Last month, Kort Egan presented a paper to the Society of Construction Law on “Smash and Grab” adjudications.
These adjudications are common, and so we thought it would be useful to provide a summary of the paper.
What Is a Smash and Grab Adjudication?
A “smash and grab” adjudication is one where payment is sought either under the payment provisions of a contract or the Housing Grants, Construction, and Regeneration Act 1996 (the “Act”). This involves a contractor contending that:
- it has submitted a valid payment application; and
- the employer has not provided a pay less notice in response,
which means that the sum claimed in the payment application is required to be paid.
In S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448, it was held that the requirement to pay the notified sum in the payment application is an immediate obligation and the employer must pay the sum stated as due, but they would then be entitled to begin a separate adjudication addressing the “true value” of the application.
But if a smash and grab adjudication has been commenced, the employer must comply with that adjudication first before it is entitled to commence or rely on a true value adjudication.
Please note, the presence of a payment application and the lack of a pay less notice does not automatically mean there is a notified sum. There are many factors to consider.
Jurisdiction
If relying on the Act, the parties need to consider if there is a construction contract as defined under the Act, and therefore if there is a right to adjudicate under the Scheme for Construction Contracts (the “Scheme”). If not, the adjudicator will not have the appropriate jurisdiction.
It is no longer the case that multiple payment applications require multiple adjudications. A referring party can now commence one adjudication for these.
What Makes a Valid Payment Application?
Substance, form, intent, and the high threshold
A payment application must be clear that it is a payment application in substance, form and intent, so that the payer has reasonable notice that the payment period has been triggered. It must state the sum considered due by the contractor at the relevant date and it must be free from ambiguity. A contractor must meet this high threshold if they want the sum to become automatically payable if an employer’s notice is not served in time.
Timing
Firstly, the parties must closely scrutinise the contract and consider what payment mechanism applies i.e. does the contract comply with the Act, is the Scheme implied and to what extent? Have the parties been using a different payment mechanism to that agreed at the start of the project?
The next thing to consider is when can a payment application be served. If the parties wish for applications to be served a certain number of clear days before a certain date (i.e. the deadline date is not included in the period), or if they wish for it to be served within specific hours, the contract will need to clearly state this. The court will not enforce these requirements if the contract is silent on this.
Another point to consider is when is the contractor entitled to interim payments until, e.g., the court has held that if a schedule has been agreed which provides valuation dates, there is no implied term for subsequent interim payments after the expiry of that schedule.
A further question is whether a payment application can be submitted early. The court has held that where the contract provides for monthly payment applications, early payment applications will not be effective, and the contractor must wait for the next relevant date.
Finally, if an application has not been served by the relevant date, is there a variation/waiver/estoppel argument? If a contractor has previously failed to comply with the payment mechanism, but the employer has nevertheless paid the claimed sum, then the contractor may argue that there has been a variation of the payment mechanism, or that estoppel/waiver operates i.e. that the employer is prevented from asserting a right which contradicts something previously agreed or that they have waived that right. However, the court has held that making a payment on one occasion where an application did not comply with the relevant date does not establish variation/waiver/estoppel for subsequent applications. Similarly, the court has upheld contract terms which expressly exclude one instance of waiver being a waiver of all subsequent non-compliance.
However, if an employer tells the contractor that they will deal with an application which does not comply with the relevant date, and then considers the application (e.g. responds with a valuation and payment notice) without stating or suggesting the application is invalid or seeking to reserve their position, then they will have affirmed the application’s validity and are estopped from saying it is invalid.
Payment Notices
The Act requires payment notices to set out the sum the payer considers due at the payment date and the basis on which that sum is calculated.
In the recent case of Downs Road Development LLP v Laxamanbhai Construction (UK) Ltd [2021] EWHC 2441 (TCC), a payment notice was sent by the employer’s agent in time but was for the sum of £1. The covering email said a further payment notice will be issued in due course as it was taking time to assess the application. After the deadline a further payment notice was sent for £657,218.50. The court held that the first payment notice was not valid as it could not be stated that that sum was the amount the employer thought due.
Conversely, many contracts contain clauses that the payment application sum is the amount the contractor believes is due to them at the relevant date. Considering the Downs case, it may be possible for an employer to argue that a payment application is invalid because the contractor cannot have actually considered the sum claimed to be due as it is exaggerated or not the true value. The courts used to give this argument short shrift, but it remains to be seen if the position has now changed.
Pay Less Notices
The Act provides that a payer may give the payee a pay less notice which specifies the sum the payer considers due and the basis on which that sum is calculated.
The court has held that a pay less notice must be in substance, form and intent a pay less notice in respect of a specific payment application and must be referable to the payment notice in which the notified sum is identified.
The Level of Specificity Required
Where contract terms or the Act require an application or notice to set out the basis on which a sum is calculated, arguments can arise on whether the application or notice does this.
It will depend on the facts of a case if a failure to break down an element of an account into line-by-line detail is a failure of substantiation that may render the application invalid.
This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any of the issues raised in this article, please contact us today by telephone or email enquiries@sharpepritchard.co.uk.
