Even though adjudication in the construction sector has developed significantly over the last two decades, it is still principally about helping the wheels of industry to turn smoothly by ensuring cash flow from employer to contractor and from contractor to sub-contractor.

This is often embodied in what are known as “smash and grab” adjudications, where the contractor (or sub-contractor) usually relies on the other party’s failure to get its paperwork in order to “grab” money quickly via an adjudication. Until now there has been no possibility of the merits of the ‘grab’ being reviewed, at least not at an interim stage, but the recent case of Grove Developments Ltd v. S&T (UK) Ltd [2018] EWHC 123 (TCC) changes this and could pave the way for less of the ‘smash and grab’ adjudications. 

Background

In Grove, the claimant (“Grove”) engaged the defendant (“S&T”) to design and build a hotel for £26,393,730.00. The contractual completion date was 10th October 2016, but completion was not achieved until 24th March 2017. On 31st March 2017, S&T sent Grove an interim application, claiming an increased overall figure of £39,707,085.00. The basis for this claim was set out in a detailed spreadsheet attached to S&T’s application.

On 13th April 2017, Grove sent a payment notice to S&T, disputing S&T’s calculation and providing its own assessment in an annotated version of S&T’s spreadsheet. On this basis, Grove issued a separate payment notice and interim certificate setting out its view that the net amount due to S&T was £1.4m. However, the payment notice was not issued in time pursuant to the time periods in the Contract.

On 18th April 2017, Grove emailed its pay less notice to S&T. Grove’s pay less notice (which was itself in time) referred back to its detailed calculation of £1.4m in the (purported) payment notice of 13th April 2017. As a result, S&T argued that Grove’s pay less notice was invalid.

An adjudication in December 2017 decided that the pay less notice was invalid because the calculation of Grove’s figure was set out in a separate document contrary to the contract, which stated that a pay less notice should “specify” both the sum due to the contractor   and the basis on which that sum had been calculated. This meant that S&T was entitled to be paid £14m under its interim application– an expected result in a ‘smash and grab’ adjudication.

Grove brought proceedings seeking various declarations from the Court, including that its pay less notice was valid. However, Grove also asked the Court to determine whether, if the pay less notice was invalid, it could commence a separate adjudication seeking a decision as to the ‘true’ value of the interim application.

Valid ‘Pay Less Notice’

On the facts, the court held that Grove’s ‘Pay less Notice’ was valid – the detailed calculation sent to S&T five days earlier on 13th April 2017 along with the (purported) payment notice would have permitted the reasonable recipient to understand exactly how Grove’s valuation was calculated. Furthermore, the court found that there could be no objection in principle to a notice referring to a detailed calculation set out in another, clearly-identified, document.

‘True’ value adjudication

Despite ruling that the pay less notice was valid, the court went on to consider whether Grove would have a right to adjudicate in the absence of a valid pay less notice’. Mr Justice Coulson ruled that an employer would have the right to initiate a separate claim seeking a decision about the “true” value of the interim application. An employer whose payment notice or pay less notice was deficient or non-existent could pay the contractor the sum stated to be due in the contractor’s application and then seek, in an adjudication, to dispute that the sum paid was the “true” value of the works for which the contractor had claimed.

The court’s reasoning can be summarised as follows:

  • Under S.108 of the 1996 Act and paragraph 20 of the Scheme for Construction Contracts 1998, there was no limitation on the nature, scope and extent of the dispute which either side could refer to an adjudicator. Accordingly, an adjudicator would have the power and jurisdiction to determine the ‘true’ value.
  • The dispute which Grove would wish to raise in a further adjudication was a different dispute to that determined in the December 2017 adjudication which concerned the question of whether the payment notice or pay less notice was deficient or out of time, not detailed matters of the valuation. If so, then the sum stated in the contractor’s application would be due and payable, and there would be no need (or jurisdiction) for the adjudicator to consider whether that sum was correct. It followed that this could then be considered afresh in a second adjudication.
  • The words of the JCT Design and Build Contract (as was used by the parties) differentiated between “the sum due” and “the sum stated as due”. The former refers to the mechanism designed to calculate a contractor’s precise entitlement (i.e. the correct, or ‘true’ value). The latter is the amount a contractor has included in his application, and which will be payable in the absence of a valid payment notice and/or pay less notice. The two are not the same and preventing an employer from adjudicating would ignore this distinction.
  • It was not controversial that if a generic employer served a payment notice or pay less notice for a lower sum than what a contractor applied, the contractor could immediately refer a dispute about the ‘true’ value to adjudication. It was only fair that an employer had a similar right.
  • There was no contractual basis for treating interim and final applications/payments in different ways. Accordingly, whether what is in dispute is an interim payment or a final payment, the employer has the right in principle to refer to adjudication.

The end of “Smash and Grab”?

Before Grove, there was a line of cases which established that an employer who failed to serve the correct notices was not entitled to subsequently adjudicate the ‘true’ value of a claim. They had to wait until the next interim certificate or (more commonly) the final account (which could be months or years away in some cases) to reverse what it considered to be an overpayment.

This approach underpinned ‘smash and grab’ adjudications, where a contractor claims (and receives) the full amount of its application for payment on the basis the employer fails to serve the correct notices. The contractor then holds on to sums to which it may not be entitled until a later date.

A contractor has always had the right to immediately adjudicate if an employer serves a payment notice or pay less notice for a lower sum than what the contractor considers to be the true value- the decision in Grove ends this imbalance.

Grove could pave the way for a reduction in the number of ‘smash and grab’ adjudications, as they are unlikely to be economical for contractors if the employer can in turn quickly seek to ascertain the ‘true’ value.

That said, the ‘smash and grab’ approach might still be an effective ‘quick fix’ for cash strapped contractors and sub-contractors as an employer in a position like Grove will first have to pay the amount claimed in adjudication proceedings before embarking on its own ‘true value’ process.

As is always the case, disputes are best avoided if possible. Grove reaffirms the importance of ensuring that notices are properly drafted and served on time. It also serves as a reminder that both contractors and employers should always have compliance with the relevant statutory and contractual provisions as their focus to avoid a Grove-style predicament.

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