Adjudication update: smash and grab no more?

The term ‘smash and grab’ has been used over recent years to describe adjudications based on a paying party’s failure to serve the correct payment or pay less notice.

Such adjudication awards, and their subsequent enforcement actions, have received much attention in the construction industry for allowing potential windfall payments to contractors as a result of procedural failures by their employers. This recent decision seeks to readdress the issue.

Background

Until very recently, a party that failed to serve a valid payment notice or a valid pay less notice would:

  • Have to pay the full amount of the application
  • Be deemed to have agreed that sum as the true value of the works at that point.

This position was set out in the cases of ISG v Seevic [2014] and Galliford Try v Estura [2015], which both supported the idea that paying parties could not challenge the true value of the works (in relation to that valuation) in a second adjudication.

Grove Developments decision

However, in his judgment in Grove Developments, handed down on 28 February 2018, Mr Justice Coulson took the opportunity to readdress this issue. Whilst he agreed with previous judgments that, in the absence of a valid payment or pay less notice, the application sum was due and payable; he disagreed that the employer was also deemed to have accepted that sum as the true valuation of the works.

Rather, he found, employers are able to dispute the true valuation of the works contained in any interim application notice by commencing a second adjudication. If a contractor has been overpaid following a ‘smash and grab’ adjudication, this can be addressed almost immediately and without waiting for the next payment cycle or the final account.

Coulson J’s judgment also provided useful guidance on the requirements of a valid pay less notice and, particularly, whether other documents (such as a spreadsheet showing the valuation calculation) can be incorporated into the notice by reference. In a common sense approach to the question, the judgment made clear that documents can be incorporated by reference, so long as the reference is clear and the referenced documents are otherwise available to both parties. Of course, whether or not a document is successfully incorporated by reference may still depend on the precise circumstances. Accordingly, where practicable, the safest approach is still to attach a copy.

The final issue addressed in the judgment was the requirement in the JCT Design & Build 2011 for the employer to serve two notices as a prerequisite to deducting liquidated damages. Grove Developments had, in this case, served two notices but had done so (via email) approximately seven seconds apart. S&T claimed that reasonable time was required between the two notices to allow the contractor to understand the warning before it being confirmed. The judge rejected the argument from S&T on the grounds that the notices had been received in order, regardless of the time between them. Despite this decision, parties are advised to leave sufficient time between notices to avoid arguments about whether notices have been received in the correct order.

Comment

This decision may prevent otherwise opportunistic contractors from commencing adjudications following a procedural failure, where the true valuation of the works is unlikely to be found in their favour. That said, cash flow remains king and, where the procedural failure by the employer is a symptom of generally untimely and unfair payments, the contractor still has adjudication as an option.

Importantly, S&T have been allowed permission to appeal, so we may see the case again. However, in the meantime, this clarificatory judgment will be seen by many as a parting gift from Coulson J to the TCC, before his permanent elevation to the Court of Appeal.

Read other items in the Construction and Engineering Brief - April 2018