The impact of the recent decision on 'smash and grab' adjudications

The recent Court of Appeal decision in Grove Developments Limited v S&T (UK) Limited was seen by many to have provided some much-needed guidance and clarity to paying parties faced with so called 'smash and grab' adjudications. M Davenport Builders Limited v Greer and Another was one of the first opportunities for the courts to apply the principles set out by the Court of Appeal but has the judgment in fact created further confusion? What is the impact of this decision now on “smash and grab” adjudications?

Background

The Housing Grants Construction and Regeneration Act 1996 (as amended) (“the Act”) requires a contract for construction operations to have an adequate mechanism to determine when payments become due and are to be finally paid.

In broad terms, the party seeking payment will apply for payment and the paying party has to assess that application within defined timescales and/or serve a Pay Less Notice if it intends to pay less than the sum applied for. If the paying party does not take either of these steps then it must pay the sum applied for (or the “notified sum” as defined under the Act). An adjudication seeking payment of the notified sum became termed a “smash and grab” adjudication.

However, what happens if the sum that has to be paid is considered to be over-valued? A practice has emerged of the paying party seeking a declaration through a further adjudication as to the “true value” of the payment application in the hope of setting off such an award against the sums it otherwise had to pay.

In February 2018, the Technology & Construction Court (TCC) in Grove Developments Limited v S&T (UK) Limited held that the paying party was indeed entitled to refer a dispute over the value of an interim payment application to adjudication, regardless of whether the appropriate payment notices had been served. The Court of Appeal later upheld the TCC’s decision. The paying party had the right to commence a separate adjudication on the true value of the interim payment application. The intention of the Act was to regulate cash flow and not to determine the overall value of the works.

The principle remained that the paying party first had to make payment as a result of its failure to provide the correct notices in response to the payment application and could not take any further action, for example by way of a “true value” adjudication, unless and until it had made payment.

Davenport v Greer

Davenport (the builder contractor) had applied for payment of some £106,160. The Greers (the employers) did not issue a Payment Notice and neither did they issue a Pay Less Notice. Davenport referred the dispute to adjudication and on 24 October 2018 obtained an award that it should be paid the £106,160. In the meantime, and without making payment to Davenport, the Greers commenced their true value adjudication on 30 October 2018 obtaining an award on 30 November 2018 in their favour that no monies were due to Davenport.

With the Greers not having made payment Davenport sought to enforce the adjudication award in its favour. The Greers sought to set off against that award the award they had obtained that no monies should be paid. That set off argument failed. It was reiterated that any second adjudication cannot act “as some sort of Trojan Horse” to avoid paying the sums stated as due. Accordingly, the Greers had to pay Davenport. But what of the “true value” adjudication it had commenced?

Stuart-Smith J noted the findings of the Court of Appeal and held “In my judgment, it should now be taken as established that an employer who is subject to an immediate obligation to discharge the order of an adjudicator based upon the failure of the employer to serve either a Payment Notice or a Pay Less Notice must discharge that immediate obligation before he will be entitled to rely upon a subsequent decision in a true value adjudication”. Therefore, payment must first be made before relying on any further adjudication decision.

He further said “The decisions of Coulson J and the Court of Appeal in Grove are clear and unequivocal in stating that the employer must make payment in accordance with the contract or in accordance of section 111 of the Amended Act before it can commence a ‘true value’ adjudication”. Therefore, payment first had to be made before any true value adjudication could be commenced. He added that this would apply to disputed applications for payment on an interim or a final basis.

It looked like a clear reiteration of the Court of Appeal’s stated position. However, and crucially, in relation to the timing, and ultimately the validity, of the true value adjudication Stuart-Smith J seemed to leave the door open to an argument that it was permissible to commence a “true value” adjudication before making payment to the payee. He said, notwithstanding his comments above, “That does not mean that the Court will always restrain the commencement or progress of a true value adjudication commenced before the employer has discharged his immediate obligations”. This comment was made noting the position in the Harding v Paice series of cases where the court declined to restrain a true value adjudication which was commenced before payment of the notified sum.

Summary

The exact grounds on which a court might permit a true value adjudication to be commenced before payment is made were not set out by the Judge.

Practically the question then becomes whether a contractor should seek a “smash and grab” adjudication, where the paying party may be able to take prompt action to obtain a decision in its favour such that any monies it pays over may shortly have to be paid back in whole or in part? Will this deter smash and grab adjudications given the temptation for the paying party to start another adjudication as soon as possible to minimise the impact on its cash flow?

Furthermore, does the paying party face the risk that another court will find that the ‘true value’ adjudicator did not in fact have jurisdiction to hear the dispute if payment had not been made such that the decision would not be enforced? Will another court seek to clarify matters further and to reinstate the Court of Appeal principles and guidance? This all remains to be seen and further judicial guidance will no doubt be sought.

The overriding message remains for payers that they should use the tools in their armoury to respond to applications for payment by way of Payment Notices or Pay Less Notices. If they do not then they will have to pay the sums claimed by the payee and will be put to further cost and expense, and potential risk in a further adjudication.