Coulson J’s decision in Grove Developments Ltd v S&T (UK) Ltd has triggered a great deal of commentary, including Jonathan Cope’s post, which I read with great interest. It got me thinking about what strategies an employer or contractor might adopt to counter a smash and grab adjudication, either pre-emptively or after the referral has landed.
Smash and grab claims are rarely straightforward
However, first a few words about smash and grab claims generally. Although they have an initial obvious attraction to the referring party in terms of cash flow, often they are not very effective as a dispute resolution tool. They are rarely sure fire winners. The facts of the Grove case demonstrate the point. The contractor, S&T, referred a smash and grab claim to adjudication and the adjudicator decided that Grove owed it £14 million. Strictly speaking, Grove was required to “pay first, argue later”. However, it did not pay. When the TCC finally decided the matter, it did not require Grove to pay.
One wonders how much resource and effort S&T expended on the smash and grab adjudication? In subsequent settlement discussions, was it perceived as being in a weak negotiating position, as it was clearly obliged to repay something? Parties considering a smash and grab adjudication should also consider the potential damage that it might do to its working relationships, its reputation and its prospects of being awarded work in future.
Negative certificate in the next interim payment cycle
In most cases, a party who is on the receiving end of a smash and grab adjudication and considers it has overpaid in an interim certificate can correct this in subsequent interim certificates as part of the payment cycle. In some instances, if the paying party has paid significantly more than it considers to be the true value of the works, it may seek repayment of the balance and certify a negative balance. This option may not be available in cases such as Galliford Try Building Ltd v Estura Ltd, where the interim payment application was effectively the last one in the payment cycle. In that case, there was also a suggestion that the employer could not certify a negative balance where the contract did not contain an express ability to do so.
Coulson J has provided helpful guidance on this. If a second adjudication decides that the true value of the interim account is less than the employer paid as a result of the first “smash and grab” adjudication, the employer can issue a negative certificate for the difference in the next payment cycle. This is so even where the contract has no express power to issue negative certificates (such as the JCT Design and Build Contract). The parties are contractually obliged to comply with the adjudicator’s decision and if the adjudicator decides that the employer is entitled to recover an overpayment, the contractor must pay any excess. It is an adjustment to the contractual mechanism that is justified on the basis of implied terms or restitutionary principles. The requirement to pay the sum applied for (if the employer fails to serve the relevant payment notices) is not a binding agreement allowing the contractor to hold onto that sum for all time.
When might an employer commence a “true value” adjudication?
If the paying party fails to issue its payment notices and is on the receiving end of a smash and grab adjudication, Coulson J made it “crystal clear” that, once it has paid the amount stated in the default payment notice, it may commence a second adjudication on the true value of the account.
I can see why it might want to commence a true value adjudication: an adjudicator’s decision on true value would be a compelling reason for the courts to set off against a smash and grab decision, assuming both decisions are valid, as in HS Works Ltd v Enterprise Managed Services Ltd. However, timing is critical. Could the paying party make a pre-emptive strike in circumstances where it suspected the contractor or sub-contractor, as the case may be, might start a smash and grab adjudication, thereby putting that party on the back foot? If it has to wait until the first adjudicator has given its decision and it has complied with that decision, the option of “setting off” is no longer available.
The requirement to “pay first” before commencing a second “true value” adjudication raises its own issues and it remains to be seen how this will be enforced in practice. For example, in the second adjudication, will it be a defence that the employer has not served the correct notices and has not paid the amount stated in the default payment notice? Will adjudicators decline to act due to lack of jurisdiction if there has been no payment? Does this deprive one party of its right to adjudicate “at any time”?
Pre-emptive Part 8 proceedings
In certain circumstances, a party may seek a declaration from the court that its payment or pay less notice was valid, or was served on time (unless, of course, the contract contains a requirement to refer all disputes to adjudication first). If Part 8 proceedings are commenced swiftly and relate to a discrete issue, and if the parties agree, they may be heard at the same time as enforcement proceedings. This is of course subject to the strict guidance given in Caledonian Modular Ltd v Mar City Developments Ltd and, more recently, in Hutton Construction Ltd v Wilson Properties (London) Ltd.
Grove’s success in this case was largely due to the fact that it commenced Part 8 proceedings very quickly – within eight days of the contractor’s referral – seeking a declaration that its pay less notice was valid. Grove knew that if the adjudicator’s decision went against it (as it did), it would be neutralised by the declaration.
So why doesn’t everyone use pre-emptive Part 8 proceedings? Well, the dispute in this case related to the validity of the notice. In many construction disputes, the issues are less clear cut. If, for example, the pay less notice is served out of time, or is otherwise invalid, proceedings to determine the true value of a final or interim account might not be appropriate for Part 8, or if they are, the matter would not be heard at the same time as enforcement proceedings, but some time later. In the meantime the losing party would have to pay up, or face a judgment for the sum of the smash and grab adjudication, plus an award of indemnity costs. In general then, in less clear cut cases, a second adjudication on true value may be preferable.
Clearly, the Grove decision has shifted the battleground for smash and grab claims. Undoubtedly the courts will map out the new territory in due course. Until then, we are likely to see some interesting arguments run by employers and contractors alike, both in adjudication and subsequent court proceedings.