The facts

Grove Developments Limited (“Grove”) engaged S&T (UK) Limited (“S&T”) to design and construct a new Premier Inn hotel at Heathrow Airport Terminal 4. The parties entered into a JCT Design and Build Contract 2011 for a total contract sum of £26m or so.

Shortly after completion, but before the final certificate, S&T submitted an interim account seeking a net payment of £14m from Grove. Given the size and timing of the application, it had all the hallmarks of a “smash and grab” claim.

Grove, in response, submitted Payment Notice no. 22 which attached a detailed account breakdown. This account valued the net payment to S&T at only £1.4m, but the Payment Notice was submitted late and was therefore invalid.

Grove did, however, submit a Pay Less Notice on time. This confirmed that the net payment to S&T for the works was £1.4m, but that a deduction of £2.5m had to be made by way of liquidated damages as completion was 23 weeks late. The calculation for the £2.5m was included within the Notice itself, but the calculation for the £1.4m was not, nor was the detailed breakdown attached. Instead, the Pay Less Notice stated that the £1.4m was as “set out in the Payment Certificate No. 22 dated 13 April 2017”. The Pay Less Notice confirmed that an overall payment of £0 was due to S&T.

S&T immediately ran off to adjudication believing that Grove had made a mistake and as a result it could claim a “smash and grab” win.

Smash and Grab

Smash and Grab adjudications stem from the judgment in ISG v Seevic (see link). In this case, the Court determined that where a payer had failed to serve a valid Payment Notice or Pay Less Notice, the sum contained within a payee’s interim Application for Payment must be paid in full irrespective of whether the sum claimed was inflated or not. Furthermore, the payer could not ask to have the “true” value of the interim account assessed in adjudication, often resulting in the payee getting a huge windfall irrespective of what the works were actually worth.

S&T believed that it was due such a windfall as Grove’s Payment Notice was out of time, and Grove’s Pay Less Notice was invalid as the £1.4m calculation was set out in a separate document, contrary to the contract which required that the pay less notice should "specify" the sum due.

If S&T was right about both of the above (and it certainly was about the Payment Notice being late) then, pursuant to ISG v Seevic, S&T it was entitled to the entire £14m contained within its interim application.

In the end the matter went to Court. Grove’s case was that S&T shouldn’t be entitled to the full £14m because, amongst other things, Grove should be entitled to have the true value of the interim account assessed, contrary to the judgment in ISG v Seevic, and subsequent decisions in Galliford Try v Estura and Kersfield v Bray and Slaughter.

The Decision

Mr Justice Coulson produced a carefully thought-out and detailed judgment. Within that, he considered whether Grove were able to have their interim account assessed for the true value. In his view, there were 6 good reasons why an interim account could be assessed to find the true value, and why ISG v Seevic was therefore wrong. In short:-

1. In Henry Boot Construction Ltd v Alston Combines Cycles Ltd, Dyson LJ had confirmed that the Court had the power to decide the 'true' value of any certificate, notice or application, be them interim or otherwise. If the court had the power to do something, then so too did an adjudicator.

2. There was (and is) no limitation within Section 108(1) of the Construction Act as to the nature, scope or extent of the dispute which either side could refer to an adjudicator. Similarly, paragraph 20 of the Scheme gave a broad power allowing a true valuation.

3. Section 108(2)(a) of the Construction Act 1996 allowed a referral to adjudication “at any time". The true value of the interim application had not been considered previously, and its value was in dispute. Any restriction would therefore be contrary to this provision of the Act as well.

4. The contract differentiated between "the sum due" following a true valuation and "the sum stated as due", being those sums payable where there had been no payment notice or pay less notice . There was a “fundamental difference between the two concepts” and Coulson J therefore believed that to refuse a “true” valuation would be to ignore the careful drafting of the contract.

5. It would be unfair and unequal if a contractor could refer an interim account to adjudication for a true valuation, but the employer could not. Neither the Scheme nor the Construction Act 1996 contained such a prohibition, and there was no justification for such radically different treatment.

6. Finally, there was nothing to justify different treatments of interim accounts and final accounts. Neither the Act or Scheme suggested a distinction, and neither did the contract. As the contract treated both types of accounts the same, so too should the parties, adjudicators and the courts.

Implications

Grove v S&T does not change the rule about “paying now, arguing later”. If an employer fails to serve a counternotice it is still obliged to pay the sum contained within the contractor’s interim application in full, and a contractor can still “smash and grab” if the employer does not. The importance in serving notices correctly remains paramount.

However, because employers are now entitled to have the “true” value of an interim account assessed, a quick-thinking employer can launch an immediate counter-adjudication to set against any smash and grab award. This is without prejudice to an employer’s right to rectify any overpayment in the next payment cycle.

What this decision means for you

This judgment makes it clear that employers and contractors alike need to have proper mechanisms to deal with Applications for Payment, Payment Notices and Pay Less Notices. However, are we now likely to see the end of smash and grab adjudications even if there has been a failure?

Well, Coulson J’s judgment makes it clear that the ability to smash and grab remains alive. Indeed, adjudicators may now be even more likely to grant technical wins if the employer can have the true value assessed at a later date. Smash and grab adjudications require limited information to run, and there remains a benefit in having that award.

However, any smash and grab win might be short-lived, as any employer worth its salt will presumably adjudicate for a true valuation if it knows a smash and grab adjudication is coming. The result might be that, rather than both parties incurring the time and effort that comes with two adjudications, the parties engage in negotiation first.

However, this judgment could certainly affect cashflow. Previously, where an Employer had failed to serve its notices and knew that it was bang-to-rights, it would make payment and then seek to revise the position in the next payment cycle. Whilst Coulson J made the point that this decision should not change that, there is surely a risk that an employer will refuse to make payment of anything above its valuation irrelevant of the notice position, and will rely upon its ability to have a “true valuation adjudication” should a smash and grab claim be threatened. This will be even more likely where the contractor has suspect solvency.

In seems likely that acting quickly and precisely will become of paramount importance for employers and contractors alike. It would be prudent for both parties to ensure that they have strict procedures in place regarding the service of notices, and to seek urgent advice should these mechanisms breakdown.

Need advice? We can help you

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