Smash and grab adjudications: a third way? 

United Kingdom

A recent TCC case has brought to light a novel approach to smash and grab adjudications. Enforcement was granted for an adjudicator’s decision which reduced the amount of a Pay Less Notice despite finding it to be valid and without purporting to determine the true value of the deductions made in the notice. The correctness of this approach was not commented on by the court, but it appears to provide a middle road for the determination of smash and grab adjudications which have hitherto been all or nothing affairs.

Smash and grab adjudications explained

A “smash and grab” adjudication is one where payment is claimed under a construction contract in the absence of a valid Payment Notice or Pay Less Notice and the amount claimed in any application for payment is therefore said to have become the “notified sum” under section 111 of the Housing Grants Construction and Regeneration Act 1996 (as amended) (the “Construction Act”). That means the paying party is obliged to pay that sum regardless of any dispute over the proper valuation of the application. Indeed, “smash and grab” adjudications are often commenced before the parties are necessarily ready to value the account.

Smash and grab adjudications often limit the adjudicator’s jurisdiction to the validity of notices and the existence of a notified sum under section 111 and preclude the adjudicator from considering the true value of the payment applied for or any deductions raised in a disputed Payment or Pay Less Notice. The adjudicator is then typically left with a binary decision as to whether the application for payment and any Payment or Pay Less Notice has been validly given. If the application is valid, but no valid Payment or Pay Less Notice is been given, payment of the full amount of the application will be ordered under section 111. Conversely, if a valid Payment or Pay Less Notice has been given, no payment will be awarded as the adjudicator has no jurisdiction to determine the merits of deductions or assessments made in those notices.

A recent decision from the TCC reveals a potential “third way” whereby an amount is still awarded under section 111 despite the existence of a valid Pay Less Notice and without determining the true value of the matters raised in that notice.

Flexidig Ltd v M&M Contractors (Europe) Limited

Flexidig was contracted by M&M to carry out civil works associated with new Virgin Media underground infrastructure. M&M made allegations of defective work which led to a series of adjudications between the parties. In their second adjudication, M&M sought £1.5m in damages from Flexidig on account of defects. Roughly £12,000 of this figure represented repair costs already incurred by M&M. The adjudicator did not purport to decide the full value of the defects claim, but instead awarded an “on account” figure of £462,456. This decision was successfully challenged by Flexidig, with the court finding that the contract between the parties did not provide for an “on account” valuation.

The fourth adjudication concerned an application for payment by Flexidig dated 26 September 2019 of circa. £2.5m (the “AFP”). From that sum, M&M paid £1.742m leaving a balance £673,374 unpaid. Referring to the outstanding sum, M&M issued a letter stating that the amount due was zero as Flexidig owed £1.5m in damages for defective works which exceeded the amount claimed. In light of M&M’s non-payment, Flexidig commenced adjudication claiming that M&M’s letter did not amount to a valid Pay Less Notice and accordingly the full amount claimed in the AFP was due to it.

The adjudicator stated that “The question for me is not the true value of the defective works. What sum is M&M entitled to owe from the AFP?”. However, despite deciding that M&M’s letter was a valid Pay Less Notice, he reduced the amount of the notice to the £462,456 on account figure decided in the second adjudication. This left a balance of £223,597.21 owing to Flexidig. The adjudicator stressed that the £462,456 figure was not an assessment of the true value of the defects claim but merely an amount to be withheld from the AFP “pending an assessment of the true value of the defective works by separate adjudication or agreement by the parties”.

The adjudicator accepted that he had no jurisdiction to determine the true value of the AFP or the defects claim (based on the drafting of the notice of adjudication). However, he considered that:

“without deciding on the true value of the Application. 1 still have jurisdiction to decide whether the amount to be paid should be greater than the sum specified in the Pay Less Notice, which, in this case was £0.00. I derive that jurisdiction from the provisions of s. 111(8) of the [Construction Act] …”

The adjudication’s decision was subsequently enforced by the TCC. Objections as to jurisdiction, unintelligibility and natural justice were all rejected, but the court did not comment on the correctness of the adjudicator’s approach in law.

Conclusions and implications

This appears to be the first recorded case of an adjudicator adopting this “third way” in a smash and grab adjudication. Whilst the court didn’t comment on the correctness of such an approach, it has been criticised in some quarters. Section 111(8) does refer to an adjudicator awarding more than an amount stated in a Pay Less Notice, however this may simply be a reference to a true value assessment. Section 111(8) is also not a provision which confers jurisdiction but one describing the circumstances in which the timing provisions of section 111(9) are to apply.

Whatever the rights or wrongs of this approach, in the absence of TCC guidance it is clear that adjudicators decisions which follow it will be enforced. Parties should therefore be aware that such a “third way” exists and factor it into their adjudication strategies. Referring parties may seek to rely on the approach to pursue a smash and grab adjudication even where a valid Pay Less Notice has been issued, or as an alternative argument to a primary case regarding the validity of such a notice.  Such arguments are likely to be more credible where the Pay Less Notice is lacking in detail such that an adjudicator may be persuaded to reduce the notice without deciding upon its true value. Conversely, paying parties should be mindful of such possibilities when drafting Pay Less Notices and make use of Payment Notices where possible (as section 111(8) does not apply to Payment Notices).

References:

Flexidig Ltd v M&M Contractors (Europe) Ltd [2020] EWHC 847 (TCC).