UK: Smash And Grab Adjudications – Redressing The Balance

Last Updated: 9 August 2018
Article by Gurbinder Grewal, Akin Akinbode, Kirsti Olson and Tracey Summerell

A review of Coulson J's final TCC decision in Grove, another instalment in the 'smash and grab' adjudications saga.

This article was first published in Construction Law on 1 June 2018 (reference (2018) 29 5 Cons.Law 27).

Key Points

  • When drafting a pay less notice, an employer can refer to and rely on calculations set out in other documents. The wording of that reference, and the content referred to, must be crystal clear
  • In the absence of a pay less notice, the contractor is entitled to be paid the sum stated as due in its payment application
  • An employer who disagrees with the contractor's valuation but fails to serve the pay less notice can start a fresh adjudication to determine the true value payable but must first pay the sum stated as due
  • Ideally, employers will want to issue 'true value' adjudications at the same time as contractor smash and grab adjudications so that they can, potentially, set off any 'overvalue' in the contractor's application found by the second adjudicator against the sum found by the first adjudicator to be payable due to the lack of a pay less notice. Coulson J's insistence on the employer paying up before starting a 'true value' adjudication may scupper this approach
  • Contractors may now think twice before starting smash and grab adjudications − especially where the employer has already disputed the figures and a second, expensive, 'true value' adjudication is likely

Construction adjudication was established under the Housing Grants, Construction and Regeneration Act 1996 as amended (the HGCRA 1996) to improve cash flow for those working on projects under construction contracts. The 'pay now, argue later' approach has become the backbone of the adjudication procedure and is rigorously supported by the Technology and Construction Court (TCC).

In recent years, contractors have used a 'smash and grab' adjudication to take advantage of the draconian 2011 changes to the payment terms under the HGCRA 1996. Contractors can start such adjudications when an employer fails to respond in time to a payment application often made at the end of the works but before the final account. Tactically speaking, success in such an adjudication transfers the whole pot of disputed valuation money into the contractor's pocket ahead of the final account process without going through the contractual valuation process. The employer must still pay up even if it has disputed those valuations throughout the project.

In Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC), Coulson J has redressed the balance between contractors and employers and made such adjudications less attractive.

The background

The claimant (Grove) engaged the defendant (S&T) to design and build a hotel at Heathrow Terminal 4 using the JCT Design and Build Contract 2011. The key facts are as follows:

  • S&T's interim application no 22 (IA22) was approximately Ł40 million, Ł14,009,906.58 higher than Grove's previous valuation.
  • In response, Grove served a payment notice, detailed assessment of S&T's valuation and interim certificate 22 on 13 April 2017 certifying as payable Ł1,407,748.
  • On 18 April 2017, Grove served its pay less notice in response to IA22, which referenced and relied on the calculations provided on 13 April.
  • S&T claimed that Grove's pay less notice did not comply with the contract and was invalid because it did not specify the calculations in the notice itself but referred back to Grove's calculations of 13 April 2017.
  • S&T referred this issue to adjudication (the third on this project) and the adjudicator decided that Grove's pay less notice was invalid.
  • In the meantime, Grove had issued proceedings in the TCC for declarations that (1) the pay less notice was valid and (2) (if the pay less notice was invalid) it could immediately go on to adjudicate the true value of IA22.
  • S&T issued TCC adjudication enforcement proceedings, which were heard at the same time as Grove's 'true value' proceedings.

The TCC's reasoning

Coulson J first decided that Grove's reference to calculations in earlier correspondence in its pay less notice was sufficient for the notice to comply with the contract. S&T could understand precisely how Grove's valuation was calculated from the 13 April 2017 calculations and there should be, in principle, no objection to the use of this method, where the reference was to another, clearly-identified, document. Grove's pay less notice was therefore effective, the third adjudicator's decision was not enforceable and it did not have to pay the Ł14 million.

Arguably, therefore, Coulson J did not need to deal with the issue of whether Grove could contest the true value of IA22. However, acknowledging that this issue would interest construction contract parties and to correct previous errant behaviour, he proceeded as if the pay less notice was invalid. He found that an employer can make a true valuation referral even when in default of the notice procedures. He gave six reasons.

First, the court can decide the 'true' value of any certificate, notice or application and, as part of that process, it has an inherent power to open up, review and revise any existing certificates, notices or applications. If the court has the power to do something, then so too does an adjudicator. Where the parties confer power on the adjudicator to decide all their disputes, the adjudicator has the same wide powers as the court.

Secondly, neither the HGCRA 1996 (s 108) nor the Scheme for Construction Contracts (the Scheme) contains any limitation on the nature, scope and extent of the dispute which either side can refer to an adjudicator; nor do they qualify the types of dispute encompassed by s 108. Just as a court can decide any subsequent dispute as to the 'true' valuation of the interim application, so can an adjudicator.

Thirdly, the third adjudicator dealt only with the validity of the pay less notice, not the true value of IA22. The valuation was a different and separate issue and could be referred to another adjudication. To find otherwise would be an unwarranted restriction on Grove's ability to adjudicate at any time.

Fourthly, common law does not recognise a contractor's right to interim payments. Standard form construction contracts therefore commonly make such provision. The contract terms are consequently of the utmost importance. The contract distinguishes between 'the sum due' (the 'true' valuation – 'calculated to the penny' using the contractual mechanisms) and 'the sum stated to be due' by the contractor (which will, for example, become payable without a pay less notice). There is a fundamental difference between the two concepts. Simply because the employer fails to serve a valid pay less notice or is late in serving, it does not mean 'the sum stated as due' ['magically'] transforms into 'the sum due'. The employer, 'having paid 'the sum stated as due', is entitled to commence an adjudication as to the 'true' valuation of the contractor's interim application. To hold otherwise 'would ignore the careful drafting of the contract provisions'.

Fifthly, a contractor can challenge 'the sum stated to be due' in an employer's pay less notice immediately. Neither the HGCRA 1996 nor the Scheme prohibits the employer from doing the same – and it would be wrong in principle, unjustifiable, unfair and unequal to stop an employer from doing what a contractor can do.

Lastly, neither the HGCRA 1996, the Scheme nor the JCT Contract distinguishes between the treatment of interim and final payment applications. The critical distinction established under the JCT contract between 'the sum due' and 'the sum stated as due' also applies on the final account. There is no material difference between the valuation and payment regimes and the corresponding rights and obligations of the parties for interim and final payments.

The contract treats interim and final applications and payments in the same way – and so too should the parties, adjudicators and courts:

'Whether what is in dispute is an interim payment or a final payment, the employer has the right in principle to refer to adjudication the dispute about the "true" valuation.'

The employer must first pay the sums stated as due then start a separate adjudication to ascertain the true value.

Coulson J found support for his conclusions in various Court of Appeal (CA) decisions, including: Rupert Morgan Building Services (LLC) Ltd v Jervis [2003] EWCA Civ 1563, Harding (t/a MJ Harding Contractors) v Paice [2015] EWCA Civ 1231 and Brown v Complete Buildings Solutions Ltd [2016] EWCA Civ 1. He dismissed S&T's argument that 'pay now, argue later' meant 'pay now, argue right at the end'. 'Pay now, argue later' means 'pay now and argue after payment'.

However, when he turned to TCC decisions, Coulson J disagreed with the TCC's reasoning in ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC). In these cases, an employer's failure to serve the pay less notice was taken as deemed agreement of the amount stated as due in the contractor's payment application. Having 'agreed', there was, technically speaking, no dispute on valuation to refer to adjudication and the employer had to pay up and wait until a final determination before challenging the true value payable under the contract.

Loath to find fault with a fellow TCC judge's decisions, Coulson J nevertheless found these two decisions 'erroneous and incomplete' and contrary to the CA authorities: he held they were not to be followed. He found there was no factual basis for the employer's deemed agreement and this concept, which lay at the root of ISG and Galliford, was not only unjustified but 'an unnecessary complication, given the clear contractual distinction between "the sum due", on the one hand, and "the sum stated as due", on the other.' In the present case, it was unrealistic to say that Grove had agreed IA22 when the parties were in obvious disagreement on the value as evidenced by the 13 April spreadsheet.

A welcome decision – but is the future clearer?

Coulson J clearly hoped his judgment would reduce the number of smash and grab adjudications − but his decision does not ban them. Contractors might still be tempted to launch such an adjudication despite knowing they may only have the cash in hand for a matter of months. Grove recognises that the HGCRA 1996 did not intend to give the contractor the right to hang on to sums to which it is not entitled for lengthy periods. Without a right to adjudicate the true value it could be months or years before the employer could recover an overpayment.

Coulson J dismissed S&T's argument that a right for employers to adjudicate the true value if it misses the pay less notice deadline would undermine the statutory adjudication system and lead to more adjudications. The risk of injustice to the employer increases as the final account process approaches. A true value adjudication is an important remedy to recover overpayments.

Employers will welcome the decision as it addresses the inherent unfairness of a sum being paid without an interrogation of its merits. That said, the extra cost of a second adjudication should still be a key consideration. Substantive valuation disputes are expensive, often involve experts and difficult issues relating to the programme and quantum. There is also no guarantee the adjudicator will agree with the employer's valuation.

Grove might still attract further judicial scrutiny on the following issues:

  • Coulson J dismissed concerns about the lack of a contractual repayment mechanism by which a sum could be repaid to the employer if the interim application was too high. The parties gave the adjudicator jurisdiction to decide the overpayment issue. If an overpayment is found, the decision is binding and the relevant party must make payment. Additional repayment terms in the contract to cover that scenario are unnecessary.
  • Coulson J appears to make clear that the employer cannot start a second valuation adjudication until it has paid up on the first decision. This might create a problem for those employers who issue strategic parallel adjudication proceedings shortly after a contractor's 'smash and grab' referral to adjudication (i.e. before they have paid the contractor). The contractor might argue the second adjudicator does not have jurisdiction to deal with the valuation issue until the first has decided whether payment is due and the monies have been paid.
  • It is not clear how a requirement to pay the sum stated as due before a second valuation issue is referred to adjudication, fits with the statutory right to adjudicate 'at any time' (once the dispute has crystallised).

Leave to appeal has been granted and the CA might soon be adding its views to the ongoing smash and grab adjudication saga.

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