“SMASH AND GRAB” ADJUDICATIONS: CONFUSION AS TO CASH-FLOW IN THE CONSTRUCTION INDUSTRY [March 2018]
Case: Grove Developments Limited v S&T (UK) Limited
Reference:  EWHC 123 (TCC)
Keywords: adjudication, “smash and grab”, Housing Grants, Construction and
Regeneration Act 1996, payment and pay less notices
“Smash and grab” has become an increasingly utilised phrase amongst professionals in the construction industry. The road to “smash and grab” adjudications began in 2014 with the case of ISG v Seevic  EWHC 4007 (TCC) in which it was decided that, in the event of an employer failing to serve a valid and effective payment and/or pay less notice in response to an interim application for payment, the amount stated in that interim application for payment became the “notified sum”. As the employer was deemed to have agreed the amount stated in that interim application for payment, he was under an obligation to pay the full amount of the “notified sum” to the contractor by the final date for payment. At the time, the court’s position was that the true value of the interim application had "been determined" - meaning that the employer was not able to adjudicate on the true value of the works but rather hope that any overpayment could be recovered in full in subsequent interim payments.
That was until the 2017 case of ICI v Merit Merrell  EWHC 1763 (TCC) when it was suggested by the court that ISG v Seevic may not be decided in the same way, leaving the construction industry wondering what was going to happen next. In his decision published only last week, The Hon Mr Justice Coulson has taken the step to depart from the decisions of his fellow colleagues in an attempt to clarify the alleged confusion as to cash-flow within the construction industry.
Grove and S&T entered into an agreement incorporating the JCT Design and Build Contract 2011 (the “Contract”) under which S&T agreed to design and build a new Premier Inn Hotel at Heathrow Terminal 4.
Following practical completion having been achieved, S&T issued to Grove its interim application for payment 22 in amount of circa £39m, that being some £14m more than Grove’s latest valuation of the works. Grove issued S&T a payment notice which the parties accepted was not served in time. Grove also issued a pay less notice which S&T complained was invalid by reason of the fact that it referred to a detailed calculation detailed in the out-of-time payment notice.
S&T commenced a “smash and grab” adjudication which was decided in its favour. The Adjudicator decided that Grove’s pay less notice was invalid because the basis of the calculation of Grove’s figure was set out in a separate document. Grove was, therefore, under an obligation to make payment to S&T in the amount of S&T’s application for payment 22.
In anticipation of an adverse result in the adjudication, Grove commenced CPR Part 8 proceedings raising the following issues for the court’s determination:
1. Issue A: whether or not Grove’s pay less notice complied with the Contract.
2. Issue B: even if Grove’s pay less notice did comply with the Contract, whether the decision in the adjudication should still be enforced.
3. Issue C: whether, in principle, at this stage, Grove is entitled to commence a separate adjudication seeking a decision as to the ‘true’ valuation of S&T’s interim application for payment 22.
4. Issue D: whether Grove’s notices in respect of liquidated damages were properly issued. This was a separate and discrete issue from the other three issues, and is not addressed in this article.
Issue A: whether or not Grove’s pay less notice complied with the Contract
In considering the first issue, The Hon Mr Justice Coulson looked at the case of Systems Pipework v Rotary Building Services  EWHC 3235 (TCC) in which he decided that the payment notice in question was deficient because it set out only one side of the equation, namely the gross calculation, and so did not specify the sum due and payable.
In accordance with that authority, The Hon Mr Justice Coulson found that Grove’s pay less notice did properly set out the basis of calculation and it was, therefore, valid. One of the reasons for his conclusion was that there can be no possible objection in principle to a notice referring to a detailed calculation set out in another, clearly-identified document. The Hon Mr Justice Coulson rejected S&T’s argument as 'artificial and contrived' in that it would have the effect of obliging a party of re-sending documents already sent. He concluded that that was not a common sense or business-like approach to a notice of this kind, and that there was nothing in the contract which required the re-sending of a document already sent, provided always that, as it was here, it was clear to what document the pay less notice referred.
It is worth noting that the court did recognise that there may be a risk that something may go wrong with the technology or the mode of delivery of the first document, however, whether or not that rendered a pay less notice invalid turned upon the facts in each case. On the facts of this case, The Hon Mr Justice Coulson held that the reasonable recipient would have known precisely what sum was being deducted and the basis of its calculation.
Issue B: even if Grove’s pay less notice did comply with the Contract, whether the decision in the adjudication should still be enforced
Having concluded that Grove’s pay less notice was valid, The Hon Mr Justice Coulson concluded that the adjudicator’s decision should not be enforced. One of the reasons for arriving at that conclusion was based on the fact that the parties had agreed to be bound by the adjudicator’s decision unless and until the underlying dispute was resolved. The Hon Mr Justice held that he had resolved the dispute as to the validity of the pay less notice.
Issue C: whether, in principle, at this stage, Grove is entitled to commence a separate adjudication seeking a decision as to the ‘true’ valuation of S&T’s interim application for payment 22
The Hon Mr Justice Coulson decided that the answer to this issue was ‘yes’ for a number of reasons.
Following Henry Boot v Alstom  EWCA Civ 814, The Hon Mr Justice Coulson held that an employer whose payment notice or pay less notice was deficient or non-existent could pay the contractor the sum stated to be due in the contractor's interim application and then seek, in an adjudication, to dispute that the sum paid was the "true" value of the works for which the contractor had claimed.
The Hon Mr Justice Coulson considered section 108(1) of the Housing Grants, Construction and Regeneration Act 1996 (the “1996 Act”) and said there was no limitation on the nature, scope and extent of the dispute which either side could refer to an adjudicator. The same was also true of paragraph 20 of the Scheme for Construction Contracts.
Further, the dispute which the employer would wish to raise in a further adjudication was a different dispute to that determined in the previous adjudication, which concerned the question of whether the payment notice or pay less notice was deficient or out of time, not detailed matters of valuation. The Hon Mr Justice Coulson held that any other result would be an unwarranted restriction on Grove's ability to adjudicate any dispute "at any time" in accordance with section 108(2)(a) of the 1996 Act.
The Hon Mr Justice Coulson said that it was instructive to look at the words of the contract which expressly differentiated between "the sum due" and "the sum stated as due" in the notices. It was held that there was a fundamental difference between those two concepts. In particular, “the sum stated as due” does not magically transform into “the sum due” by reason of the employer’s failure to serve a proper or timeous pay less notice.
In considering the matter of fairness, The Hon Mr Justice Coulson noted that a contractor can launch an immediate attack on the "sum stated to be due" in the pay less notice, because they say that it is too low. He said that there would need to be clear words in the 1996 Act, the Scheme and/or the contract which would prohibit the employer from being able to do the same. Given that there were no such words, there was no justification for a difference in treatment between the employer and the contractor.
The Hon Mr Justice Coulson noted that the only real justification which has been advanced for prohibiting an employer from commencing a second adjudication, to deal with the dispute about the 'true' value, has been the mantra that it does not really matter, because the prohibition only applies to interim applications, and does not apply to the final application. It was held that, as a matter of first principles, there was nothing whatsoever to justify treating interim and final applications/payments in different ways. The contract treats them in the same way. So too should the parties, the adjudicators and the courts.
The Hon Mr Justice Coulson’s comments on ISG v Seevic and Galliford Try v Estura
As part of his judgment, The Hon Mr Justice Coulson considered ISG v Seevic and Galliford Try v Estura  EWHC 412 (TCC), and confirmed that those decision should not be followed. In particular, The Hon Mr Justice Coulson stated that the concept of a deemed agreement is not only unjustified, but it is also an unnecessary complication. He concluded that the analysis in both ISG v Seevic and Galliford Try v Estura is erroneous and/or incomplete.
What is the effect of Grove Developments v S&T?
The 1996 Act was intended to assist cash-flow within the construction industry. In the opinion of The Hon Mr Justice Coulson, the decision to allow the ‘true’ value of an interim application for payment to be decided in an adjudication would not prejudice the construction industry in respect of cash-flow at all. He said that it was not a policy of the 1996 Act that contractors would be entitled to hang on for lengthy periods to sums to which, on a proper analysis, they were not entitled. Cash-flow must not be confused with the contractor retaining monies to which he has no right.
Does Grove Developments v S&T undermine the notice regime under the 1996 Act?
The suggestion is that every employer who misses the relevant deadline for the pay less notice will simply start a second adjudication as to the true value. The Hon Mr Justice Coulson raised the question: “But why would they?” Proceeding on that basis could be inefficient and costly; the employer would still have to pay the sum stated as due in the interim application for payment and no second adjudication would be necessary in circumstances where the alleged over-valuation could be resolved in the next interim application. The Hon Mr Justice Coulson made it clear that, even if the relationship between the parties was poor and there was a second adjudication to determine the ‘true’ value of the interim application, that second adjudication cannot be used as some sort of Trojan Horse to avoid paying the sum stated as due.
Is this the end of “smash and grab” adjudications?
The Hon Mr Justice Coulson did not think so. He said the sky had not fallen in; there were no significant adverse consequences and his decision did not strike at the heart of the adjudication system. Quite the contrary, The Hon Mr Justice Coulson thought that his decision would strengthen the system by reducing the number of “smash and grab” adjudication which, in his opinion, had brought adjudication into disrepute.
Grove Developments v S&T is likely to create much debate amongst those in the construction industry. We will have to wait and see whether S&T appeals the decision and how the courts respond to The Hon Mr Justice Coulson’s judgment in subsequent “smash and grab” cases.