The Business and Property Courts (formerly known as the Technology and Construction Courts or "TCC") has very recently handed down a landmark judgment in which it considered the entitlement of an employer to have an interim application for payment valued in circumstances where the same application has already been subject to a 'smash and grab' adjudication. Both contractors and employers should be alive to the effects of the decision and its potential repercussions as to cash-flow in the future.
In 2015 Grove Developments Ltd (the "Employer") engaged S&T (UK) Ltd (the "Contractor") to design and build a new Premier Inn Hotel at Heathrow Terminal 4. The contract incorporated the JCT Design and Build Contract 2011. Under the contract the works were due to complete 10 October 2016. However, works were significantly delayed, eventually reaching completion on 24 March 2017.
Shortly after practical completion had been achieved, but before the works had been certified, the Contractor sent the Employer its interim application No.22, claiming payment in the net sum of over £14m. The Employer responded with its Payment Notice which valued works in the net amount of £1.4m. Shortly thereafter the Employer emailed the Contractor with its pay less notice stating its intention to deduct liquidated damages, as a result of which the Employer considered sums due as at the date of the pay less notice totalled £0.
The Contractor maintained that the Employer's pay less notice was non-compliant and therefore ineffective. In November 2017 the Contractor commenced an adjudication seeking a declaration to this effect. In December 2017 the adjudicator found in favour of the Contractor, finding that the Employer's pay less notice was invalid. On the face of it, such a decision gave rise to a 'smash and grab' claim, entitling the Contractor to the full sum claimed in its interim application No.22, being in excess of £14m.
What is a 'smash and grab' claim?
There is a line of recent legal authorities, beginning with the 2015 case of ISG –v- Seevic (1) and re-iterated in the case of Galliford Try –v- Estura (2), in which the TCC determined that "if an employer fails to serve the relevant notices under this form of contract it must be deemed to have agreed the valuation stated in the relevant interim application, right or wrong" (3). Importantly, the TCC went on to state that given that the value of the interim application had been determined, it was not open for the employer to commence a second adjudication with a view to having the 'true' (as opposed to 'deemed') value of the interim application assessed.
The decision in Seevic was seen as a means of safeguarding cash-flow, and reinforcing the policy of 'pay now, argue later' enshrined by the amended Construction Act 1996.
Seevic has given rise to what has become known in the industry as 'smash and grab' claims, whereby contractors seize upon the employer's failure to issue a valid pay less notice in time by claiming payment of sums stated in their interim application for payment, without regard to the employer's comments or assessment as to the validity of the application.
In projects involving regular interim payments, the risk of an employer suffering considerable financial prejudice as a result of failing to issue a timely and valid pay less notice is somewhat tempered due to the fact that the employer can effectively 'undo' the effects of an unjust smash and grab claim in the next interim payment run. For this reason, contractors tend to be more likely to pursue a smash and grab claim in respect of the final interim payment, at which point the opportunity for the employer to 'undo' the effect of the smash and grab claim, via the final account process, may not arise for a number of months.
Returning to Grove and S&T, presumably anticipating an adverse decision in the adjudication, the Employer commenced Part 8 court proceedings in the TCC in November 2017 (before the date of the adjudicator's decision). Among the issues to be decided by the court was whether the Employer was entitled to commence proceedings so as to decide the 'true' valuation of interim application No.22 in circumstances where the adjudicator had determined that the Employer had failed to issue a timely and valid payless notice in response to the application?
In a typically detailed and well-reasoned judgment, likely to be his final substantive one in the TCC/ Business and Property Courts before elevation to the Court of Appeal, Mr Justice Coulson undertook a detailed review of the "first principles" and also relevant case law. As a result of such analysis, Coulson J concluded that it was open to an employer, whose payment notice or pay less notice is deficient or non-existent, to pay the contractor the sums stated to be due in the contractor's application and then seek, via a second adjudication, to dispute that the sum paid amounted to the 'true' value of the works.
Coulson J reasoning is set out in detail within the judgment, but in summary of some of his findings:
- The dispute which the employer would raise in the second adjudication is different to that which is determined in the first. In the present case, the adjudicator had been asked to consider whether or not the Employer's payment notice/ pay less notice was valid; the adjudicator had not been asked to consider the true valuation of the works, and therefore this issue was capable of reference to adjudication. Any other result would result in an unwarranted restriction on the Employer's entitlement to adjudicate any dispute "at any time" pursuant to the Construction Act 1996.
- The drafting of the contract supported such a finding in its differentiation of "the sums due" as at clause 4.7.2 and "the sums stated to be due" in the context of payment notices/ pay less notices as at clause 4.9 (both amounting to standard form JCT drafting).
- Given that it is open for a contractor to commence an adjudication in circumstances where it disagrees with sums assessed by the employer in its payment notice/ pay less notice, principles of equality and fairness demanded that an employer be granted a similar right. It would be wrong to prohibit the employer from doing what the contractor can do.
- The Court of Appeal authorities are consistent with the decision. In particular, in the leading case of Rupert Morgan Building Services –v- Jervis (4) the court found that that the absence of a withholding notice (as then referred under the unamended Construction Act) entitled the contractor to payment, however, an interim certificate was not conclusive evidence that the works had been done in accordance with the contract and the employer was not precluded from subsequently pursuing payment via adjudication.
- The concept of 'deemed agreement', which lies at the root of the earlier TCC cases of Seevic and Galliford Try is "…not only unjustified, but it is also an unnecessary complication…". To the extent such causes are an authority for the principle that the employer is prohibited from commencing an adjudication as to the 'true' value of the interim application following payment of the sum stated as due, then such cases should not be followed.
A number of commentators have predicted that Coulson J's judgment will result in the end of the smash and grab adjudications.
Given that the benefit of a favourable decision in a smash and grab adjudication may now prove to be short-lived, presumably some contractors will think twice before launching an adjudication simply because the employer has failed to issue a timely and valid pay less notice. That being said, some contractors may be willing to bet that an employer who has been on the wrong end of a smash and grab claim will be somewhat gun shy and therefore unlikely to rush to commence a further adjudication concerning the same application, perhaps preferring a course of negotiation first. That, combined with the fact that there is typically a limited amount of evidence needed to support a smash and grab claim - particularly in comparison to the information needed so as to enable a proper valuation of works - means that smash and grab adjudications are unlikely to disappear entirely.
For employers, the decision will presumably provide a degree of re-assurance that, while a failure to issue the necessary notices may result in short term financial pain (in that the employer remains obliged to pay the sum applied for), the employer retains the option to challenge the payment application via adjudication, if necessary.
It remains to be seen what effect the decision will have upon the protection of cash-flow across the industry at large. In his judgment Coulson J concluded the decision would have not result in prejudice to contractors as, in circumstances where the employer fails to issue a valid pay less notice in time, contractors will remain entitled to payment of the full amount applied and so "there is no threat to cash-flow". In principle, Coulson is of course correct. However, in circumstances where the employer controls the purse strings, will it simply refuse to pay sums applied for, highlighting that any attempt by the contractor to commence a smash and grab claim will be countered with a second valuation adjudication? Time will tell.
1. ISG Construction Limited –v- Seevic College  2 All ER Comm.545
2. Galliford Try Building Limited –v- Estura Limited  BLR 321
3. Paragraph 18, Galliford Try –v- Estura
4.  EWCA Civ. 1563