'Smash and grab' adjudications can still hurt a paying party if key payment procedures are not followed, despite the recent decision in Grove Developments Limited v S&T (UK) Limited.
Purchasers of works and services in the construction industry may have taken comfort from the recent decision of Mr Justice Coulson in Grove Developments Limited v S&T (UK) Limited ('Grove'). However, 'smash and grab' adjudications are still alive and can still kick a paying party where it hurts if key payment procedures are not followed.
What is a ‘smash and grab’ adjudication?
A 'smash and grab' adjudication is where a contractor claims the sum due stated in its interim application on the basis that no valid payment notice or pay less notice has been issued by the paying party. If the contractor successfully proves that the paying party failed to issue a valid notice the contractor will be awarded the sum claimed in its application. The 'true value' of the works at the time the application is submitted is not relevant in a ‘smash and grab’ adjudication. If the paying party does not pay up, the contractor can force payment through a swift and straight forward court process.
Why are ‘smash and grab’ adjudications a risk for the paying party?
A ‘smash and grab’ adjudication can result in a paying party having to pay a substantial sum to the contractor that does not reflect the sum the contractor is entitled to under the contract i.e. the ‘true value’ at the time of the assessment. This can put a contractor firmly on the front foot when it comes to final account negotiations particularly if the ‘smash and grab’ adjudication is launched (as they typically are) towards the end of a project at a time when the paying party cannot clawback any (or a material part) of the overpayment through subsequent interim assessments.
Why is the decision in Grove significant?
Before Grove, the relevant case law suggested that a paying party could not launch a second adjudication on the 'true value' of the works at the time of the assessment. The courts had taken the view that in the absence of a valid payment notice or pay less notice the paying party should be regarded as having accepted the valuation put forward by the contractor. This left the paying party having to clawback any overpayment through subsequent interim applications (if the work yet to be done was of sufficient value) or, if not, through the final account process, which under a Joint Contracts Tribunal (JCT) contract is not concluded until after the defects rectification period. As the contractor would usually dispute the final account, the paying party would be forced to refer the dispute to dispute resolution (typically adjudication) in order to recover any overpayment.
Grove decided that a second adjudication on ‘true value’ was permissible as it was a different dispute to the one decided in the ‘smash and grab’ adjudication. A ‘smash and grab’ adjudication is solely focused on the validity of the disputed payment notice or pay less notice while the second adjudication is focused on the ‘true value’ of the works at the time of the assessment.
Why are there still risks for the paying party after Grove?
It is clear from Grove that ‘smash and grab’ adjudications are still permissible and the paying party will be obliged to pay any sum awarded to the contractor in accordance with the adjudicator’s decision. ‘Smash and grab’ adjudications are therefore still a potentially potent strategic option for a contractor.
The second adjudication on ‘true value' could be very complex and may take some time and significant cost to commence. If the disputed sum is large enough it will likely require programming and quantum experts as well as legal advisors to manage. The paying party will have to pay all those costs regardless of whether it wins or loses the adjudication.
It is also unclear when the paying party is entitled to launch the second adjudication. On one analysis, Grove suggests that the paying party may have to wait until the 'smash and grab' adjudication has been concluded. However, as a party to a construction contract has a statutory right under the ‘Construction Act’ to refer a dispute to adjudication at any time, it is arguable that the second adjudication on ‘true value’ could be started as soon as the paying party is in a position to do so. This is particularly true as the dispute on ‘true value’ could crystallise before or at the same time as the technical dispute (i.e. the validity of the payment notice or pay less notice) to be determined in the 'smash and grab' adjudication.
However, even if it is permissible to launch the second adjudication before a decision is reached in the ‘smash and grab’ adjudication, it seems clear that the courts will not stay enforcement of any sum awarded in the ‘smash and grab’ adjudication pending the decision in the second adjudication.
Key points to take away
The clarification of the law in Grove is clearly helpful to paying parties. Grove allows the paying party to refer to adjudication the ‘true value’ of the works in relation to any assessment instead of potentially having to wait until the final account process to escalate the matter.
However, the paying party will still have to pay out any sum awarded in a ‘smash and grab’ adjudication in accordance with the adjudicator’s decision. The paying party will not be allowed to wait until the outcome of the second adjudication.
A paying party may have to wait until the decision in the ‘smash and grab’ adjudication has been made, and any sum awarded has been paid, before launching a second adjudication on ‘true value’. With complex projects though, there may be practical difficulties in launching the second adjudication before then in any event.
The key message to paying parties therefore remains unchanged: avoid the need to defend a ‘smash and grab’ adjudication, and potentially launch a second adjudication on ‘true value’ by strictly adhering to the payment procedures in your contracts. Doing so will maintain the paying party’s tactical advantage over the contractor who will be forced to prove its entitlement by engaging on the substantive issues through negotiation or formal dispute resolution.