Cornerstone – ‘Smash and grabs’ – where are we?
12 November 2019
The term is often used disapprovingly, but ‘smash and grab’ adjudications are really just a means of enforcing a party’s legal right. Yes, they can be an easy way to avoid a party having to prove their underlying entitlement. But it’s equally true that if the paying party wants to avoid this, they only have to get their notices in properly; and if they haven’t done so, why shouldn‘t the payee exercise their rights?
The law on payment and pay less notices, and their effect on adjudications, has been the subject of countless column inches over the last five years or so. This article takes a swift look back.
For the uninitiated, (if any), ‘smash and grabs’ are simply adjudications where the payee looks for payment on a procedural basis (‘technicality’, pejoratively) because the payer has failed to serve the right notices at the right time, entitling them to payment of an applied-for sum in default.
Up until around five years ago, most parties would deal with payment notices and pay less notices (introduced by the changes to the Construction Act which came into effect in October 2011) in the same way as they had withholding notices under the old Act. Simply, if notices weren’t served by the right time, although a procedural adjudication could proceed, the party in default would start their own adjudication at, or around the same time, to determine the true value of the works (a ‘counter-adjudication’). The results of the two would be offset against each other and, other than the cost of having to deal with the adjudications, the payer would be in no worse position than if it had served the right notices.
The game changer – ISG v. Seevic College
All that changed at the end of 2014 when the Technology and Construction Court (TCC) stated in ISG v. Seevic College that an employer’s failure to serve a valid payment or pay less notice didn’t just mean that a sum became due to be paid by default, but that the payer was taken to agree with the value of the application. As such, there could be no dispute referable to adjudication about the true value, and so there was no scope for a counter-adjudication. In that case, Seevic College was stuck having overpaid ISG by £768,525.36 (the sum determined as a result of the second, unenforceable decision) until the balance could be redressed at final account stage.
Suddenly, the failure to issue the right notices threatened real consequences. With most forms of contract only allowing payments to flow one way (to the party doing the work) on an interim basis, paying parties risked having to find significant sums of money for potentially significant periods of time. The potential unfairness was illustrated a few months later in Galliford Try v. Estura. There, the employer had failed to serve a valid notice in response to Galliford Try’s application for a net payment of £4.075m, which the TCC said following ISG v. Seevic meant it had to pay and had no chance to recoup until the final account stage. The Court there did note the unfairness – in particular noting that Galliford Try’s application claimed £2.7m in respect of loss and expense, a type of claim it said was “frequently significantly overvalued, and that quite often the true value is about a third of the figure claimed.” The Court also found a way around enforcing payment by Estura but the ‘manifest injustice’ exception was said to be narrow and has not been implemented since.
The industry proceeded for a few years with this uneasy situation. It generally gave a party who had a procedural adjudication open to them, particularly at the right time (say, around practical completion where the value of works – and dispute – is typically high, but the final payment could be years away) a cash flow windfall and huge commercial leverage to use that to reach a commercial settlement. But that was what the courts said, at least implicitly, Parliament had intended.
Commentators cast doubt on whether ISG v. Seevic was correct, noting that the idea of a failure to serve a notice could deem agreement seemed a stretch. There was also a parallel case, Paice v. Harding, that was decided a week prior to ISG v. Seevic which ruled that a counter adjudication could be commenced, stating that the situation was different because it related to a payment on termination. In the Court of Appeal case, the Court said that Paice v. Harding was right, casting further doubt on ISG v. Seevic, without directly deciding the point.
ISG v. Seevic was wrong after all
Ultimately, in February 2018, the Court explicitly said for the first time that ISG v. Seevic was wrong. The Court was asked to make declarations arising out of an adjudication award in S&T (the contractor’s) favour. Of ISG v. Seevic, the Court said that “it seems to me to be clear that an employer in the position of Grove must pay the sum stated as due, and is then entitled to commence a separate adjudication addressing the ‘true’ value of the interim application,” and therefore concluded that “the analysis in ISG v Seevic and Galliford Try v Estura is erroneous and/or incomplete”. It was a rare example of the TCC overturning itself – without recourse to the Court of Appeal. But Coulson J concluded that “the conflict in the cases is all too apparent and, for the reasons which I have given, I find myself unable to follow the ‘different line’ that [the judge] took in ISG v Seevic and Galliford Try v Estura”.
In November 2018, in a highly anticipated judgment, the Court of Appeal upheld the first instance decision. It confirmed that it is open to a party that has failed to serve a payment notice and pay less notice to commence an adjudication to have the true value of the payment assessed. The logic in ISG v. Seevic that the paying party was ‘taken to agree’ the valuation and therefore there could be no dispute was therefore wrong. However, crucially the Court of Appeal confirmed that before a ‘counter adjudication’ could be commenced, the paying party must actually pay the sum that had become due as a result of the failure to serve a valid payment notice and pay less notice. The Court said this was because the mandatory payment provisions of the Construction Act trump the statutory right to adjudicate.
The requirement to pay the fruits of a ‘smash and grab’ before counter adjudicating is a change from the pre- ISG v. Seevic position. Again, commentators have questioned the Court’s logic on why this should be the case – in particular, how it affects a party’s statutory right to adjudicate at any time. But the position has been confirmed in subsequent cases, such as Davenport v. Greer where the Court said that “it should now be taken as established that an employer who is subject to an immediate obligation to discharge the order of an adjudicator based upon the failure of the employer to serve either a Payment Notice or a Pay Less Notice must discharge that immediate obligation before he will be entitled to rely upon a subsequent decision in a true value adjudication. Both policy and authority support this conclusion and that it should apply equally to interim and final applications for payment”.
This does raise practical problems. For example, what is the position if a counter adjudication is commenced before a decision on a ‘smash and grab’? In such cases there will be no “immediate obligation to discharge” for the paying party. Would a court intervene to prevent a valuation dispute – and what if a ‘smash and grab’ is only suggested but not actually commenced?
These are interesting questions – perhaps more so to lawyers than parties to disputes, who won’t welcome any continuing uncertainty – but they will surely come before the court before long. Unfortunately that won’t be in the Supreme Court considering this particular case, because it was confirmed in September that the parties had reached a settlement and therefore an appeal to the highest court in the land would not be proceeding.
Despite many parties suggesting that the decision in Grove v. S&T would spell the end of ‘smash and grabs’, that has not proved correct. If anything, the number of ‘smash and grabs’ succeeding seems to have increased recently, perhaps because the consequences are not quite so extreme as they were, which may offer comfort to adjudicators wavering over whether to grant relief.
There are a host of unanswered questions on construction payment rules which continue to cause uncertainty, and which will before long come before the courts (or perhaps, may even be clarified by legislation – when the Government has time). But for the time being at least, it seems that the position on ‘smash and grabs’, and counter adjudications, is a little more certain.
This article is from the autumn 2019 issue of Cornerstone, our newsletter for those working within the construction industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at November 2019.
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at November 2019.