Court of Appeal confirms demise of “smash and grab” adjudication

A Court of Appeal decision yesterday has upheld a TCC decision earlier this year which opened the door for so called “true value” adjudications to counter the effect of “smash and grab” decisions based on the absence of payment or pay less notices. The decision authoritatively resolves this long running issue on which there are conflicting first instance TCC decisions. The Court of Appeal has also clarified the timing of when “true value” adjudications are able to brought, favouring an approach first requiring payment of any “smash and grab” decisions.

“Smash and grab” and “true value” adjudications explained

A “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. From 2014 onwards a number of TCC decisions had considered the effectiveness of these “true value” adjudications. Some decisions held that they were permissible for final payments but not for interim payments. Others held that they were permissible for both final and interim payments, including the first instance decision by the TCC in the present case.

For a more detailed summary of these cases, please see our Law-Now on the first instance decision here.

S&T (UK) Ltd v Grove Developments Ltd

Grove engaged S&T under an amended JCT Design and Build 2011 contract to design and build a new Premier Inn Hotel at Heathrow Terminal 4. Just after practical completion had been achieved, S&T submitted an interim payment application claiming an additional £14 million above Grove’s previous valuations. Grove submitted both a payment notice and a pay less notice, but he parties fell into dispute as to the validity of those notices.

S&T commenced a “smash and grab” adjudication and was successful in contending that both of Grove’s notices were invalid. The Adjudicator therefore concluded that the full amount of S&T’s payment application was the “notified sum” for the purpose of section 111 and required Grove to pay this amount to S&T.

Grove commenced Part 8 proceedings seeking declarations from the TCC as to a number of matters, including whether or not it was entitled to commence a fresh adjudication seeking a decision as to the true value of S&T’s interim application. As practical completion had been achieved, Grove was not able to seek to recover the £14 million paid to S&T through subsequent interim payments and would need to wait until the final account procedure could be operated if it was not able to immediately commence a fresh adjudication as to valuation.

At first instance, Mr Justice Coulson (as he then was) concluded that Grove was able to challenge the true value of S&T’s interim application through a separate adjudication. Success in such an adjudication would result in S&T being required to pay back any over payment received through its “smash and grab” adjudication.

The Court of Appeal

The Court of Appeal upheld the TCC’s decision essentially for the same reasons:

“section 111 is not the philosopher's stone. It does not transmute the sum notified … into a true valuation of the work done … Subsequently, the adjudication provisions of the Act or (if correctly drafted) of the contract come into play. Either party can challenge the correctness of the notified sum by adjudication”

The Court also gave important guidance as to the timing of any “true value" adjudication. At first instance, Justice Coulson had noted that such an adjudication would need to be “dealt with, by the adjudicators and by the courts, in strict sequence. The second adjudication cannot act as some sort of Trojan Horse to avoid paying the sum stated as due.” It was unclear precisely what was meant by this. The Court of Appeal has clarified that the adjudication provisions are to be interpreted as being sub-ordinate to the obligation to pay the “notified sum” under section 111:

“The Act has created both the prompt payment regime and the adjudication regime. The Act cannot sensibly be construed as permitting the adjudication regime to trump the prompt payment regime. Therefore, both the Act and the contract must be construed as prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation.”

Conclusions and implications

This decision has significant implications for the practice of adjudication in the UK construction industry. The popularity of “smash and grab” tactics rose considerably when “true value” adjudications had been outlawed by a set of initial TCC decisions in 2014 and 2015. Although such tactics are likely to remain with the industry in some form, the inevitability of payers launching “true value” adjudications in response may now temper enthusiasm for them.

The Court of Appeal’s guidance as to the timing of “true value” adjudications would appear to prevent them being used, either in parallel or subsequently, to avoid payment of a “smash and grab” decision. The implications of this are likely require further examination in future cases. For example, where an artificially large "smash and grab” decision has been obtained, the paying party may not ever be able to pay the sum awarded and, on one view, might thereby be shut out from having the true value of the account determined, at least by adjudication.

References:

S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448.

Grove Developments Ltd v S&T (UK) Ltd[2018] EWHC 123 (TCC).