Sector - Finance & Legislation
‘Smash and grab’ adjudications; is it all over?
Allowing contractors to take advantage of the failings of an employer by claiming payment in full where no valid payment or pay less notice is served, it is no surprise that so-called ‘smash and grab’ adjudications have become one of the construction industry’s hottest topics.
Going against the courts’ previous stance on these disputes, the recent ruling in Grove Developments Ltd v S&T (UK) Ltd , has been hailed by many as the beginning of the end for this controversial approach to deciding contractor payments. However, with the smash and grab approach still likely to prove a useful tool for contractors looking to achieve a swift decision regarding outstanding payments, it is essential that employers ensure their processes around issuing payment and pay less notices are up to scratch.
The cash flow benefits provided by smash and grab adjudications have made them increasingly popular with the claiming party to construction contracts. Under the 1996 Construction Act, employers are required to issue a valid payment notice no later than five days after the due date, detailing the sum due for payment at the due date and the basis on which that sum has been calculated. In the event that the payer disagrees with the ‘notified sum’, they are required to serve a ‘pay less’ notice ahead of the final payment date.
Employers who fail to serve a valid and timely payment or pay less notice may find themselves in a sticky situation, facing claims for the full amount of payment applied for, whether this represents the true valuation of the works carried out or not. The judgments in ISG v Seevic  and Galliford Try v Estura  show the courts’ previous approach to these cases; that the failure of the paying party to serve a pay less notice constitutes a ‘deemed agreement’ to pay the sum in full, as requested by the contractor.
The decision in the Grove Developments case has been seen by many as a fatal blow for smash and grab adjudications. In this dispute, the judge’s decision went against the courts’ previous position that the failure of an employer to serve a pay less notice represents a deemed agreement, preventing them from launching a counter adjudication to determine the ‘true value’ of an account. The conclusion, that there was a ‘powerful reason’ not to follow the precedent set by previous cases, was based on the reasoning that the Construction Act contains no limitation as to the nature, scope and extent to which either side can refer a dispute to an adjudicator.
For many businesses and institutions who regularly take up the services of construction sector contractors, this conclusion is likely to be welcomed as the light at the end of the tunnel. However, it would be premature to assume that the industry has seen the last of smash and grab adjudications. The judge’s proviso that the paying party may only launch a counter-adjudication after the first has been concluded means that there is still a financial incentive for contractors to launch a smash and grab. With the opportunity to gain a healthy short-term injection of cash, some contractors may bank on the chance that the paying party will not want to invest the time and costs needed to gather necessary evidence and launch a second adjudication, and they may therefore get away unchallenged. While employers may be able to rectify overpayments in a later payment cycle, that isn’t always going to be the case where the application is made towards the end of a contract. On this basis, smash and grab adjudications still provide a fast means for contractors to boost their cash flow and even manoeuvre themselves into a strong position for settling the final account.
With smash and grab adjudications likely to continue to prove a useful strategy for contractors for the foreseeable future, it is vital that their employers recognise the importance of issuing accurate and timely payment and pay less notices. A failure to do so could result in them being forced to part with more cash than the claiming party is fairly entitled to, threatening the smooth delivery of projects and even the financial stability of the business. The decision in the Grove Developments case, which emphasises a ‘pay now, value later’ approach, may well have implications for future cases, therefore the old saying of ‘prevention is better than cure’ is one which employers would do well to heed.
Similarly, the decision about whether to commence a counter-adjudication against a contractor should not be taken lightly. If the employer has neglected to serve the correct payment or pay less notice, and therefore made an over payment early on in a project, there may be a chance to recoup funds further along the line without taking on additional legal fees. However, if the slip – up happens late on in the life of a contract and / or the contractor appears to be struggling financially, particularly where an employer does not have sufficient security against contractor insolvency, they may need do everything in their power to avoid waving goodbye to a significant sum.
While smash and grab adjudications are still very much an option for contractors looking to get paid on a technical knockout basis, it could be argued that the courts’ latest ruling means that for both parties of a construction contract, things are no longer as clear cut. It is also important to bear in mind that for contractors looking to secure repeat business from employers, launching an adjudication may well be short-sighted in terms of marring the commercial relationship and also detracting from delivering projects on time and within budget.
By taking a meticulous approach to issuing payment and pay less notices, employers can help to avoid claims for excessive sums and the legal fees associated with counter adjudications as to the true value, and instead focus time and efforts on ensuring the smooth and cost-effective delivery of the project at hand.
Kate Onions is a construction partner at law firm, Shakespeare Martineau.
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