The recent appeal case Grove Developments Ltd v S&T (UK) ("Grove") has triggered a lot of discussion on the impact of 'smash and grab' adjudications. Here we consider the key points of the case and its likely effect.
'Smash and Grab' Adjudications
A 'smash and grab' adjudication occurs when either a main contractor or sub-contractor ("payee"), has issued a payment application to an employer or main contractor ("payer"), but the payer has failed to issue a valid payment notice and/or pay less notice in response.
The Housing Grants, Construction and Regeneration Act 1996 ("HGCRA") provides that the sum applied for in the payment application will become due for payment as "the notified sum" if a valid payment or pay less notice is not issued in time. The payer is then obliged to pay this notified sum, whether or not it represents the correct or true value for the works. If the payer does not pay, the payee can raise adjudication proceedings to enforce payment of the notified sum.
The policy behind this was to counter the so-called 'set off abuse' of the 1980's and early 90's. At that time, it was possible for payers to withhold payment of sums properly due, without justification and without notifying reasons for this. Payees had to then resort to lengthy and expensive court or arbitration proceedings to recover these sums.
This encouraged 'set-off abuse'. HGCRA was then introduced to give payees a right to receive payer notifications and a swift means of recovering payments due, through a 28-day adjudication process. These have become known colloquially as "smash and grab" claims.
It was held in cases such as ISG v Seevic and Galliford Try v Estura that, when faced with a 'smash and grab' adjudication claim, a payer could not have recourse to a "counter adjudication" i.e. an adjudication on the true value of an interim payment application. Any recourse to claim for the true value of the payment application arose only in the context of a subsequent interim payment application failing which at final account stage.
The Technology and Construction Court ("TCC") in Grove went against this trend and held that a payer can raise a counter-adjudication on an interim payment application.
What you need to know about Grove
The Court of Appeal confirmed the decision by the judge in the TCC. The key points are:
- Cases which allowed smash and grab adjudications to the exclusion of counter-adjudications on value (ISG v Seevic and Galliford Try v Estura) were wrongly decided.
- The notified sum under a payee's payment application and the true value of that application constitute different disputes for the purposes of adjudication.
- A payer can commence adjudication proceedings on the true value of the works, after 'smash and grab' adjudication proceedings on any interim application.
- The adjudication provisions in HGCRA are secondary to the payment provisions and therefore payment must be made following a successful 'smash and grab' adjudication claim before a dispute on the true value of the application can arise and therefore be adjudicated on.
What to take from Grove
Grove does not make it any less important for payers to ensure that payment notices and pay less notices are served correctly and on time.
This will avoid the payer having to make an initial payment on a 'smash and grab' claim and then having the cost and hassle of raising counter-adjudication proceedings. Also, even though adjudication proceedings are swift, there is still the risk of a payee insolvency event occurring after the payer makes payment on the 'smash and grab' claim and before the payer's counter-adjudication proceedings are concluded.
The outcome of Grove still leaves protection to payees as to cash flow and incentives to payers to administer payments promptly and fairly. A successful 'smash and grab' claim may result in the payer having to make a significant payment, and the cost, time and hassle of a counter-adjudication to retrieve any over-payments provides a powerful incentive to payers to avoid such circumstances.
Therefore, whilst the threat and consequences of a 'smash and grab' claim have been diminished, they remain a useful tool for payees to recover swift payment and a strong incentive for payers to administer payment processes promptly and fairly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.