March 1, 2018

Spotlight on Grove Developments Limited v S&T (UK) Limited: is this really the end for ‘smash and grab’ adjudications?

Construction & Engineering

This decision overturns what has for a number of years been the general understanding in the construction industry: namely, that if a paying party fails to issue an effective payment or pay less notice in response to a contractor’s application for interim payment, then the paying party must pay the amount applied for in full and cannot commence a claim in adjudication for a determination of the true value of the works to which the interim payment application relates.

This understanding came about as a result of the decision of Mr Justice Edwards-Stuart in ISG v Seevic [2014] EWHC 4007, where he held that in the absence of a Payment or Pay Less Notice from the employer, the employer “must be taken to have agreed” the value stated in the contractor's payment application. In such circumstances, an adjudicator would not be entitled to decide the true value of the works associated with the interim application in question because the true value of the application "has already been determined".


‘Smash and grab’ adjudications

Mr Justice Edwards-Stuart’s decision in Seevic has given rise to what has become known in the construction industry as the ‘smash and grab’ adjudication, where a contractor who has made an interim application for payment, but who has received no or no effective payment or pay less notice in response from the employer, is usually able to recover the full amount applied for, regardless of whether that application correctly states the value of his works.

Such ‘smash and grab’ adjudications are normally used by contractors in relation to their penultimate or last interim payment applications, to avoid allowing the employer to recoup in the next interim payment valuation any over payment arising from the obligation to pay the amount applied for in full. In these circumstances, the Employer has to pay up and then wait (usually up to 12 months or even more) for the final reckoning of the contractor’s account by way of the final payment.

If properly timed, ‘smash and grab’ adjudications can result in significant windfalls for contractors as the valuation of their works is not properly scrutinised until the final account, by which time the employer will have already been obliged to pay the amount applied for and may have gone bust as a result.


Why the decision in ISG v Seevic represented a “wrong turn”

Now, in Grove Developments Limited v S&T (UK) Limited, the legal fiction that an employer is deemed to have “accepted” the contractor’s interim valuation if he doesn’t serve an effective payment or pay less notice, has been rejected.

Mr Justice Coulson reviewed the numerous authorities on the subject and concluded that the decision in Seevic represented a “wrong turn” in the law and gave six reasons as to why he thought this was the case:

1. Adjudicators have the same power as the court to open, review and revise any certificates, notices or applications issued under a contract. So an adjudicator has the same power to open up, review and revise the contractor’s application for interim payment as he does in relation to any payment notice or certificate issued by the employer or the employer’s contract administrator.

2. There is nothing in the Construction Act or the statutory Scheme which limits or qualifies the power or jurisdiction of an adjudicator to open up or review payment notices, even in circumstances where the paying party has already paid the interim payment application in question.

3. The dispute relating to the 'true' valuation of the interim payment application in Grove was not considered or decided by an adjudicator. Instead, the adjudicator had simply considered the question of whether Grove should pay the amount applied for, given the absence of a payment or pay less notice.  If Grove were to challenge S&T's evaluation in its payment notice, then that dispute would still be capable of being referred to adjudication. To decide otherwise would be an “unwarranted restriction” on Grove's ability to adjudicate any dispute "at any time", and this would be contrary to the right to adjudicate conferred by  section 108(2)(a) of the Construction Act.

4. The JCT contract uses different words in the context of interim payment valuations under clause 4.7.2 (i.e. "the sum due") compared to the words used in clause 4.9 in the context of payment notices or pay less notices (i.e. “the sum stated as due").

The phrase "the sum due" in Clause 4.7 is intended to represent the 'true' valuation of the contractor's “precise entitlement” under the mechanism for calculating interim payments.

“The sum stated as due" in clause 4.9 is not the same thing. It represents the amount which the contractor has stated is due in his payment application and which, in the absence of a payment notice and/or a Pay Less Notice, the employer is then obliged to pay in response to the interim payment application.

The fact that the employer may have missed the deadline for serving its payment or pay less notice and is therefore obliged to pay the “sum stated as due” in the contractor’s application does not mean that "the sum stated as due" has somehow “magically been transformed” into a true or proper valuation under Clause 4.7.

5. Given that a contractor can launch an immediate attack on the "sum stated to be due" in any payment or pay less notice issued by the employer there would need to be clear words in the Construction Act and/or the Scheme and/or the particular contract in question to effectively prohibit the employer from being able to do the same. In Mr Justice Coulson’s view there are no such words anywhere in the Construction Act or the Scheme or the JCT form which envisage such a “one-way street”.

6. Contrary to previous decisions in the technology and construction court (e.g. Kersfield Developments v Bray and Slaughter and Kilker Projects Limited v Purton [2016] EWHC 2616 (TCC) the paying party’s right to refer to adjudication a dispute about the true value of the contractor’s works is the same regardless of whether the dispute relates to works included in an interim application or in a final account.


Does this spell the end for ‘smash and grab’ adjudications?

Is this decision likely to spell the end of ‘smash and grab’ adjudications?  Mr Justice Coulson seems to think so. In paragraph 143 of his judgement he says: “I believe that [my conclusion] will strengthen the system, because it will reduce the number of ‘smash and grab’ claims which, in my view, have brought adjudication into a certain amount of disrepute”.

However, employers should not assume that issuing payment or pay less notices on time is not still very important, if not essential, to protect their interests.

As the judge makes clear in paragraph 137, the amount applied for still has to be paid by the employer pending the outcome of a second adjudication on the proper valuation.

In reality there is a huge difference between the evidential hoops that a contactor has to jump through in order to succeed on a ‘smash and grab’ adjudication compared to the hoops that an employer would have to jump through (and likely expense involved) to establish overpayment on a proper valuation of the works, particularly if the contractor’s application involved claims for prolongation and loss and expense.

Furthermore, if the employer hasn’t got the money to pay the adjudicator’s decision on the ‘smash and grab’, it will need to move very very swiftly to get an adjudication on a proper valuation underway. In the meantime, and only in exceptional circumstances, will the contactor not be entitled to proceed to enforce the earlier decision.

As Winston Churchill famously said after the battle of El Alamein: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.


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