Smash and grab adjudication ‘essentially over’ after TCC judgment

The judge went back to first principles and found six reasons to support his conclusion that developer Grove was entitled to adjudicate the ‘true value’ of the sum due in a second adjudication in relation to the same interim application even if the paying party had  failed to serve a timeous and compliant payment or pay less notice.

In his judgment, Mr Justice Coulson said that there was a “powerful reason” for departing from the reasoning of Mr Justice Edwards-Stuart in the cases of ISg v Seevic (2014) and Galliford Try v Estura (2015). That judge’s finding that failure to serve a payment notice amounted to deemed agreement to the value stated in the application has been the subject of much debate amongst practitioners, especially after the Court of Appeal cast doubt on its validity without rejecting it altogether in Harding v Paice (2015).

Mr Justice Coulson gave contractor S&T leave to appeal on the issue, so it seems likely that the Court of Appeal will settle the question once and for all in the near future.

It is still important for paying parties to serve timeous and compliant payment or pay less notices, as otherwise they will still face the risk of being on the receiving end of an adjudication claiming the full amount of the interim application. In such cases, however, it will be open to the paying party  immediately to commence a second adjudication to ascertain the ‘true’ amount due under the interim application, and paying parties would be well advised to do so.

In the event that the payee wins the first adjudication, the paying party will still have to pay the full amount pending the outcome of the second adjudication. However, if the decision in the second adjudication is obtained before the hearing of enforcement proceedings, the court may well take the decision in the second adjudication into account when dealing with enforcement of the first adjudication.

‘Smash and grab’

The 2009 Construction Act amendments require the payee to serve a payment notice not later than five days after the due date, specifying the sum considered due and the basis of that calculation. Failure to serve a valid payment notice may trigger a default payment notice. If the payer intends to pay less than the ‘notified sum’ set out in the payment notice or default payment notice, a pay less notice must be served in advance of the final date for payment. Again, this must specify the sum considered due and the basis of that calculation.

The term ‘smash and grab’ has increasingly been used by the industry to describe claims for the full amount set out in an application where the payer fails to serve a valid pay less notice in time. The decision in ISg v Seevic, in which Pinsent Masons, the law firm behind Out-Law.com, acted for the successful party, appeared to open the floodgates to their type of adjudication, although the courts have increasingly been making these claims more difficult by requiring parties to meet particularly high thresholds in order to be successful.

Grove employed S&T to design and build a new Premier Inn Hotel at Heathrow Airport under a JCT Design and Build 2011 contract. Disputes arose about S&T’s interim application for payment as well as Grove’s application for liquidated damages. Over the course of three adjudications, the adjudicator decided that Grove had failed to serve a valid pay less notice. This meant that, on the face of it, S&T was entitled to over £14 million under its interim application.

First principles

Mr Justice Coulson found support in what he described as “first principles”, as well as the Court of Appeal authorities, for his conclusion that Grove was entitled to dispute that the sum paid was the ‘true value’ of the works for which S&T had claimed in a second adjudication, despite failing to issue a valid pay less notice in response to its interim application:

• Henry Boot Construction v Alstom Combined Cycles (2005) supports that proposition, and provides an “instructive starting point”. This case is authority that the adjudicator has “the same wide powers as the court” to decide all disputes between the parties, including the power to decide the ‘true value’ of an interim application;
• There is no limit, either in the Construction Act (as amended) or the Construction Industry Scheme, on the nature, scope and extent of the dispute which either side can refer to an adjudicator;
• The dispute which the employer would seek to raise in the second adjudication was a different dispute to that which was determined in the first, on the validity of the pay less notice;
• Specific to this case, the terms of the JCT D&B 2011 contract expressly differentiate between “the sum due” and “the sum stated as due”, leaving open the prospect of a second adjudication;
• Considerations of “equality and fairness”: a contractor is entitled to dispute the “sum stated to be due” in a pay less notice, so there would need to be clear words in the Act, the Scheme or the contract preventing the employer from being able to do the same. Without these, it would be “wrong in principle to prohibit the employer from doing that which the contractor can do”;
• There is no distinction in the Act or the Scheme between interim and final applications for payment, meaning that ISg v Seevic was wrongly decided.

In addition, Mr Justice Coulson said that the suggestion in the ISg and Galliford Try cases that failure to issue a payment or pay less notice should be treated as “deemed agreement” was unjustified.

The underlying philosophy behind the original Housing Grants, Construction and Regeneration Act was and remains one of ensuring that “roughly the right amount of cash is in the right hands for the right amount of time”. This is re-enforced in the Act both by its provisions related to payment, and the right to adjudicate “at any time”. This decision upholds that philosophy.

Since the original Construction Act came into force in 1996, lobbyists have complained that there is no real sanction that could be levied against a paying party for failing to serve a timeous and compliant payment notice. This ultimately led to the 2009 amendments to the payment provisions.

Based on the latest decision, there is a sanction for not serving a timeous and compliant payment notice: the right for the payee to adjudicate on the full amount as set out in the interim application. It is, however, not much of a sanction, as the paying party can now immediately commence a second adjudication to ascertain the ‘true’ amount due.

Michael Hopkins is a construction disputes expert at Pinsent Masons, the law firm behind Out-Law.com.