Smash and grab adjudications: the TCC hints at change

A TCC decision last week has questioned whether the existing case-law as to so called "smash and grab" adjudications should be reconsidered in light of Court of Appeal decisions in late 2015 and early 2016. This may encourage parties to revisit the practice of bringing subsequent or parallel adjudications as to the true value an interim payment to overcome “smash and grab” adjudications brought due to the absence of a payment or pay less notice.

“Smash and grab” adjudications explained

The so called “smash and grab” adjudication is one where payment is claimed under a construction contract in the absence of any payment or pay-less notice. In such circumstances, the amount claimed in any application for payment will have become the “notified sum” in accordance with section 111 of the Housing Grants Construction and Regeneration Act 1996 (as amended) (the “Construction Act”). The paying party is obliged to pay that sum regardless of any dispute over the proper valuation of the application.

In response to such adjudications, some paying parties had commenced subsequent or parallel adjudications requesting a determination of the true value of the application in question. If commenced promptly these could effectively “cancel out” any decision in the “smash and grab” adjudication. A number of cases in 2014 and 2015 considered whether such parallel adjudications were permissible:

• In Harding v Paice an Employer failed to serve a payment or pay-less notice in response to a final application for payment from its Contractor following termination for default under the JCT Intermediate form. The Contractor was awarded the full amount of its application in an initial adjudication, but the Employer was held to be able to challenge the proper valuation of the application in a subsequent adjudication despite the absence of notices. This decision was upheld by the Court of Appeal late in 2015. See our Law-Now on the appeal decision here.

• In ISG v Seevic and Galliford Try Building v Estura a different conclusion was reached in relation to the interim payment provisions of the JCT Design and Build 2011 form of contract. Employers who had failed to serve payment or pay-less notices in relation to interim applications for payment, were deemed to have accepted the sums claimed in those applications and could not challenge the true value of the applications through adjudication (although they would be free to argue for a different valuation on subsequent interim applications). See our Law-Nows on these two cases here and here.

In our Law-Now on the Court of Appeal’s decision in Harding v Paice, we noted the apparent tension with the Seevic and Estura decisions. The Court of Appeal noted the “somewhat different line” taken in those cases and expressly left open the question as to whether they were correctly decided. Whilst Seevic and Estura had continued to be followed by the TCC after Harding v Paice (see for example our Law-Now on Kersfield Developments v Bray and Slaughter here), a TCC decision last week has now directly questioned whether Seevic and Estura remain good law.

ICI Ltd v Merit Merrell Technology Limited

ICI and MMR entered into a contract based on the NEC3 terms for the installation of pipework by MMT (among other things) associated with the construction of a new paint manufacturing facility in Northumberland. The parties fell into dispute over various quality issues and the contract was ultimately terminated by MMT for ICI’s repudiation (as found by the court).

Prior to the termination, MMT had issued two payment applications to ICI, numbered 22 and 23. ICI had not issued any payment notice or pay less notice in response to these applications and MMT obtained adjudication decisions requiring payment of the full sums applied for. These decisions were subsequently paid by ICI.

In contesting MMT’s claim for damages for repudiation, ICI argued that it was able to challenge the true value of applications 22 and 23 and to have brought into account any overpayment by it as a result of the adjudication decisions. MMT relied in response on the Seevic and Estura decisions and in particular, Edwards-Stuart J’s finding in Seevic that “in the absence of any notices the amount stated in the contractor's application as the value of the works executed is deemed to be the value of those works so that the employer must pay the sum applied for." Whilst MMT accepted that the value of subsequent interim applications could be contested by ICI, as termination had occurred shortly after application number 23, it argued that ICI was stuck with the deemed valuation of those two applications brought about by its failure to serve payment or pay less notices.

The court rejected this argument, finding by reference to largely standard NEC3 payment terms that ICI had an accrued right to challenge the true valuation of applications numbered 22 and 23 at the date of termination and to seek the recovery of any overpayment. In considering the application of the Seevic decision, the court referred to Harding v Paice as well as one other Court of Appeal decision and noted that:

“the ratio of both those Court of Appeal authorities – though neither expressly finds that ISG v Seevic is wrong, because it was unnecessary for the differently constituted courts to do so – cast some real doubt on whether that case would be decided in the same way now. That must lead to similar doubts as to whether the reasoning in that case concerning rights to recover overpayments is correct …”

Conclusions and implications

This decision appears to reopen the debate over whether “smash and grab” type adjudications, commenced where an employer has failed to serve payment or pay less notices, can be countered by a parallel or subsequent adjudication challenging the true value of the payment in question. Up until now, the ability to bring such challenges had been accepted by the court only in relation to final payments. The present decision suggests that such challenges may also be available for interim payments, subject to the specific terms of any given contract. The tension between the present case and the Seevic and Estura line of cases suggests that further guidance may follow from the TCC and potentially the Court of Appeal in the not too distant future.

References:

Harding (t/a M J Harding Contractors) v Gary George Leslie Paice Kim Springall [2014] EWHC 3824 (TCC)

ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC)

Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC)

Harding (t/a M J Harding Contractors) v Paice & Anor [2015] EWCA Civ 1231

Kersfield Developments (Bridge Road) Ltd v Bray and Slaughter Ltd [2017] EWHC 15 (TCC)