The following article is drawn from a book entitled ‘A Practical Guide to Construction Adjudication’, due to be published by Wiley Blackwell in November 2015.
To the extent that an adjudication topic can ever be considered as ‘hot’, then this is one. A ‘smash and grab’ adjudication as it has affectionately become known refers to an adjudication where the underlying dispute prays on the incompetence of payers and contract administrators. At present, the industry is rife with them. A recent quintet of cases has shone a light on the issue of smash and grab adjudications and in particular the ability of the paying party in the first adjudication to commence a second valuation adjudication. The question that has been at the heart of each of these cases is whether a party to a construction contract can challenge a payment notice in circumstances where it hasn’t served the relevant pay less notice when it is said the payment notice is wrong or must the payer pay it forthwith? This article examines the statutory payment regime in so far as it relates to smash and grab adjudication, analyses the six cases that have addressed this issue and offers some practical guidance on what to do.
What is a smash and grab adjudication?
Where the Act applies and a payee makes an application for payment, if the payer wishes to pay less than the amount applied for but does not issue a withholding or pay less noticfe within the time required by the contract, subject to a debate about whether the amount applied for is due, the payee will be entitled to the amount applied for regardless of whether or not the payer considers, legitimately or otherwise, that the amount to be paid should be less. Where, in the absence of a withholding or pay less notice, the payer does not pay the full amount by the final date for payment, the payee may commence an adjudication to recover the sums due. This type of adjudication is sometimes known as a ‘smash and grab’ adjudication, because it is (in theory) a sure-fire way obtaining an award in the payee’s favour and of arises out of a technical argument based on the failure to issue a withholding or pay less notice and not any substantive as to whether the contractor was entitled to the sums applied for. What is more, since the amendments were introduced to the Late Payment of Commercial Debts (Interest) Act 1998 in March 2013, where that act applies, it may be possible for the payee to recover all the costs of the adjudication from the payer.
Historically and notwithstanding the strong legal footing of such a claim, adjudicators have been reticent to grant the referring party what it seeks because the claim does do not get to the heart of the matter. Therefore, adjudicators have often latched on to the smallest crumb of evidence, such as any argument that the withholding or pay less notice was issued, or good reasons why it was not, in order to overturn the referring party’s reliance on the failure to issue a withholding or pay less notice in order to address the substantive dispute. Where such morsels are not available, the most likely outcome has always been that the adjudicator will enforce the failure to issue a withholding notice with an award in payee’s favour .
The payers repost: the valuation adjudication
However, rather than pay the sum determined as due by the adjudicator, it has up until recently, been common practice for the responding party in the first adjudication to commence a second adjudication, either before or soon after the first adjudicator’s decision, which seeks a determination of the value of the work carried out that was the subject of the application in the first adjudication. If the adjudicator in the second adjudication decided that the value of the works done was less than the amount applied for, then the referring party in the second adjudication (the responding party and payer in the first adjudication), would then set-off one adjudicator’s decision from the other with the effect that the amount it ultimately paid was the true value of the works and not the sum applied for. Whilst this might seem an overall fair result, it may be seen as effectively neutering one of the central functions of the Act, which is to ensure that the payer pays the amount applied for forthwith in circumstances where a valid withholding or pay less notice is not in place. The neutering effect of the valuation adjudication was the reason the editors of the Building Law Reports in the case of Urang Commercial Ltd v Century Investments Ltd  used to suggest that enforcement cases essentially arising from the failure to issue a withholding or pay less notice are rare.
Pausing here, whilst it is overwhelmingly the common practice for the payee to commence an adjudication recover in order to recover sums due to it in this context, provided that the contract provides for litigation and not arbitration as the forum for finally determining disputes, there is no reason why the payee cannot skip adjudication, initiate court proceedings and at the same time make an application for summary judgment. The possible benefit of this approach is that unless the payer is very quick off the mark with its counter adjudication, summary judgment (and therefore an order for payment) will be given before the second adjudication has concluded. In certain circumstances this may be beneficial.
Relevant aspects of the statutory payment regime
A recent quintet of cases has shone a light on the issue of smash and grab adjudications and in particular the ability of the paying party in the first adjudication to commence a second valuation adjudication. The question that has been at the heart of each of these cases is whether a party to a construction contract can challenge a payment notice in circumstances where it hasn’t served the relevant pay less notice when it is said the payment notice is wrong or must the payer pay it forthwith?f
Before considering these cases and although it is not within the scope of this book to address the statutory payment regime in detail, it is helpful to refer to certain aspects of the payment regime.
- The payment regime under the 1996 Act and the 2009 Act are fundamentally different. Under the 1996 Act, section 110 permitted parties to a construction contract to agree whatever mechanism they deemed appropriate in order to calculate the amount due. However, pursuant to the 2009 Act, section 110A provides that the payer, payee or specified person issue a payment notice in acccordnce with the provisions of that section. Parties are no longer free, as they once were, to agree the mechanism to calculate the amount due, because the amount due is the amount in the payment notice. The payment notice should equate to the sum that is properly due, but in fact it is the author’s assessment of what sum is due, which may be different from the amount properly due for a variety of reasons, because the author considers that the payee is entitled to payment that it is not in fact entitled to, because there has been a mistake or a divergence of views.
- It follows that because the payment mechanism under the 1996 Act and the 2009 Act are different, decisions of the court decided under the 1996 Act in relation to this issue are of limited assistance.
- It is trite that the 1996 Act sets out what the parties must do with regard to payment. To the extent that the contract provides for a mechanism that is different to the legislation, the contractual provisions are invalid.
- Section 111 of the 1996 and 2009 Act does not differentiate between the type of payment to which they apply. Thus, it applies to a single lump sum payment, payments in instalments (interim payments or interim payments on account), final payment or payments upon termination.
- Section 111(1) of the 2009 Act, which deals with the requirement to pay the notified sum, provides:
Subject as follows, where a payment is provided for by a construction contract, the payer must pay the notified sum (to the extent not already paid) on or before the final date for payment.
This provision does not expressly address the question of whether a party to a construction contract must pay the notified sum where it considers that it is wrong. Either it may be taken to mean that the payer must pay the notified sum but it is free to start its own proceedings to challenge it if they wish or it may mean that the obligation to pay the notified sum means what it says and that this can’t be diluted by the payer seeking to achieve some different outcome before paying the sum.
Case analysis: Morphuse, Harding, ISG, Galliford and Caledonian
With that background in mind, it is now appropriate to turn to the quintet of cases.
The first case is Morphuse Framing Solutions v Bracknell Property Ltd . Morphuse obtained an adjudicator’s decision that Bracknell should pay the full amount applied for in an interim application because Bracknell did not issue a pay less notice. Two weeks after the decision, Bracknell commenced a second adjudication seeking a declaration as to the value of the works as at the date the contract had been terminated. The adjudicator determined that a lesser sum was due and Bracknell paid that sum. The court determined that both adjudicators’ decisions were valid and enforced them both. Bracknell was only liable to pay the interest on the money due under the first adjudication up until the payment of the money due under the second adjudication. Importantly, the judge said that it was not against public policy to start a second adjudication before enforcement proceedings had been concluded in the first. That action, the judge said, was consistent with the right to adjudicate ‘at any time’. The judge appeared to legitimise both adjudications, in part, because he said the subject matter of the adjudications was distinct: the first related to an interim application and the second related to a post-termination final account valuation. They were, judge said, different to the ‘smash and grab’ and valuation adjudication process described at the start of this chapter.
The second, third and fourth cases were all decided by Edwards-Stuart J within four months of each other, they were all employer/contractor disputes and the contracts were all based on the JCT form. In Harding t/a MJ Harding Contractors v Paice and Springall , the contractor terminated the contract (a JCT IFC 0211 form) and then issued a post termination final account valuation as required by the contract. It is relevant that the contract between the parties in this case provided that the employer was to pay the ‘amount properly due in respect of the account’. This wording, it is submitted, is contrary to the requirement of the 2009 Act, which requires the payer to pay the amount in the payment notice. There is no question that the payer should only pay the amount ‘properly due’.
In any event, the employer (Paice and Springall) failed to issue a pay less notice, Harding commenced an adjudication for the full amount applied and was awarded the full amount. The employer then commenced a second adjudication seeking a valuation of the works that were the subject of the valuation. Harding made an application to the court for an injunction on the basis that the second adjudicator had no jurisdiction because unless a valid pay less notice had been served, then the amount applied for was due and could not ever be undone. Harding also argued that as a matter of fact the scope of the first adjudication included an assessment of the merits of the application, but the adjudicator decided that he did not need to address that point because of the failure to issue a pay less notice.
The court disagreed, holding that the adjudicator’s decision that the amount applied for was to be paid did not mean that the paying party was precluded for all time from commencing further proceedings to determine the value of the works. It also confirmed that where the adjudicator does not make a decision on an issue or issues, in this case the true value of the amount applied for, it is open for either party to raise those issues in a second adjudication. It seems to have been a relevant consideration to the court that application in question related to the final account, not an interim application although it is questionable whether this distinction between types of payment is important for the reasons adumbrated earlier.
The second case is that of ISG Construction Ltd v Seevic College. There, under a JCT 2011 design and build form, the contractor issued an interim application for payment (albeit after practical completion), the employer did not issue a pay less notice nor did it pay and so the contractor commenced a ‘smash and grab’ adjudication. The contractor obtained an award in its favour for £1.1 million based on the employer’s failure to issue a pay less notice. Before the conclusion of the first adjudication, the employer commenced a second adjudication and asked the adjudicator to value the contractor's works in respect of the same amount applied for in the first application. The second adjudicator valued the works at £315,000 and awarded a repayment of around £700,000 to the employer. In the event, the employer had not paid the £1.1 million and so there was nothing to repay. As a result, the contractor commenced proceedings to enforce the adjudicator’s first decision and a declaration that the second adjudication was invalid because the second adjudicator lacked jurisdiction. The court enforced the first adjudicator’s decision and declined to enforce the second adjudication for the following reasons.
- The contract provides no mechanism for repayment of sums from the contractor to the employer. The only mechanisms for payment under the contract were through interim applications or the Final Statement.
- The employer is not entitled to demand a valuation of the contractor’s work on any other date than the valuation dates for interim applications.
- If the employer fails to serve any notices in time it must be taken to be agreeing the value stated in the application, right or wrong.
- If an employer that failed to serve a payment or pay less notice against an interim application could then refer to adjudication the value of that interim application (which may require a payment to the contractor or a repayment by the contractor), that would ‘completely undermine’ the statutory payment regime.
- The second adjudicator was asked to decide the same dispute as the first, which meant he lacked jurisdiction.
Therefore, in contrast to Harding, in ISG the judge prohibited the subsequent valuation adjudication. Four observations may be made:
- The mechanism for payment in the contract in Harding is different and, it is submitted, defective. The mechanism in ISG appears compliant with the 2009 Act.
- The application in ISG was interim and not final. Whilst again this seems to have been relevant to the court, it is submitted that this distinction is not relevant.
- The relief sought in the second adjudication was repayment which was clearly prohibited (at that stage) under the contract.
- In part, the court found support for its conclusion in the case of Watkin Jones & Son Ltd v Lidl UK GmbH (No 2), although for the reasons explained, it is thought that the decisions of the court on the 1996 Act are of limited, if any applicability.
Perhaps the most surprising and draconian of those observations is that interim applications that had not been the subject of a valid pay less notice cannot in themselves be challenged. In effect, the value of the application is unimpeachable.
The decision was supported (albeit by the same judge) in the next case on this issue, Galliford Try Building v Estura Ltd. In this case, the contractor issued an interim application, the employer’s agent neglected to serve a pay less notice in time and the contractor commenced an adjudication for the value of the application. Estura commenced a second adjudication seeking a declaration as to the valuation of the amount in the interim application, which it considered to be some £4 million less. The second adjudicator resigned on the basis that, in line with the ISG decision (which had been issued six days after the commencement of the second adjudication), it was not open to him to value the amount in the interim application. Galliford commenced enforcement proceedings and the court enforced the adjudicator’s decision, declining to entertain any of Estura’s jurisdictional objections.
In giving its judgment, the court held that where there is a dispute, as in this case, as to the correct amount owing in an alleged ambiguous interim application, it was open to the paying party to challenge the adjudicator’s decision on that issue in a final determination. Thus, the court said that if the paying party commenced Part 8 proceedings, then it may well be the case that the court arrives at a different decision to the adudicator at the same time, or soon after the adjudication enforcement proceedings. To be clear, the court did not say that Part 8 can be used to determine the true value of the sum applied for in an interim application where no pay less notice has been issued. The court’s view, as in ISG, is that an unchallenged interim payment application is permanent. Furthermore, if one accepts that all types of payment are the same under the Act, it may be said that this case and ISG is support for the view that any unchallenged payment becomes permanent.
Whilst it may be possible to correct overpayments in subsequent interim applications or a final account, if the overpayment falls towards the end of the project, such as in a final payment application, and the overpayment is not capable of being recouped in later applications, this could cause real difficulties. Indeed, it is understood that the recent practice of payees is that post practical completion, they submit an application for payment, then keep updating the application with a minor change and resubmitting it in the hope that on one cycle the payer will miss the pay less notice. This is exactly what happened the most recent case on this issue, Caledonian Modular Ltd v Mar City Developments Ltd, where the contractor submitted application number 15 on 30 January 2015 and subsequently submitted an updated application which the contractor sought to argue was a new application. Although a pay less notice was issued against the 30 January 2015 application, one was not issued against the later submission. The contractor commenced a smash and grab adjudication, the adjudicator awarded the contractor over £1.5 million, the employer failed to pay and so the contractor sought to enforce. The court rejected the validity of the later application for various reasons, but in relation to the tactic deployed by the contractor, Coulson J said this:
I consider that the suggestion that the documents of 13 February give rise to an undisputed entitlement to over £1.5 million defies common sense, and would be contrary to the purpose of the notice provisions in the 1996 Act. It is simply not permissible for a contractor to make a claim for £1.5 million (interim application 15 on 30 January); to have it knocked back through the payless notice mechanism; to update that same claim 8 days later by adding one small variation worth £6,000; and then, by reason of that update alone, miraculously to become entitled to the £1.5 million, despite the fact that the claim for the vast bulk of that sum had already been the subject of the valid payless notice.
Such a sequence would make a mockery of the notice provisions under the Act and the Scheme. It would encourage a contractor to make fresh claims every few days in the hope that, at some stage, the employer or his agent will take his eye off the ball and fail to serve a valid payless notice, thus entitling the contractor to a wholly undeserved windfall. The whole purpose of the Act and the Scheme is to create an atmosphere in which the parties to a construction contract are not always at loggerheads. I consider that the claimant's approach would achieve the opposite result.
How to recoup overpayments
Returning to Galliford, whilst an unchallenged interim application may be unimpeachable, the court held that an overpayment could be corrected in the final account. However, the court recognized that the final account may be some time away. Alternatively, an overpayment may also, in effect, be corrected in subsequent interim applications. Most standard form construction contracts provide that the assessment of the amount due at each interim application is calculated on a cumulative basis so that the whole account is revalued at each assessment. Therefore, if an overpayment is made to a contractor pursuant to interim application no.1 (because, for instance, the payer failed to issue a withholding or pay less notice setting out the lower amount it calculated was due and was therefore forced to pay the full amount), the employer can in effect recoup that overpayment through its assessment of interim application no.2 by reducing the amount that would otherwise be due to the contractor for the work done pursuant to interim application no.2 to take account of the overpayment made on interim application no.1. However, it is suggested that there are at least two problems:
- The JCT does not expressly permit negative declarations. Therefore, if there is an overpayment of £4 million, the next interim application is only £1 million, it may be argued that the most the payer can do is value the application at £0 and not -£3 million. Even if a negative declaration is possible, the contract does not permit repayment of that amount until the final account stage.
- Given the repayment prohibition, the payer may not recoup the overpayment until interim application no.3 or no.4 if the value of the work done in interim application no.2 is less than the overpayment in interim application no.1. This may be a particular problem (as in this case) where the overpayment occurs at the end of the project where most, if not all the work has been done.
The limitations expressed on the ability to recoup overpayments appear to be driven by the wording of the particular contract in question, as opposed to any mandatory requirements of the Act. Therefore, employers would be well advised to ensure that their contracts provide that if there is an overpayment in an interim application, this can be corrected in a subsequent application by the issue of a negative declaration and repayment at that stage.
In addition to contractual wording that permits the payer to recoup overpayments, what other options might there be available that may lead to avoiding paying or at least recovering the money quickly?
- If the contract contains provisions that permit an adjudicator, arbitrator or the court to open up, review or revise certificates, it may be argued this provides a contractual basis upon which the overpayment may be correct. However, if it is accepted that the permanent effect of an unchallenged application is imported into the contract by virtue of the Act, it is doubtful this argument could succeed. Indeed, adjudication procedure in ISG and Galliford was the Scheme, which contains such a provision at paragraph 20(a) and yet it does not appear that the employer relied on this in argument.
- It may be possible to succeed on a claim for restitution to recover the money, although in circumstances where there is express wording that prohibits repayment, it is thought this claim is unlikely to succeed.
- Where the amount applied for is incorrect in that it arises from a clerical error, it may be possible to rely on section 110A of the 2009 Act to assert that the application is invalid. Section 110A provides that the payee, payer, or specified person’s notice is the sum that the relevant entity ‘considers to be or to have been due’. The argument may be made that a notice containing a sum that is arrived at in error is not considered due.
- Another argument might be that the notice (either the application notice or certificate) is in some way defective such that the failure to serve a pay less notice is immaterial. For instance, the contents of the notice may not comply with the requirements of the contract, the notice may have been issued early or late, it may have been submitted fraudulently, or the person who issued or authorised the notice does not have the authority to do so.
- In the event the payee commences court proceedings and obtains summary judgment in its favour, it may now be possible to argue a stay of execution. A stay of execution suspends the consequences of all or part of the adjudicator’s decision. In what must have seemed like a clutching at straws, the final argument presented by Estura was that the court should stay the execution of the adjudicator’s decision. A stay is generally only available where the payee is near insolvent or in financial difficulty. However, in this case, the court granted a stay of £2.5 million on grounds that there was a risk of manifest injustice.