Smash and grab is no longer the last word in adjudication

27 February 2018

Coulson J leaves his legacy in the Technology & Construction Court (TCC) with his last judgment before his elevation to the Court of Appeal. He dishes out the last word on "smash and grab" adjudications and his hope that this judgment will help to lead to their demise.



The contract and the facts

S&T (UK) Limited ("S&T") was engaged by Grove Developments Limited ("Grove") to design and build a new Premier Inn Hotel at Heathrow Terminal 4. The form of contract was JCT Design and Build 2011 incorporating a Schedule of Amendments (the Contract). The contractual completion date was 10 October 2016. Practical completion was not achieved until 24 March 2017. The dispute centred around S&T's interim payment application no. 22 and the validity of Grove's Pay Less Notice issued in response.

Prior to the matter ending up in court, there had been three adjudications in relation to the Contract. The first adjudication (Adjudication No 1) decided that the Schedule of Amendments was incorporated into the Contract; the second adjudication (Adjudication No 2) decided that S&T was entitled to a partial extension of time to 9 January 2017; and the third adjudication (Adjudication No 3) decided that Grove's Pay Less Notice dated 18 April 2017 was invalid in response to S&T's application for payment no. 22. The "smash and grab" decision in the third adjudication meant that S&T were, on the face of it, entitled to be paid in excess of £14 million pounds.

Grove had pre-empted an adverse result in Adjudication No 3 by the commencement of Part 8 proceedings in the TCC. This, together with S&T's counterclaim and separate enforcement action in respect of the decision of Adjudication No 3, raised a number of issues for the court's determination.

The main issues

There were four issues to be decided by the court:

  1. whether or not Grove's Pay Less Notice dated 18 April 2017 was valid;
  2. whether, even if Grove's Pay Less Notice was valid, the result in Adjudication No 3 should nonetheless be enforced;
  3. whether, in principle (and if the Pay Less Notice was invalid), Grove would be entitled to commence a separate adjudication as to the "true" value of S&T's interim application no. 22; and
  4. whether Grove's notices in respect of liquidated damages were properly issued. This final point is a separate issue to the validity of the Pay Less Notice and will not be covered in this alert.

The decision

The court found in favour of Grove on the following basis:

Issue 1

S&T had argued that the Pay Less Notice dated 18 April 2017 was invalid because the basis on which Grove had arrived at its (lower) valuation was set out in a separate document which had been provided to S&T five days earlier. S&T contended that, because this earlier document was not re-attached to the Pay Less Notice it failed to properly specify the basis on which the sum had been calculated.

Coulson J did not agree. He found that the Pay Less Notice dated 18 April 2017 (PLN) was valid because it specified both the sum the employer considered to be due and properly incorporated - by reference - the basis on which the sum was calculated.

As long as it was entirely clear what document was being referred to and the contents of the underlying calculation were clear and complete, there could be no issue with incorporation by reference. He took the opportunity to re-state the approach the Court will take when deciding on the validity of a notice:

"A pay less notice will be construed by reference to its background, in order to see how a reasonable recipient would have understood it. The court will be unimpressed by nice points of textual analysis, or arguments which seek to condemn the notice on an artificial or contrived basis. One way of testing to see whether the contents of the notice are adequate is to see if the notice provides an adequate agenda for a dispute…"

On this basis, S&T's argument that the PLN was invalid did not succeed.

Issue 2

Having finally determined the validity of Grove's Pay Less Notice, the court found that the decision in Adjudication No 3 was "no longer material or enforceable".

Issue 3

Having found in favour of Grove on the first two issues, the court held that - even if Grove's Pay Less Notice had been invalid and S&T had been permitted to enforce the result of the "smash and grab" Adjudication No 3 - Grove would nevertheless have been entitled to commence a separate adjudication seeking a decision as to the "true" value of S&T's interim application no. 22.

The crux of this issue is succinctly summarised by Coulson J as follows:

"…can an employer, whose payment notice or pay less notice is deficient or non-existent, pay the contractor the sum stated as due in the contractor's interim application and then seek, in a second adjudication, to dispute that the sum paid was the 'true' value of the works for which the contractor has claimed? In my view, on the application of first principles…the answer to that question is Yes…it seems to me to be clear that an employer in the position of Grove must pay the sum stated as due, and is then entitled to commence a separate adjudication addressing the 'true' value of the interim application."

The cases of ISG v Seevic and Galliford Try v Estura were considered in which the judge had concluded that, in the absence of a Pay Less Notice from the employer, that the employer has agreed (or must be taken to have agreed) the value stated in the contractor's interim payment application. In this way, he said, the true value of the application "has already been determined".

Coulson J disagreed with this analysis for the reason that these cases do not deal directly with Grove's submission that, following payment of the sum stated as due, the employer should be able to commence an adjudication as to the "true" value of the interim application. The court decided that to the extent that the authorities "answer that question in the negative", they should not, in Coulson J's view, be followed.

Coulson J made clear in this case:

"…. I do not consider that the conclusions which I have reached strike at the heart of the adjudication system. On the contrary, I believe that it will strengthen the system, because it will reduce the number of 'smash and grab' claims which, in my view, have brought adjudication into a certain amount of disrepute".

Conclusion

In very simple terms - this case is of particular interest as it confirms that a party does have the right to adjudicate on the "true" value of an interim application where there is either no Payment / Pay Less Notice or the relevant notice is deficient in some way.

In light of this definitive decision, is this the beginning of the end for "smash and grab" adjudications? Coulson J's last decision in the TCC before being elevated to the Court of Appeal certainly means that he bows out with a flourish.


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