‘Smash and Grab’ adjudications can be a real thorn in the side for employers. Construction Solicitor, Sean Garbutt looks at recent case law that confirms that an employer still has to ‘pay now and argue later’ when on the wrong end of a ‘smash and grab’ adjudication decision.
Readers may recall the recent news story where it was reported that a disgruntled contractor smashed his way through the reception area of a (at that point, soon to be opened!) newly built hotel in Liverpool. The source of his discontent was said to be unpaid wages.
Whilst this type of incident is fortunately rare, failure of payers to adhere to the payment provisions in construction contracts can have a detrimental impact on cash flow in the supply chain and the financial health of subcontractors and suppliers (potentially, therefore, disrupting progress on site). Conversely, a payer who is not fully aware of his payment obligations can also find himself having to pay out significant sums which he may not consider are truly due to the payee.
Many readers will be familiar with the concept of adjudication and, in particular, its applicability to enforcement of payment provisions in construction contracts. In broad terms, construction contracts (or in default the Scheme for Construction Contracts) entitle contractors/sub-contractors to make applications for interim payments during the currency of a project. Employers must then respond to that application either by way of a timely Payment Notice and/or a Pay Less Notice to account for any overvaluation in the application, or to make provision for the deduction of any contra-charges and the like. Failure to issue a timely Payment Notice and/or a Pay Less Notice may entitle the contractor/sub-contractor to the sum applied for as a ‘notified sum’.
What then if an employer does not make payment of that notified sum?
A contractor in this position would be entitled to commence an adjudication seeking a decision that the notified sum is due and payable, in full and without deduction – words, no doubt, which will send a chill down the spine of quantity surveyors and commercial managers everywhere! An adjudication of this type is generally difficult to defend from an employer’s perspective. Such adjudication has become commonplace and is colloquially known as ‘Smash and Grab’ adjudication (albeit a slightly different kind of approach to ‘Smash and Grab’ than the one shown in the video above…).
At the end of 2018, the Court of Appeal confirmed, in S&T (UK) Ltd –v- Grove Developments Ltd, that the employer’s remedy if it finds itself ‘on the wrong end’ of a ‘Smash and Grab’ would be to commence its own ‘true value’ adjudication. That is to say, commence a separate adjudication seeking an assessment by an independent adjudicator who will make a temporarily binding decision as to the true value of the works performed, including any allowances made for defective works, contra-charges, delay damages etc.
Clearly an employer who feels that he has been (or will be) asked to make an overpayment following a ‘Smash and Grab’ adjudication will want to commence his ‘true value’ adjudication as soon as possible so as to ensure that any windfall payment does not spend too long in the subcontractor’s bank account rather than his own (particularly if there is a danger of a subcontractor going bust before the ‘true value’ adjudication can be concluded).
What then, would be the position if a ‘true value’ adjudication was commenced prior to the employer actually making payment of any sum awarded in a previous ‘Smash & Grab’ decision?
Such a situation arose earlier this year and came before the High Court in M Davenport Builders Ltd v Greer.
There was a final account dispute between Mr and Mrs Greer and their builder (Davenport), after Davenport had made a final account application for a payment in the sum of £106,160.84. The Greers failed to submit a Payment Notice or a Pay Less Notice within the required timeframes, and Davenport commenced (and succeeded with) a ‘smash & grab’ adjudication. Davenport obtained a decision whereby the full sum of £106,160.84 was to be paid by the Greers without deduction or adjustment (the ‘First Decision’).
Despite the First Decision, the Greers did not pay the sum they had been directed to pay and instead commenced a ‘true value’ adjudication challenging the merits of Davenport’s final account application. The adjudicator in the ‘true value’ adjudication determined that, on the merits of the final account application, no sums were in fact actually due to be paid to Davenport (the ‘Second Decision’).
Davenport commenced Court proceedings, seeking an order that the sum determined as due in the First Decision should be paid notwithstanding the Second Decision. The Greers, in defence sought to rely on the Second Decision as justification not to pay the First Decision. The question before the Court was therefore whether the Greers were entitled to rely on the Second Decision, considering that they had not actually paid the amount awarded by way of the First Decision.
The Court concluded that the Greers could not rely on the Second Decision until they had discharged their immediate payment obligation pursuant to the First Decision. The Judge said:
“In my judgment, it should now be taken as established that an employer who is subject to an immediate obligation to discharge the order of an adjudicator based upon the failure of the employer to serve either a Payment Notice or a Pay Less Notice must discharge that immediate obligation before he will be entitled to rely upon a subsequent decision in a true value adjudication.”
However, the Judge did offer a chink of light to employers who may want to start a ‘true valuation’ adjudication prior to paying up in response to a ‘Smash and Grab’. He went on to say:
“That does not mean that the Court will always restrain the commencement or progress of a true value adjudication commenced before the employer has discharged his immediate obligation”.
Unfortunately, no examples were provided of when a Court may grant an injunction to prevent a party in the position of the Greers from commencing a ‘true value’, and this is something that no doubt will be tested in Court over the coming months and years.
At this point, therefore, the basic position is likely to be that parties will have to discharge all payment obligations under historic ‘Smash and Grab’ adjudication decisions prior to commencing any subsequent ‘true value’ adjudications. Failure to do so may result in an injunction being sought to restrain the ‘true value’ adjudication, or the second adjudication decision being unenforceable and ultimately the costs of obtaining that decision, therefore, being wasted.