Guest Blog: Getting paid: smashing and grabbing and counter adjudicating

Getting paid for construction works can be difficult and can prompt lengthy and expensive legal disputes. Two key aspects of this are first, making sure you are making applications for payment strictly in accordance with the construction contract and two, acting upon late payment if there is a failure of your employer to issue a valid pay less notice. Seeking payment due to a failure of an employer to issue a valid pay less is known as "smash and grab" as it is a rough and ready method of obtaining payment at adjudication without proving the true value of your application. 

If there is a valid pay less notice, then you should consider challenging an adverse valuation and not waiting for long periods of time when the damage to your cash flow could derail performance on site. 

Another important element to obtaining payment is making sure your financial records actually substantiate the application being made and that every relevant scrap of paper is electronically filed and can be retrieved at a moment's notice. Countless claims fail because records are not kept properly and this costs contractors millions of pounds each year. There is also the matter of condition precedents to payment and time limits. Again, payment provisions of contracts need to be studied and looked at each payment cycle so there is nothing left out or dates missed. A failure to follow a condition precedent will be an effective barrier to payment. 

A recent case Grove Developments Limited v S&T(UK) Limited** [2018] looked at a situation where a contractor was left substantially out of pocket and sought to challenge the validity of a pay less notice. This case has arguably been the most written about case this year and looks set to continue to influence the sector for the months ahead.  

Background

S&T was engaged by way of a JCT Design and Build 2011 Contract for the design and construction of a 613 no. bedroom Premier Inn Hotel including a pedestrian link bridge at Heathrow Terminal 4.

In March 2017, S&T made an interim application for payment in the sum of c.£14 million. The difference between the parties had been significant for some time, and up to this point Grove had sought to pay less than the sums applied for.

In respect of the March 2017 application, which was the subject of the dispute, Grove had failed to issue a valid payment notice. This meant that, it was imperative that a valid pay less notice was issued should the employer wish to pay less than the sum applied for.

The relevant dispute between the parties arose out of the validity of the payless notice. Practitioners will be aware that pursuant to the JCT standard form and the Construction Act, a payless notice must specify the sum due and the basis on which that sum had been calculated. The employer stated that the sum due was £0, and referred to a payment certificate sent previously to specify the basis on which that sum had been calculated; the payment certificate was not, itself, attached or sent with the payless notice. It was the contractor's position that this invalidated the payless notice, as the notice itself did not specify the basis of the calculation. 

S&T referred the dispute to adjudication, where the adjudicator found the payless notice to be invalid. Grove was ordered to pay £14million. 

Court decision 

While the adjudication was ongoing, the employer referred the same question on the validity of the payless notice to the Court, and at the same time challenged the decision in ISG v Seevic Village [2014] EWHC 4007 (TCC) which held that if the employer failed to issue a valid pay less it was deemed to have agreed the value of the application. 

The court held that:

1. the Payless Notice was not deficient because it properly incorporated the calculation of the sum due by reference; and 

2. if the employer had been liable to pay the sum stated to be due in the contractor's interim application, on the assumption it would pay the sum in full it would then be entitled to commence an adjudication (or other proceedings) to establish the sum actually due to the contractor in respect of the application (i.e. the true value).

The second point is of particular relevance, because it contradicts the position taken in ISG and therefore departs from the line of authority that has developed over the last four years.

It is fair to say that when ISG was handed down it sent shockwaves around the industry and has prompted significant rigour as to pay less notices. However, one important factor that was addressed in this case is the assumption that employers will actually make payment before they counter adjudicate on value. 

If this is the position, then smaller contractors should still adjudicate on a failure to issue a pay less and insist on payment before their employer can do anything about it. This putting contractors in a stronger commercial position to negotiate being in receipt of the money rather than chasing it. However, if as we suspect, employers will not pay and will try and counter adjudicate on value you could challenge the ability of an employer to do that if the Grove v S&T judgment is being followed and/or make sure your substantiation for your application is ready to withstand scrutiny from an adjudicator. 

In our experience, the position before ISG was that paying parties did not pay and used the threat of a counter adjudication to muscle the unpaid party into a deal or would just adjudicate on value.  As such, this judgment may make you question whether the payment notices required by the Construction Act have any teeth and whether this could be a regressive step. However, given the wording of the judgment the legal position may be different now and it is in the interests of unpaid parties to challenge this. 

As parties adjudicate and we start to see adjudication enforcements in the Courts it will be interesting to see how this case has been interpreted and whether it has been followed. It will also be very interesting to consider how adjudicators will grapple with this and whether they will decline to hear references to adjudication if the payment application has not been paid first. It is worth remembering this judgment of course remains a first instance decision, just like ISG and the cases after it, so there remains some scope to distinguish between the two. It could mean the demise of smash and grab and, instead, longer and more costly valuation adjudications taking place. In any event, it is unlikely that the number of adjudications and / or litigation in this area is going to decline anytime soon so it will undoubtedly remain a 'dispute hot topic' for some time.

**It is worth noting that S&T(UK) Limited has obtained permission to appeal. 

Theresa Mohammed, Partner, Trowers & Hamlins 

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