The death of the smash and grab adjudication was widely reported in 2018 but has perhaps been exaggerated to grab the headlines.
So what happened in 2018 to get everyone talking? In July 2018 we reported on Grove Developments Limited v S&T (UK) Limited, a case that had significant implications for the potency of ‘smash and grab’ adjudications. In his ruling, Mr Justice Coulson differentiated between disputes over the valuation of a payment application, and disputes over payment applications where no such valuation exercise was involved. He concluded that, in the former scenario, it should be possible to cross-adjudicate on the merits of the payment application. But, in spite of the Court of Appeal upholding the first instance decision in November 2018, the concept of smash and grab is not dead.
Smash and grab – a short history
A “smash and grab” adjudication is a (somewhat pejorative) term used to describe a situation where a paying party under a construction contract fails to provide the relevant payment or payless notice, such that a sum applied for by the receiving party becomes due and payable under current legislation¹ and the receiving party commences an adjudication on that basis.
The legislation exists in order that contractors and sub-contractors have transparency and some degree of certainty over cashflow – which is the lifeblood of the UK construction industry – through particularly the interim phases of a construction project.
The term “smash and grab” conjures up images of unmeritorious, deliberately overstated applications being capitalised upon and taken advantage of and indeed this does sometimes occur. Of course, the paying party shouldn’t allow itself to be taken advantage of anyway because it should always put the mandatory notices in place within the permitted timescales. ‘Technical’ adjudications on payment notices are almost always cheaper, quicker and more certain than adjudications where the merits of the account have to be examined because they only usually relate to a couple of clauses of the contract, no more than a couple of notices and then consideration of the calendar to see whether or not notices were served when they should have been. Conversely, adjudications on the merits of any particular application usually involve analysis of the evidence of the works carried out, consideration of the contract workscope, issues of quantum, delay and/or quality.
Reining in the effects of a ‘smash and grab’ adjudication
In March 2018 the case of Grove Developments Limited v S&T (UK) Limited saw the Technology and Construction Court rein in the effects of a “smash and grab” adjudication. To recap, until then, a successful smash and grab adjudication had been held by the court to be a deemed ‘acceptance’ by the paying party that the sum found to be payable was in fact the correct sum for that particular application/certification/payment cycle and it could not therefore be challenged on its merits. The paying party would have to pay up and then wait until another payment cycle to attempt to correct the situation. This caused problems when the next payment cycle might be some time away and/or where the receiving party was in control of the payment cycle (contracts where an application is necessary to trigger any certification) and/or where the contract did not provide for overpayments being restored to the paying party. If a receiving party knew it was only entitled to an interim payment of £100,000 but applied for £250,000 and got away with it, then it would have a windfall of £150,000 until the paying party was in a position at some point in the future to do something about it. This became a relatively powerful tool where the paying party was not on the ball and some companies did take advantage.
A sea change for merits-based adjudications?
The Grove case changed this so that a disgruntled paying party that felt that it had overpaid as a result of a payment notice adjudication could pay up, but then commence a merits-based adjudication (or other formal dispute process) on the same application/certification cycle. This was a sea-change because an unmeritorious application could then be reversed relatively quickly, so as a strategy it instantly became much less advantageous to a receiving party. The Court of Appeal’s judgment in November, upholding the first instance decision, is likely to be the law of the land for the foreseeable future.
Valid applications still being ignored by paying parties
The reality is that there are still many instances of perfectly valid, uninflated applications being made by contractors and sub-contractors that go completely ignored by paying parties. Similarly there are unmeritorious and defective payment or pay less notices issued by paying parties, giving the receiving party the opportunity of a technical adjudication that will get them the money that they genuinely believe that they are owed. Yes, the paying party can pay up and challenge in its own subsequent merits-based adjudication but it has the expense, not to mention the burden of proof, of launching and pursuing it and in many cases it simply will not do so. If the application was in broadly the appropriate sum, any later challenge would be unlikely to succeed.
Cashflow is king
Even where the paying party does want to challenge the sum payable, the Court of Appeal has stated that there is still a requirement to pay the notified sum first. The basis for the Court of Appeal’s finding in this regard is already creating some academic debate but in practical terms there is clear authority that cashflow remains key. The option for an unhappy receiving party to pursue payment notice adjudications was a very deliberate and indeed central tenet to the Construction Act legislation and it absolutely still has a very effective place in preserving cashflow in the construction industry in 2019 and for the foreseeable future.
¹ Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009.