The end of "smash and grab" adjudications?

Published 23 August 2018

Executive Summary

In Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC), it was held that the employer was entitled to refer a dispute about the value of the contractor's interim application for payment to adjudication, despite a previous adjudication deciding that a party was entitled to sums in the absence of any payment notices.

Facts

• In 2015, the Employer, Grove Developments Limited ("Grove") entered into an amended JCT D&B 2011 (the "Contract") with the Contractor, S&T (UK) Limited ("S&T") to design and build a new hotel for the contract sum of c. £26 million. There were significant delays and practical completion was achieved on 24 March 2017 (the contractual completion date was 10 October 2016). Since 24 March 2017, there were three adjudications.
• The third adjudication centred around S&T's payment application 22. In response to an interim payment application by S&T, Grove issued a payment notice which contained sufficient information to enable S&T to know the basis of the valuation but it was issued out of time.
• Grove then issued a pay less notice in time but did not re-attach the detail of the calculation. Instead, it sought to expressly incorporate by reference the detail of the sum to be paid as set out in the earlier payment notice. S&T persuaded an adjudicator that this was insufficient to stand as a valid pay less notice.
• As a result of this decision, Grove was required to pay £14 million.
• Grove, however, issued Part 8 proceedings arguing that its payless notice was valid but that, in any event, it was entitled to adjudicate on the "true value" of the payment application.
• Coulson J (as he was then) held that Grove had complied with the requirement to “specify the basis of the calculation”. The pay less notice was in that respect compliant. He then grappled with the more interesting issue of whether, having had a decision from an adjudicator, Grove was nevertheless entitled to commence its own adjudication proceedings in respect of the "true value" of the application.

Decision

Coulson J held that, on first principles, Grove was entitled to raise the dispute regarding the 'true' value of interim application no. 22 in a subsequent adjudication, notwithstanding the well-known decision in ISG v Seevic.

Coulson J came to this conclusion on the basis of six main reasons:

• In line with the case of Henry Boot Construction Limited v Alstom Combined Cycles Limited [2005] 1 WLR 3850, the court (or an adjudicator) has the power to decide the 'true' valuation of interim application no. 22. Henry Boot was authority for the proposition that the court can decide the 'true' value of any certificate, notice, or application and that, as part of that process, it has an inherent power to open up, review and revise any existing certificates, notices or applications.
• The second reason was linked to the first, but centred on the statutory powers of the adjudicator (notably, section 108(1)) of the Construction Act and paragraph 20 of the Scheme, being the right to refer a dispute to adjudication at any time.
• The dispute that Grove would seek to raise in the second adjudication (regarding value) was a different dispute to that which was determined in the first (as to whether a notice was valid). The present case considered Grove's payment/pay less notice, and not the 'true' value (and thus this was a separate issue capable of being referred to adjudication). There could be no restriction on the Employer's right to refer a dispute to adjudication 'at any time'.
• The specific wording in the Contract supported the decision. In particular, the Contract expressly differentiated between 'the sum due' and the 'the sum stated as due'.
• For the reason of equality and fairness, it would be wrong to prohibit Grove from doing what S&T can do, in particular, S&T can, if it disagrees with sums assessed, commence an adjudication; why should Grove not have the same right?
• There was no justification for different treatment between valuation and payment regimes for interim and final payments.

Coulson J also reviewed the Court of Appeal adjudication authorities. He held that:

In the case of ISG v Seevic, the employer had not served a pay less notice and was deemed to not only have agreed with a contractor's applications, but could also not subsequently challenge the amount claimed by the Contractor.

The analysis in ISG v Seevic (see our alert on this here) and Galliford Try v Estura (see our alert about this here) was held to be incomplete. Coulson J reviewed the concept of 'deemed agreement' and stated: 'In my view, the concept of a deemed agreement, which lies at the root of ISG v Seevic and Galliford Try v Estura is not only unjustified, but it is also an unnecessary complication, given the clear distinction in the contract between 'the sum due', on the one hand, and 'the sum stated as due', on the other.'

Comment

This is a landmark judgment and has implications for 'smash and grab' adjudications which have become commonplace following ISG v Seevic and Galliford Try v Estura.

Implications for the 'smash and grab' environment:

Cash-flow

Coulson J reiterated that that this is not an adverse judgment for contractors regarding cash flow as the employer is still obliged to pay the sum in the payment application, but the employer now has, if there is an over-valuation, the opportunity to rectify it. This might be correct, but in theory, the employer could simply refuse to pay the sums applied for and counter the contractor's smash and grab with a second valuation adjudication.

'Smash and grab' environment:

Some believe that 'smash and grab' adjudications will still be prevalent as:

• 'Smash and grab' adjudication can still be used to exploit procedural advantages and deal with parties not paying;
• Contractors will still be able to utilise the adjudicator's decision as a negotiation tool to try and resolve disputes (even if the employer is entitled to a separate adjudication concerning the correct value of an interim payment);
• Adjudicators may, in fact, be more understanding of a contractor's 'smash and grab' claim if they know that the employer will be able to start a separate adjudication on the 'true' value;
• 'Smash and grab' is still useful where the contractor is confident that the 'smash and grab' is the 'true' value;
• 'Smash and grab' is still useful for maintaining cash flow (if the paying party does not opt for a true value adjudication).

This judgment provides welcome re-assurance for employers:

Whilst a failure to issue the correct notice may result in short term financial pain (and employers will be required to pay the sum applied for), the employer retains the option to challenge the payment application via adjudication.

Also, as contractors/sub-contractors tend to be more likely to pursue a 'smash and grab' claim in respect of the final interim payment (at which point the opportunity for the employer to 'undo' the effect of the 'smash and grab' claim, via the final account process, may not arise for a number of months), this judgment will be welcomed by those employers that cannot wait till the next interim payment date, or there is a significant amount of time till the next date.

A number of uncertainties remain

• There remains uncertainty regarding when a party can cross-adjudicate regarding the 'true' value. Coulson J stated that the party can cross-adjudicate once it has paid out the 'smash and grab' adjudication, although, Coulson J also stated that there can be no fettering on the right to adjudicate at any time (Prior to ISG v Seevic, contractors would often initiate a counter adjudication on merits shortly after and the two adjudications would run at the same time). Following this decision, the sum stated as due will need to be paid before another adjudication can be commenced.
• Questions remain as to whether or not a 'smash and grab' adjudication can be immediately countered by a parallel adjudication. The Employer can, provided he acts quickly, commence an adjudication as to the 'true' value shortly after the 'smash and grab' adjudication. Any adjudication decision must be given within 28 days of the Referral Notice, and it takes 28 days for an enforcement hearing to be listed by the TCC. The Employer could thus get an adjudication decision on the 'true' value of an interim payment before an enforcement hearing is held.

A number of questions remain unanswered. Permission to appeal the Decision has been granted.