The end of ‘Smash and Grab’ adjudications?

Many of us will be familiar with the decision in ISG Construction v Seevic College. As a result of that decision (and others following on from it) we have seen three years of hard hitting ‘Smash and Grab’ adjudications (that the Courts would rather we didn’t call them). Coulson J (as he then was) may have ended, or at least limited, that practice with his recent decision in Grove Developments Ltd v S&T (UK) Ltd, however. Contract Administrators, QSs and their insurers might sleep a little easier now, although the need to issue valid payment notices and pay less notices remains.

Grove Development v S&T (UK) Ltd

Under a JCT Design and Build Contract 2011, Grove Developments contracted with S&T to construct the new Premier Inn Hotel at Terminal 4, Heathrow Airport.

S&T submitted an application for payment in the sum of £14,009,906. Grove Developments served a payment notice stating that the sum due was £1,407,748. All seemed well for Grove, – but for the fact the payment notice was served out of time.

Having become aware of the possible invalidity of the payment notice, Grove had a second bite of the cherry which it did by serving a pay less notice, in time. However, it was argued that Grove failed to show the basis on which the sum had been calculated in the pay less notice itself. They had instead referred back to the calculation in the payment notice issued five days prior to that. 

S&T took the opportunity and referred its claim to adjudication (‘Smash and Grab’), S&T argued successfully in arguing that the pay less notice served by Grove was invalid because it failed to set out the ‘basis of the sum due’. 

The Part 8 Claim

Grove didn’t sit back and take the Adjudication decision. Instead, Grove commenced Part 8 proceedings on two bases:

1. Seeking a declaration that the pay less notice was valid.
2. Seeking a declaration that if the pay less notice was invalid, it could commence an adjudication to establish the sum actually due. 

The law was (until now) at set out in ISG v Seevic: in essence, that failure to serve a valid payment or pay less notice meant the sum in a default payment notice (including an application) was taken as being agreed. That meant that, on a technicality, there was no dispute capable of reference to a second adjudication on the true value of the application, so the paying party was stuck with having to pay out and having to wait, potentially until the final account, to reclaim any overpayment. The logic behind that ‘deemed agreement’ has been queried by many practitioners and doubt cast on it in other decisions (including those of the Court of Appeal), but until now it has been considered binding in adjudications.

The Judgment

Departing from ISG v Seevic, the court said that Grove could bring a second adjudication on the basis that “It is well established that a court can “open up” and decide the true value of a certificate, notice or application; and if the court has this power, so should an Adjudicator. In fact, paragraph 20(a) of the Scheme expressly states that an Adjudicator can do this… A second adjudication to determine the true value of the payment due, is a different dispute to whether a valid payment or pay less notice has been served. The language used in the contract, where this is a distinction between “the sum due” and the “the sum stated as due”, supports this view”.

As such, the court concluded 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 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 (as he then was) 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”.

The judgment also considered what constituted a valid pay less notice when it considered Grove’s Part 8 claim. Before this judgment, reference to a previous notice to show the basis on which the sum had been calculated would constitute an invalid pay less notice. However, Coulson J (as he then was) has stated that “the reasonable recipient would have known precisely what sum was being deducted and the basis of its calculation”. A helpful clarification for all those issuing a pay less notice.

The Outcome

So is this the end of the ‘Smash and Grab’ adjudication? The answer is probably, ‘possibly’. In its current guise it is dead in the water, but parties may still aim for payment on a procedural basis and put the onus back on the paying party to seek a valuation of the works in reverse. However, the fact that such ‘reverse adjudications’ are now permissible again (as they were thought to be prior to ISG v. Seevic) dramatically reduces the value of a ‘Smash and Grab’ decision. Parties seeking payment will have to ask whether it is commercially wise (and cost effective) to bring a ‘Smash a Grab’ adjudication if the true value of the works are to also likely to be referred at the same time or shortly thereafter (to enable one decision to be set off against another).

The content of this article is for general information purposes only. For further advice on any issues relating to this article, please contact a member of Birketts’ Construction and Engineering Team. Law covered as of March 2018.