Smash and grab adjudications: not the end of the story?


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Summary: The scope of ‘smash and grab’ adjudications is contentious. In particular, do they determine the underlying value of the contractor’s works? This issue was considered by Fraser J in Imperial Chemical Industries Limited v Merit Merrell Technology Limited [2017], the dramatic fallout of ICI’s attempt to bring its contract with MMT to an end on the basis of MMT’s alleged repudiation.

Among the core objectives of the Housing Grants Act is to ensure a contractor’s right to  interim payments, and to enforce the payment of these by way of an adjudicator’s decision in circumstances where the employer has failed to issue timely, or otherwise valid, payment and/or pay less notices.  Such adjudications are known, somewhat pejoratively, as ‘smash and grab’ adjudications. 

Employers can mitigate their eventual liability to contractors by revisiting the value of the contractor’s work in subsequent payment applications, or on final completion.

However, the scope of ‘smash and grab’ adjudications is contentious.  In particular, do they determine the underlying value of the contractor’s works?  This issue was considered by Fraser J in Imperial Chemical Industries Limited v Merit Merrell Technology Limited [2017], the dramatic fallout of ICI’s attempt to bring its contract with MMT to an end on the basis of MMT’s alleged repudiation. 

The background

ICI engaged MMT to provide piping works associated with the construction of a new paint manufacturing facility in Northumberland pursuant to an amended NEC3 contract with an initial contract price of approximately £1.9 million.

The works were delayed and over budget, but the parties cooperated for some time until ICI’s Dutch parent company, AkzoNobel, took over the administration of the project with the objective of reducing ICI’s expenditure. ICI stopped paying MMT and eventually, AkzoNobel wrote to MMT accepting its repudiation of the contract, and seeking to bring the contract to an end.

MMT commenced two relevant adjudications in relation to ICI’s failure to issue valid payment and/or pay less notices before ICI’s purported acceptance of its repudiation.  Both adjudicators found in MMT’s favour and ICI was ordered to pay £8.375M. 

In this action in the TCC, the judge had to decide firstly whether MMT had repudiated the contract, and secondly whether ICI could recoup this payment to MMT, which it considered exceeded MMT’s entitlement.

Could ICI claim ‘overpaid’ progress payments after repudiation?

Yes, in principle.  As the contract ended through repudiation, the parties’ accrued contractual rights as at the date of the purported repudiation remained actionable (while their respective rights and obligations accruing after that date, such as working or making payment, did not).  As ICI could reclaim overpayments to MMT before terminating the contract, it continued to hold that right afterwards.

The finality or otherwise of adjudicator’s decisions in so-called ‘smash and grab’ adjudications

Among MMT’s arguments opposing ICI’s recovery of any alleged overpayments, it contended that payments made during the project were ‘deemed’ to equate to the value of the works, and therefore those decisions were finally binding in these circumstances, pursuant to ISG Construction Ltd v Seevic College [2014].

Fraser J rejected MMT’s argument, and its characterisation of ISG v Seevic.

The first part of Fraser J’s reasoning was contractual.  Under the wording of this NEC3 contract, all payments valued by the Project Manager and paid by ICI were interim because any overpayment could be revisited in later evaluations.  The contract also stated that payment did not evidence ICI’s acceptance of the works.

 Second, Fraser J held that adjudicators’ interim decisions do not decide the contractor’s final entitlement to payment.  Amounts deemed payable following an employer’s failure to serve notices are deemed valuations of the works as at the contractual valuation date, and may be challenged in subsequent payment claims, and/or considered on final account.  Therefore, the value of the adjudicator’s determination does not amount to the final valuation of the contractor’s works. 

Contractual and valuation issues for the same payment claim – different adjudications?

Because ICI paid a substantial amount to MMT following adjudicators’ decisions arising out of its failure to issue valid notices, this case again raised the issue of precisely what an adjudicator decides when considering these types of adjudications.

In ISG v Seevic, Edwards-Stuart J held that where an employer fails to issue valid and/or timely interim payment notices, the amount claimed is ‘deemed to be the value of those works’, and the adjudicator is taken to have decided that issue. This finding was significant because it meant that the employer could not subsequently launch an adjudication contesting that interim valuation.  The value of the works was decided in the first adjudication; therefore the second adjudicator had no jurisdiction to consider it. 

ICI v MMT queries whether this approach remains good law.  Referring to more recent Court of Appeal cases (MJ Harding Contractors v Paice and Springall [2015] and Brown v Complete Building Solutions Ltd [2016]), Fraser J observed that the terms, scope and extent of the dispute referred to adjudication, and the decision, must both be analysed to determine whether an issue has already been decided.  In respect of a payment claim, the validity of employers’ pay less notices can be limited to a contractual issue, and may be considered different to a dispute regarding the value of the work.  If an adjudicator determines the dispute on the basis of the contractual issue, but not the valuation issue, then a second adjudication on value cannot be barred on jurisdictional grounds:  ‘deemed’ valuations are not enough. 

So, not only did Fraser J hold that amounts payable in ‘smash and grab’ adjudications are not deemed to equal the value of the works, he observed the Court of Appeal’s approach casts serious doubt on this aspect of ISG v Seevic.  If this is correct, the employer may be entitled to commence a second adjudication contesting the amount of that payment. 

Practical takeaways

So, what does this mean for parties commencing or defending so-called ‘smash and grab’ adjudications? 

There are competing policy issues at stake: on the one hand, contractors must be able to enforce their right to timely interim payments; on the other, employers must be able to recover overpayments. 

Previously, the courts have been careful to distinguish between adjudications contesting interim and final claims for payment. 

This decision appears to move away from that distinction. Employers can now point to another case, this time on an interim application, which appears to support the general principle that the value of a ‘smash and grab’ adjudication can be disputed in a subsequent adjudication.  This approach would certainly allow for greater consistency across different contracts and types of application. 

However, this case doesn’t provide a definitive principle on that question, so it will fall to a future case to provide certainty.  Watch this space.

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