Blog authors: David Savage and Andrew Keeley – Charles Russell Speechlys
Recent case law has reduced the scope for unwary Employers to defeat ‘smash and grab’ adjudications.
As you would expect, the payment terms in the 2011 JCT contracts comply with the statutory payment requirements imposed on the construction industry by the Government.
It is increasingly important to understand and strictly comply with these payment terms.
For example, under a JCT Design and Build Contract 2011:
- If a Payment Notice is not given by the Employer, the sum stated in the Contractor’s Interim Application becomes automatically due by default;
- If the Employer intends to pay less than the sum stated as due in Payment Notice or Interim Application, it must serve a Pay Less Notice not later than 5 days before the final date for payment.
This only gives the Employer and its advisors two limited opportunities to pay less than the amount claimed by the Contractor.
If these opportunities are missed, then the Employer will be vulnerable to a ‘smash and grab’ adjudication i.e. an adjudication referral based solely on the Employer’s failure to serve either a Payment Notice or Pay Less Notice (with no need for the Contractor to show that the sum claimed relates to work that has actually been properly completed).
Previously an Employer might have responded with a ‘counter-adjudication’, asking the adjudicator to revalue the Contractor’s Interim Application.
However, this ‘counter-adjudication’ strategy was considered by Mr Justice Edwards-Stuart, head of the Technology and Construction Court (TCC), in an important series of recent cases.
Mr Harding (T/A Harding Contractors) v (1) Mr Paice & (2) Ms Springall  EWHC 3824 (TCC)
Having terminated his employment under a JCT Intermediate Building Contract 2011, the Contractor (Mr Harding) served his account under clause 8.12.3 on the joint Employers.
Mr Harding successfully obtained a ‘smash and grab’ adjudicator’s decision as the Employers did not serve their Pay Less Notice in time.
In response the Employers commenced a counteradjudication, asking the adjudicator to determine the proper value of the works.
Despite Mr Harding’s objections, the TCC allowed this counter-adjudication to proceed, noting that the JCT provisions dealing with payment following termination only required the Employer to pay the amount “properly” due.
This case therefore appeared to endorse the use of counter-adjudications by Employers. However, crucially it was concerned with the JCT terms dealing with the consequences of termination rather than interim payments.
The position for interim payments proved to be somewhat different.
ISG Construction Ltd v Seevic College  EWHC 4007 (TCC)
ISG had entered into a JCT Design and Build Contract 2011 with Seevic College.
ISG obtained a adjudicator’s decision that, because Seevic College had not served a Payment Notice or Pay Less Notice, it has to pay the full sum of £1m claimed in ISG’s Interim Application.
Unsurprisingly Seevic College commenced a counteradjudication and the adjudicator ordered ISG to repay £768k.
ISG challenged enforcement of this decision. The TCC agreed with ISG that the lack of a Payment Notice or Pay Less Notice meant that Seevic College was deemed to have ‘agreed’ the value of the works claimed in ISG’s Interim Application.
Consequently the counter-adjudication related to an issue that had already been decided and the decision was unenforceable. Seevic College was required to pay the full sum claimed by ISG in its Interim Application;£768k more than the counter-adjudication had (unenforceably) found was properly due.
Galliford Try Building Ltd v Estura Ltd  EWHC 412 (TCC)
This case also concerned a JCT Design and Build Contract 2011. The mployer, Estura, failed to serve a Payment Notice or Pay Less Notice.
Galliford Try consequently obtained a ‘smash and grab’ adjudicator’s decision ordering Estura to pay the full sum of £3.9m claimed in Galliford Try’s Interim Application.
Estura tried to commence a counter-adjudication but the adjudicator resigned, saying that he could not consider the proper value of the works in the absence of a Payment Notice or Pay Less Notice.
Estura then sought relief from the TCC. However, the TCC agreed that Estura could not challenge the validity of the adjudicator’s decision: if the Employer failed to serve the correct notices, it was deemed to have agreed the valuation stated in the Interim Application and had no defence to a claim for payment.
Unusually, the TCC did attempt to mitigate the potentially unfair effect of the decision. It concluded it would be unfair to enforce the award in full: but did not consider it fair to stay the entire amount. The TCC ordered that payment of £1.5m should be enforced immediately, with enforcement of the balance to be stayed until further order.
The Act was intended to protect cash-flow on projects by limiting the opportunities for paying parties to arbitrarily withhold payment. This policy of ‘pay now, argue later’ has been reinforced by the recent line of cases, which make it clear that there are very limited grounds for resisting payment where no valid Payment Notice or Pay Less Notice has been served, regardless of whether the sum claimed represents an accurate valuation of the works. There are also very limited grounds for resisting enforcement of an adjudicator’s decision, even if that decision is obviously wrong on the facts or the law.
While this policy is a laudable attempt to prevent the very real payment abuses that particularly afflicted the construction industry, it also creates a real threat of unscrupulous and opportunistic claims for payment.
So is there anything that Employers and Contractors can still do to minimise the risk and impact of ‘smash and grab’ adjudications?
- Agree sensible contractual timescales and procedural requirements for serving Payment Notices and Pay Less Notices and strictly follow them.
- Overpayment can often be corrected in the next interim valuation or final account; however, note that JCT contracts do not anticipate negative valuations.
- Check for any procedural errors in the contractor’s Interim Application. See, for example, Caledonian Modular Limited v Mar City Developments Limited  EWHC 1855 (TCC).
- The possibility of counter-adjudication may depend on the precise contract terms, as in Harding v Paice; although this case has now been appealed, with a decision due in November 2015.
- A defence of fraud may be raised in adjudication proceedings. However, the Court made clear in SG South Ltd. v King’s Head Cirencester LLP & Anor  EWHC 2645 that allegations of fraud must be supported by “clear and unambiguous evidence and argument” and that the Court has a realistic view of the construction industry i.e. overstated ntitlements, speculative arguments and honest mistakes are common practice and will not constitute fraud!
- In Galliford Try the TCC suggested that a paying party might be able to bring Part 8 proceedings in Court for a declaration as to the true sum stated in the application. However, Part 8 is usually used in claims where there is unlikely to be a substantial dispute of fact, which means it may be unsuitable for determining valuation issues.
- If all else fails, there may be grounds for bringing a negligence claim against the Contract Administrator/Employer’s Agent who forgot to issue the Payment Notice in the first place.
For further information please contact Andrew Keeley, Senior Associate at Charles Russell Speechlys LLP (Email: email@example.com, Tel: 01483 252581).
Note: Blog posts are the views of the author(s) and do not necessarily reflect the views of JCT.