Smash and Grab in Smithereens?

Farhana Choudhury,  30th January, 2019

In a previous post, Will Buckenham (Partner at Gosschalks) reported on the TCC decision in Grove Developments Limited -v- S&T (UK) Limited which had the potential to close the door on “smash and grab” claims in adjudication.

The Court of Appeal (see S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448) has now upheld Mr Justice Coulson’s first instance judgment and in doing so provided a detailed analysis of the HGCRA payment rules.

The previous post can be read here, though as a brief recap, Mr Justice Coulson decided that where a payer fails to submit a valid Payment Notice or Pay Less Notice and thereby becomes a victim of smash and grab, they are nevertheless entitled to commence their own separate adjudication to have the true value of the works assessed.

This decision was contrary to the decision in ISG v Seevic where the High Court had previously determined that payers are deemed to have agreed with a payee’s account should they fail to serve a valid notice. Coulson J listed six reasons as to why the case of ISG v Seevic had been wrongly decided. Given that ISG v Seevic and Grove v S&T were contrary to each other the High Court Decision was unsurprisingly appealed by S&T (UK) Limited.

The Court of Appeal has handed down its judgment, upholding Mr Justice Coulson’s first-instance judgment, and agreeing entirely with all six reasons given and dismissing the appeal. The rationale for this was as follows:

  1. The case of Henry Boot Construction Ltd is binding authority that the Court, together with adjudicators, have wide powers to determine the true value of any payment certificate, notice or application - including the opening and revising of a sum notified as due and payable in an interim application.

  2. S108(1) of the Act and para. 20 of the Scheme are such that there is no limit on an adjudicator’s jurisdiction, preventing them from exercising their wide powers.

  3. Procedural deficiencies in issuing a notice and the value of such a notice, are two separate matters to be raised in separate adjudications and there had not therefore, been any adjudication about the true value of the interim application in this instance.

  4. The contractual wording differentiating between a “sum due” and “the sum stated as due” was deliberate, “the sum due” being a contractual mechanism designed to result in a true valuation.

  5. As a contractor has the ability to adjudicate the true value of an application without the Act deeming so, so should too, an employer be entitled.

  6. There is no basis or justification for treating interim and final account payments differently.

However, crucially, the Court of Appeal has made it quite clear that the adjudication provisions are secondary to the mandatory payment provisions within the Act. As such, in spite of s108 providing the parties with the right to refer a dispute to adjudication at “any time”, the employer must first make payment to the contractor in accordance with its immediate payment obligations under s111 of the Act. It can only then exercise its right to a separate “true value” adjudication.

As such, a payer cannot use its right to a true value adjudication to withhold or delay making a payment to a payee. Whilst this ensures cash flow for the payee, it will be particularly hard for a payer to stomach where it fears that the payee is at risk of insolvency. An employer, for example, will be required to make payment to a contractor whom may well go bust before a true value adjudication can be resolved, resulting in the overpayment being lost forever.

“Pay now, adjudicate later” is the parting message which only goes to further emphasise that employers, contractors and sub-contractors all need to have proper mechanisms in place to enable them to serve compliant notices. Serving a valid notice is much better than seeking to rely on an entitlement to a true valuation adjudication. However, should a payment be missed it is not, in theory, the end of the world but a payee will need to act quickly to seek to reverse any overpayment.

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