Are there any defences to a 'Smash and Grab' adjudication?

Since our last Adjudication Matters update in May this year (read Part 1 and Part 2here), the Courts have been considering the payment mechanism under the Construction Act 1996 and in particular whether there can be any defence to a'smash and grab' adjudication to claim payment of the notified sum.

To recap, following the 2011 amendments to the Construction Act 1996, if a paying party fails to serve a Payment Notice, or a Pay Less Notice, within the time limits stated in the contract, the amount claimed in the Application for Payment will automatically become the notified sum. The paying party has an obligation to pay the notified sum irrespective of the merits of the Application for Payment.

In 3 recent cases, the paying party tried to escape paying the notified sum by arguing that the Applications for Payment were not valid.

Two of the below arguments were successful, one wasn't. Can you guess which? You might be surprised...

"Your Application is too early"

In the recent case of Leeds City Council v Waco UK Ltd [2015] EWHC 1400 (TCC),the Technology and Construction Court (TCC) has held that an Application for Payment was not valid because it was submitted earlier than the date stated in the contract between the parties and the parties had not agreed an alternative date.

Waco UK Ltd (Waco) made its Application for Payment no.21 (Application 21) on 22 September 2014, 6 days before the date stated in the contract between the parties of 28 September 2014.

Leeds City Council (LCC) did not issue a Payment Certificate or a Pay Less Notice.

Waco commenced adjudication for the amount applied for in Application 21 on the basis that this was the notified sum. The adjudicator found in Waco's favour and ordered that LCC pay £484,759.50 plus VAT. LCC did not pay and Waco applied to the Court for summary judgment to enforce the adjudicator's decision.

Summary judgment was not given. LCC was given leave to defend the application provided that they made payment of the sum awarded by the adjudicator to Waco by 7 April 2015. LCC made payment then applied to the Court for a declaration that Application 21 was not valid because it was served too early.

The parties' conduct during Applications 1 to 20

The contract stated that after Practical Completion, Applications for Interim Payment would be made at intervals of 2 months, unless otherwise agreed.

The TCC found that the phrase "unless otherwise agreed" gave the Employer's Agent authority to agree different dates for interim payments other than those stated in the contract. If the Employer's Agent had acted in a way which led Waco to believe that Applications for Interim Payment would be accepted even if not made on the contractual valuation date, but on some other date then LCC could not resile from that understanding. There had to be some form of reliance by Waco on LCC's/the Employer's Agent's conduct. In order to decide this point, the Court considered the conduct of the parties in the previous interim applications.

Waco's previous Applications were almost always a few days later than the date provided for in the contract. These late applications were accepted by the Employer's Agent. The Employer's Agent expressly agreed with Waco that the December interim Application could be served early due to the contractual date falling within the festive season. The only other early Application was made in July 2014. This was paid by LCC.

The Court found that the acceptance of the early interim Application in July 2014, without this being previously agreed between the parties, did not amount to a representation that LCC would accept early interim Applications in the future. LCC had done nothing to make Waco think that the September 2014 Application would be accepted early. The Court said the Employer needs to have some idea of when an interim application is likely to be received so that he can ensure that he has the resources available in order to respond to it within the limited time that the contract allows – in particular, to consider and prepare any Payment Notice. The Contractor cannot simply make an Application whenever it wants.

As such, Application 21 was invalid and Waco was ordered to pay back the sums paid by LCC.

Contractors should ensure that their Applications for Interim Payment are made on the dates set out in the contract, or that variations to these dates are expressly agreed in writing with the Employer's Agent.

In order to avoid making a representation that Applications will be accepted outside of the agreed dates, Employer's Agents should record all agreed variations in writing and expressly state that this variation is a 'one off' and will not apply to future Applications.

"You never told me that this was an Application"

In Caledonian Modular Limited v Mar City Developments [2015] EWHC 1855 (TCC)the Technology and Construction Court (TCC) agreed with the paying party's argument that documents served by the claiming party did not amount to a valid Application for Payment because they did not state on the face of them that they were intended to be an Application for Payment.

The Facts

Mar City Developments Ltd (MCD) engaged Caledonian Modular Ltd (CM) to carry out construction works at a site at Greenpoint, North London.

CM brought adjudication proceedings on two occasions claiming payment for work it had done. On both occasions, the adjudicator ruled in CM's favour. MCD did not dispute the findings of the first adjudication, but objected to the second adjudicator's decision on the basis that the documents served by CM on 13 February were not a valid Application for Interim Payment.

MCD contended that it had never understood that the documents dated 13 February were intended to be an Application for Interim Payment and that the relevant Application was actually received by them on 19 March.

MCD then issued a Pay Less Notice, dated 26 March, which was validly served and was not time barred. MCD agued that if they had known that the documents dated 13 February were an Application for Interim Payment, they would have issued a Pay Less Notice accordingly.

Were the documents dated 13 February a valid Application for Interim Payment?

The TCC held that the documents dated 13 February were not valid as CM had not made it clear that the documents were intended to be an Application for Interim Payment. Moreover, when MCD asked CM for clarification as to the meaning of the documents, CM failed to adequately disclose their intent.

Was CM entitled to make an application on 13 February?

The Court suggested that CM was not entitled to make an Application for Interim Payment in February, given that the alleged Application was made only 8 days after CM received a validly served Pay Less Notice relating to a previous Application. Contractors cannot simply issue new claims over a short period of time in the hope that the Employer will 'take his eye off the ball and fail to serve a valid Pay Less Notice'. Such actions are contrary to the purpose of the Construction Act 1996 and the Scheme for Construction Contracts 1998. The Court found that the parties should have followed the 28-day payment cycle which they had previously agreed upon.

Comment

If a Contractor wishes to make an Application for Interim Payment then they must clearly state this intention in the documentation sent to the other side.

The case is a warning against abuse of the adjudication process. It encourages all parties to abide by agreed timescales and not to pursue payment through inundating the other side with claims over a short period of time.

"You should have discussed this with me first"

In City Basements Ltd v Nordic Construction UK Ltd [2014] EWHC 4817 (TCC) the Technology and Construction Court (TCC) held that the failure to serve a Payment Notice or a Pay Less Notice was sufficient to crystallise the dispute, and no further discussions between the parties were necessary before the dispute could be referred to Adjudication.

City Basements Limited (City) made its Application for Interim Payment No.8 (Application 8) on 3 December 2013. Nordic Construction UK Ltd (Nordic) failed to serve a Payment Notice or a Pay Less Notice.

City commenced adjudication on 15 January 2014. The adjudicator found in City's favour and ordered that Nordic pay to City the full amount stated in Application 8. Nordic did not pay and City commenced court proceedings to enforce the adjudicator's decision.

It is an established principle of adjudication enforcement that the courts will refuse to enforce an adjudicator's decision that is based on an adjudication notice issued before the dispute referred to adjudication has crystallised.

The contract between the parties stated that "with a view to avoidance or early resolution of disputes... each Party shall promptly notify the other of any matter that appears likely to give rise to a dispute or difference....the senior executives.... shall make [sic] as soon as practicable for direct, good faith negotiations to resolve the matter"

Nordic argued that this provision meant there should be some form of discussion between the parties before adjudication could be commenced and that as no such discussion had taken place, no dispute had crystallised between the parties and the adjudicator did not have jurisdiction to determine the dispute.

City said that Nordic had not raised this argument during the adjudication and this went beyond the scope of the general reservation with regards to the adjudicator's jurisdiction that Nordic had included in its Adjudication Response.

The Court dismissed City's argument and said that a general reservation is sufficient to reserve all future arguments of jurisdiction.

However, the Court did not accept Nordic's argument either. It found that the Construction Act 1996 gives a party a right to refer to adjudication at any time and there is no requirement to go through dispute avoidance or seek early resolution of disputes in order to get to adjudication.

The Court upheld the adjudicator's decision and granted summary judgment in City's favour.

This case confirms that the safest course of action for a paying party remains to serve a Payment or a Pay Less Notice. If not, an adjudication decision ordering you to make payment of the full amount applied for might be unavoidable.