Smash and grab no more?

We have written in these pages, and spoken at seminar after seminar, about the importance of issuing timely and valid applications for payment, payment notices and pay less notices. That lecturing ratcheted up a notch when ISG v. Seevic changed the construction world at the end of 2014.

For those that have been paying attention, in ISG v. Seevic the court said that a failure to serve a valid payment notice or (in response to a default payment notice) pay less notice meant that the paying party was ‘deemed to agree’ the value of the works at the relevant date. That meant that not only was the payee entitled to be paid the notified sum (i.e. sum in the default payment notice), usually with interest from the final date for payment, but the payer was precluded from starting a ‘reverse adjudication’ to determine the correct value of works. 

By way of reminder, prior to ISG v. Seevic, it was common to see a payer faced with an indefensible payment notice adjudication to accept that decision as an inevitability, but to start another adjudication of its own seeking a valuation, then offsetting the two decisions against each other. In other words: “yes I have to pay you £X for failing to serve the correct notices, but I have a decision which also says the true value of the works is £X-Y, and so I will pay you £X-Y (or you will repay me any overpayment)”. While that on some level undermines the importance of payment notices and pay less notices, it did ensure that something approaching the ‘right’ sum was paid, and that payees did not receive a potential windfall on a procedural technicality. 

However, in a judgment at the end of February, Coulson J sitting in the Technology and Construction Court (TCC) (in one of his last cases before he is elevated permanently to the Court of Appeal) changed this. The decision is a curve-ball in its unusual mechanism and timing, but perhaps not in its underlying rationale: there are many in the industry who have long-felt that ISG v. Seevic, and related cases, were founded on a false premise, and the Court of Appeal had itself suggested as much in some cases.

Coulson J said that the court was wrong when it said in ISG v. Seevic that a party failing to serve a valid payment notice or pay less notice was ‘taken to have agreed’ the value of the works (as was Galliford Try v. Estura, which followed shortly on from ISG v. Seevic and supported those conclusions). In Grove Developments Limited v. S&T (UK) Limited [2018], the court was asked to make declarations arising out of an adjudication award in S&T’s, the contractor’s, favour. The judgment makes interesting reading, dealing as it does with questions as to the requirements of a valid pay less notice – issues which have vexed the industry for some time. 

But it is the comment on ISG v. Seevic that will likely most impact the industry. 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”.

This is 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 [Edwards-Stuart J] took in ISG v Seevic and Galliford Try v Estura”.

This might be seen as good news for payers and bad news for payees, whose actual or threatened ‘smash and grab’ adjudications will no longer give the bargaining power they have to date because the paying party will be able, in most cases, to seek a counter-adjudication on the underlying value of works undertaken. That said, it is unlikely to see the end of the ‘smash and grab’ – the, at least, temporary transfer of money and the need for a paying party to then start its own adjudication, potentially at significant cost and with a time delay, will still leave some parties keen to exploit procedural failings. Given the Act’s notice provisions, some might say they would be justified in doing so. And it has been suggested that Coulson J’s comments in Grove v. S&T suggest that the paying party has to pay sums awarded under a ‘smash and grab’ decision before it can commence its own adjudication in reverse – although it is questionable whether that is, in fact, the case, or how it would work if the paying party took the initiative in seeking a valuation before a payee had the chance to start a ‘smash and grab’.

Overall, this decision changes the payment adjudication landscape – but the Construction Act’s payment regime remains unchanged. As such, parties should certainly not take Grove v. S&T to mean that the need for timely and valid applications for payment, payment notices and pay less notices falls way. If anything, as many questions remain about how the payment regime should operate in practice as there ever were, albeit the questions have changed. The coming months will see how the adjudication process adapts and, in time, no doubt more cases will be shedding further light on this ever-adapting area of law.

The content of this article is for general information only. If you would like to discuss any of the issues raised in this article further, please contact a member of Birketts’ Construction and Engineering Team. Law covered as at April 2018.

This article is from the spring 2018 issue of Cornerstone, our newsletter for those working in the construction industry. To download the latest issue, please visit the newsletter section of our website.

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