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The term ‘smash and grab’ has increasingly been used by the construction industry to describe claims in which, following a failure by an employer to give the required notice, a contractor could obtain an adjudication decision for the amount in its interim application, which the employer would be unable to challenge until the next payment cycle, even if it was significantly more than the employer considered to be the true value of the works.
In a recent, significant judgment by Coulson J, the court held that an employer is able to challenge the amount due to a contractor in respect of an interim application by way of further adjudication as to the true value of the works even if the employer has not given a valid payment or pay less notice.
Grove Developments Ltd (“Grove”) appointed S&T (UK) Ltd (“S&T”) as contractor to build a Premier Inn hotel at Heathrow Airport. The case concerns S&T’s interim payment application 22, which was the last interim application prior to the final account. The amount of the application was £14m more than the previous certificate and it was accompanied by a detailed spreadsheet.
Grove sent S&T a payment notice, attaching the same spreadsheet with Grove’s detailed assessment/valuation added. It was accepted that this payment notice was out of time and therefore invalid. Grove sent S&T a pay less notice, in time, which stated the amount due to S&T was zero and that the basis on which this was calculated was set out in the payment notice.
S&T argued that the pay less notice was not valid as it did not ‘specify’ the basis for the calculation as required by the contract because the spreadsheet was not attached. The adjudicator agreed with S&T and therefore Grove was required to pay the amount stated in S&T’s interim application.
The most significant part of the judgment considered the question, “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?”
The court’s decided this in the affirmative by an analysis of first principles:
- the court can decide the ‘true’ value of any certificate, notice or application,
- there was no limitation on the power of an adjudicator to do the same under the HGCRA 1996 or the Scheme for Construction Contracts,
- a dispute on the true value of the work would be a different dispute to whether the employer’s payment notice and/or pay less notice was valid,
- the contract expressly differentiated between the ‘sum stated as due’ in the interim application, which was immediately payable to the contractor, and ‘the sum due’, which was the result of a contractual mechanism designed to calculate the contractor’s precise entitlement,
- the employer should be able to refer a dispute as to the true value of the works to adjudication as a matter of equality and fairness,
- there was no basis to justify a distinction between interim and final payments (to which the prohibition did not apply)—no such distinction was made in the HGCRA 1996 or the JCT contract.
Coulson J undertook a comprehensive analysis of the authorities. Support was found in the Court of Appeal decisions including Rupert Morgan v Jervis and Harding v Paice. Those cases did not draw a distinction between interim and final payments.
However, this ruling represents a significant departure from previous TCC authorities, particularly ISG v Seevic and Galliford Try v Estura. In those cases it was held that where a paying party under a construction contract failed to give a payment or pay less notice, it was deemed to have agreed to the amount stated in the contractor’s interim payment application, and therefore could not challenge the ‘true value’ in adjudication.
Coulson J drew some support from the specific terms of the contract, a JCT Design and Build Contract 2011, in particular the distinction between the use of ‘sum due’ and the ‘sum stated as due’. It remains to be seen if this leaves open the door for future challenges.
The court also held that a pay less notice was valid even though it specified the basis of calculation by reference to an earlier document, and that the employer’s notices in respect of liquidated damages were valid under the contract.
The practical implications of this case are that where a paying party fails to give a valid payment or pay less notice:
- it is still required to pay the amount in the payee’s application, but
- it is able to refer a dispute to adjudication as to the true value of the works.