Judgment clarifies position on smash and grab

So-called smash-and-grab adjudications remain rife in the UK construction industry.

Despite their violent-sounding name, this species of adjudication might better be called notified sum adjudications, where the payee seeks an enforceable decision that it has to be paid the notified sum.

It is only where the payer fails to serve either of these notices that the sum in the payee's document, often its application for payment, becomes payable as the notified sum. If the payer serves the right notices at the right time, it can influence the notified sum and there can be no smashing or grabbing.

Where the payer fails to pay the notified sum, the payee can refer a smash-and-grab adjudication seeking a decision that the notified sum is payable. This is regardless of whether the notified sum is fair and reasonable; that is, it need not be a genuine reflection of the true value of the works. There are many a cautionary tale around this and those reading this article should be mindful and cautious of falling foul of the payment provisions in a construction contract.

For a number of years there was uncertainty over whether a positive decision from a (generally much quicker) smash-and-grab adjudication could be enforced while a live 'true-value' adjudication was still running its course.

The landmark case in this area is S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448. No doubt keen to follow the underlying principles of the Housing Grants, Construction and Regeneration Act 1996, by protecting the payee and keeping money flowing down the contractual chain, the Court of Appeal held that the paying party had to pay the notified sum pending the outcome of the true-value adjudication. The court established what has come to be known as the 'pay now, argue later' principle.

Although this clarification was welcomed, the case left many unanswered questions.

• How can the obligation to pay be squared with the right under the Housing Act to refer any dispute about the value of work to adjudication at any time?
• When can a party on the wrong end of a smash-and-grab claim start its own adjudication on the true value of the application?
• Does a payee need to adjudicate to establish a notified sum that must be paid?

The contractor issued two notices for payment, neither of which received a response from the payer. Indeed, the trust issued neither a payment notice or pay-less notice in respect of the notices and made no payment to the contractor. 

When the trust later commenced (and won) a true-value adjudication, obtaining a declaration that the contractor was not entitled to any further payment, the payee contractor applied to the courts for a declaration that the adjudicator's decision was unenforceable because the employer was prohibited from commencing a true-value adjudication until it had first paid the notified sums arising from the payee's unanswered notices for payment.

The court found for the contractor payee, deciding that there was a notified sum that had not been paid.

The court then reiterated the principle established in S&T that, unless and until the payer has fulfilled its obligation to pay a notified sum, it is not entitled to commence a true-value adjudication.

The trust argued that the principle established in S&T applied only where a previous adjudicator's decision determined that there was a notified sum due and payable. The court rejected this argument and held that the paying party's right to refer a true-value adjudication was contingent on it complying with its statutory obligations to pay the notified sum and there could be a notified sum by virtue of the contractual terms alone, i.e. there is no need to also have an adjudicator's decision saying there is a notified sum and ordering it to be paid.

This case is another boost for payees, and gives even sharper teeth to the principle in the Housing Act that the parties should pay first and argue later.

The clear message is that, if a company fails to serve a payment notice or pay-less notice in the right form at the right time, it risks losing a lot of money. Certainly, AM Construction looks to have closed the door on the potential for a payer to run a pre-emptive true-value adjudication before paying the notified sum.

Once that money has been paid out it can be very difficult to get it back. At the very least, the commercial balance on the project is likely to be heavily tipped in the payee's favour.