‘Smash and grab’ adjudications – it’s not all over
However, in this article we take a closer look at whether that is truly likely to be the case, or whether, in fact, as we conclude, education providers should, when acting as employers on construction projects, still be vigilant when handling applications for payment made by main contractors (and indeed the fees claimed by their construction consultancy providers).
A ‘smash and grab’ adjudication is one where a contractor takes advantage of the failings of an employer by claiming payment in full where no valid payment or pay less notice is issued. Following a raft of cases dealing with ‘smash and grab’ adjudications, the Court of Appeal has recently provided parties to construction contracts with some welcome guidance in its judgment in the case of Grove Developments Limited v S&T (UK) Limited ( EWCA Civ 2448).
This case has been said by many to sound the ‘death knell’ for smash and grab adjudications. However, in our experience that doesn’t reflect what is happening in practice.
Smash and grab adjudications have been popular with contractors since the Construction Act 1996 made adjudication the favourite means by which to claim payment. Under that Act, on receiving an application for payment, employers are required to issue a valid payment notice no later than five days after the due date for payment. To be valid, the payment notice must set out the sum due at the due date and the basis on which the sum is calculated. If the employer wishes to withhold any of the sum due stated in the payment notice, then a pay less notice must be issued ahead of the final date for payment.
If an employer fails to issue a valid payment or pay less notice, they open themselves to the risk of facing a claim for the full amount of payment applied for; whether this represents the true value of the works carried out or not. The approach of the court pre Grove was essentially that, in the absence of payment or pay less notice, the employer was ‘deemed to have agreed’ to pay the sum applied for by the contractor in full. As such, there was no entitlement on the part of the employer to pursue a ‘counter-adjudication’ to obtain a decision as to the ‘true value’ of the amount payable to the contractor.
The decision in the Grove case has changed the position. In short, the court decided that an employer is entitled to commence an adjudication to determine the ‘true value’ of the amount payable, even if the employer failed to serve a valid payment or pay less notice.
For education providers who regularly engage the services of main contractors and construction professionals (architects, QSs etc.), this is a welcome development. However, our view is that the legal commentators who have hailed the decision as making the end of smash and grab adjudications are being unrealistic.
We take this view on the basis that the court made it clear that this second adjudication to determine the ‘true value’ can only be commenced after the first smash and grab has been concluded (and crucially, payment of the sum the adjudicator decided is payable made). On this basis, contractors are likely to consider that smash and grab adjudications remain a good strategy in many instances, being an opportunity to obtain a cash injection. Given this, it is vital that education providers, when acting as employers, remain vigilant in ensuring that valid payment and pay less notices are issued. A failure to do so could well result in being parted with more money than the contractor is actually entitled to.
Whilst underpayments might be able to rectify overpayments in subsequent payment cycles, that isn’t likely to be possible where the application in question has been made close to the end of a contract, or (worse case) the contractor has become insolvent.
Education providers often engage construction professionals (architects/QSs/project managers) to oversee and administer their contracts with building contractors. The expectation is that such professionals should be well versed in the payment processes involved in construction contracts. However, we have been involved in instances where payment and pay less notices have not been issued by the construction professional on behalf of the education provider/employer, or have not been validly issued (e.g. issued late or not containing the right information). In those circumstances, it is worth exploring whether the education provider can look to recover its losses from the construction professional, who will usually have the benefit of being insurance-backed.
Where construction projects are being project-managed internally (for example, by those in the institution’s estates team), those in that role must be alive to any applications received and ensure that they have the requisite knowledge and experience to deal with them in a timely and appropriate way. Regular diary reminders which are back-to-back with the payment schedules in construction contractors to prompt the relevant people into dealing with applications are sensible. Mistakes can occur when there are various jobs being undertaken at the same time, with applications being submitted at difference times and in different formats.
Education providers often have long term and ambitious development plans. By taking a meticulous approach to issuing payment and pay less notice, they can help avoid claims for excessive sums and the legal fees associated with counter-adjudications as to the true value, and instead focus on ensuring the smooth and cost effective delivery of their portfolio of projects.