Since 2011, when the amendments to the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) introduced the requirement for paying parties to give payment or pay less notices and set out the consequences of the failure to do so, what have become known as “smash and grab” adjudications – where in the absence of the required notices the party applying for payment recovers the full amount applied for – have become common in the construction industry.
The consequences of “smash and grab” adjudications became more severe following the judgment of Edwards-Stuart J in ISG v Seevic in 2014, where he said that a failure to give a payment or pay less notice was deemed acceptance by the paying party of the value of an interim application and that a second adjudication on the “true value” of the interim application was not permitted.
Earlier this week Coulson J handed down judgment in Grove Developments Limited v S&T (UK) Limited, in which he has provided an important clarification in relation to this issue that I believe the construction industry will welcome; contrary to the judgments in and following ISG, Coulson J held that it is possible for a paying party to adjudicate on the “true value” of an interim application in circumstances where no payment or pay less notices were given and there has been a successful “smash and grab” adjudication.
Coulson J has set out, in a detailed judgment that reviews the ISG line of authorities, why they were in his view incorrectly decided and has given six reasons why the employer (or contractor in a contractor/ subcontractor situation) may adjudicate the “true value” in a second adjudication:
- By reference to the Court of Appeal judgment in Henry Boot Construction v Alstom Combined Cycles (2005) Coulson J said that the court can decide the true value of any certificate, notice or application and, as part of that process, has the power to open up, review and revise any existing certificate, notice or application. Coulson J confirmed that an adjudicator has the same wide powers as the court.
- There is no limit on the jurisdiction of an adjudicator which would prevent him or her from exercising the above powers.
- On the basis that the first adjudicator has been asked to decide whether the payment or pay less notice is valid, the issue to be referred in a second adjudication about the “true value” of the interim application would be a different dispute.
- The JCT contract uses two different forms of words: “the sum due” in the context of determining the actual (“true”) value, and “the sum stated to be due” in the context of what is included in the required notices. Having paid “the sum stated to be due”, the employer can adjudicate on the true value, i.e. “the sum due”.
- As a contractor can launch an adjudication in relation to the sum stated to be due at any time, it would be wrong in principle to treat the employer differently.
- There is no contractual basis for treating interim and final account payments differently. As the contract treats them in the same way, so should the adjudicator and the courts.
Although it remains important for paying parties to comply with the payment and pay less notice requirements of their contract (or the Act), as doing so removes the payee’s ability to “smash and grab”, it now seems that the significant benefit to the payee of knowing that the true value of the interim application could not subsequently be challenged by the paying party and determined by an adjudicator – and the resultant cash flow windfall – has been removed. This may reduce the attraction of commencing “smash and grab” adjudications, as paying parties will now be able to commence their own separate adjudication in relation to the “true value” of the same interim application.
A development in the ISG line of authorities was flagged by Andrew Davies in August 2017 when commenting on ICI v Merit Merrell Technology where he asked whether the end was nigh for smash and grab. However, I still do not believe – despite the express reversal by Coulson J of the ISG line of authorities – that this is the end of “smash and grab” adjudications.
"Earlier this week Coulson J handed down judgment in Grove Developments Limited v S&T (UK) Limited, in which he has provided an important clarification in relation to this issue that I believe the construction industry will welcome…"
Where notices are not served in accordance with construction contracts, there will be those who will wish to adjudicate to obtain payment of the amount applied for and to hold on to that cash until any underlying issues concerning the “true value” are resolved. The resolution of the underlying issues may not necessarily happen immediately, as paying parties may wish to take time to craft their arguments for the “true value” adjudication. Cash flow will continue to be king, particularly in the uncertain industry conditions which prevail following the insolvency of Carillion. We will, I think, therefore continue to see “smash and grab” adjudications, but possibly fewer in number following Coulson J’s clarification of what happens next.
Coulson J also set out important guidance regarding two other issues:
First, in relation to the requirements for the content of pay less notices, Coulson J confirmed that documents forming part of such notices may be incorporated by reference. It was confirmed that Grove’s pay less notice was valid despite only referring to and not setting out or attaching the document that set out the basis on which the sum stated to be due had been calculated. Coulson J held that it was acceptable to refer to a copy of a valuation previously appended to a payment notice as, approached objectively and construed in accordance with the underlying contract, it would have been understood by a reasonable recipient to have included the valuation as it was clearly referred to. Coulson J made it clear that the court would be unimpressed by reliance on arguments that seek to condemn notices on “artificial or contrived” bases.
Secondly, Coulson J clarified a separate issue in relation to the operation of the notice regime under the JCT forms of contract to allow an employer to claim or deduct liquidated damages for delay. The three steps required under the contract are: the issue of a non-completion certificate; the notice advising that the employer may require payment of, or may withhold or deduct, liquidated damages; and the notice advising that the employer required the contractor to pay, or that the employer intends to withhold or deduct, liquidated damages. Coulson J confirmed the important point that the two notices required must be received in the correct order. The period of time between the notices is not a relevant factor. Grove sent the notices in very quick succession, but in the correct order, and so complied with the contract.