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Where next for smash and grab adjudications?

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Summary: In his final judgment before going up to the Court of Appeal, Coulson J (now Coulson LJ) took the opportunity to leave a lasting legacy to the UK construction industry, by ending the practice of smash and grab adjudications. Only time will tell if the judgment succeeds in ending this practice, and we understand that leave to appeal has been granted, with the appeal likely to be heard in early 2019.

Smash and grab: what is it?

The Housing Grants, Construction and Regeneration Act has brought many benefits to the UK construction industry, including increased cash flow. However an unwelcome side effect has been the smash and grab claim, where a party who is owed money submits a payment application for a large amount, near the end of the works but before the final account.  By failing to comply with the (some might say complex and ill-considered) amendments to the payment provisions of the Act, a party may find itself required to pay a substantial sum. This judgment marks an attempt to end the practice.

The facts

S&T claimed £14 million in an interim payment application, and Grove served the requisite notices.  However, the parties agreed that the first notice, the payment notice, was served late. S&T argued that the second notice, the pay less notice, was invalid because it merely referred to, but did not include, a spreadsheet setting out the amount to be paid.  S&T referred three disputes to adjudication, including a third one on the validity of the pay less notice.  The adjudicator agreed that the pay less notice was invalid, and awarded S&T the sum applied for.

Anticipating that the adjudicator would find in S&T’s favour and order it to pay £14 million, Grove pre-emptively issued part 8 proceedings seeking a declaration that it was not required to make any further payment to S&T.

S&T applied to enforce the adjudicator’s decision. The court was able to decide Grove’s Part 8 application at the same hearing as the adjudication enforcement. Finding that the pay less notice was in fact valid and therefore that the adjudicator had got it wrong, Coulson J refused to enforce the adjudicator’s decision.  Grove need not pay.

Second “true value” adjudications

Having decided that the pay less notice was valid and that the adjudicator’s decision should not be enforced, Coulson J did not strictly speaking need to decide whether Grove could commence a second adjudication on the true value of S&T’s interim application. But he did so anyway.

He declined to follow the decisions of Edwards-Stuart J, the previous judge in charge of the TCC, in Galliford Try v Estura and ISG Construction Ltd v Seevic College [2014]. Edwards-Stuart J had held that the victim of a smash and grab adjudication was not entitled to commence a second adjudication on the true value of an interim payment application.

Coulson J acknowledged that in accordance with Willers v Joyce he was obliged to follow the judgments of a court of the same level, unless there was good reason not to.  Here he found good reason to depart from existing authority. In his view these decisions had exacerbated the practice of smash and grab adjudications, which had arisen as a result of the complexities of the payment provisions of the Act.

He preferred the Court of Appeal case of Rupert Morgan v Jervis [2003] (EWCA).  In that case the Court of Appeal held that in the absence of a pay less notice, the contractor was entitled to payment.  However, an interim certificate was not evidence that the works had been conducted in accordance with the contract, and the employer was not precluded from showing overpayment and recovering it, either by way of an interim certificate or in adjudication, arbitration or legal proceedings.

Will this drive a ‘coach and horses’ through the notice provisions of the Act? Coulson J says not.  He emphasised that in accordance with Rupert Morgan v Jervis the losing party needs to pay up first before commencing a second adjudication. Furthermore, he did not consider that the Act was intended to allow a party to hold on to sums to which it is not entitled for long periods of time.

What about part 8 proceedings?

Can the recipient of a smash and grab decision commence Part 8 proceedings to ensure that it doesn’t have to pay up? Or, as Grove did, can it commence Part 8 proceedings pre-emptively without waiting for a decision in the smash and grab?

Whilst Grove successfully resisted enforcement of a smash and grab in this case, the court made it clear in Hutton Construction Ltd v Wilson Properties (London) Ltd [2017] that using Part 8 to overturn an adjudicator’s decision is a risky strategy, only effective for a dispute involving a discrete issue, such as this one, which requires no oral evidence and which is capable of being heard in the short time available for an enforcement hearing.  For example it would be impractical for the court to reopen a final account dispute which has been decided by an adjudicator over a period of four weeks or more, and to decide it in a matter of two hours in court.  To attempt to shoehorn such matters into an enforcement hearing is an abuse of process and will be met with an order for indemnity costs.

Assessing the legacy

In this, his last judgment in the TCC, Coulson J has clarified a number of issues that will greatly assist construction practitioners. Whilst there is no express right to recover overpayments of interim certificates under the JCT form of contract, nevertheless he has confirmed that such a right exists at common law, by implication of a term to that effect or by way of restitutionary principles.

Just as helpful is his statement that by failing to serve the requisite notices the paying party has neither agreed, nor is deemed to have agreed, that the amount claimed in a smash and grab is the true value of the interim application.

But this judgment poses nearly as many questions as it resolves:

  • What impact will it have on the practice of smash and grab? The number of smash and grab adjudications might decline now that they can be countered immediately with a second adjudication on true value.
  • How will the requirement to pay up before commencing a second adjudication work in practice?  In a second adjudication, perhaps the adjudicator will decline to act on the grounds of lack of jurisdiction if no payment has been made.
  • Will the court set off a second decision against the first, as in HS Works v Enterprise Managed Services? Or will the parties need a third adjudication to determine the amount of any overpayment? 

Alternatively, aggrieved employers might take a risk and start Part 8 proceedings where there is no requirement to pay up first. After all, in this case, Grove did not have to pay the sum of £14 million.

Coulson J appears confident that this judgment will reduce the number of smash and grab adjudications, and time will tell if it succeeds.

 

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