Smash and Grabs in 2023 – Pay now, argue later
For better or for worse, “smash and grab”/ “notified sum” Adjudications have been a staple of the Construction Adjudication landscape ever since the amendments to the original Construction Act took effect in 2011
The purpose of the statutory “notified sum” regime is all about cash flow. It provides that a “notified sum” stated within either a valid payment application, valid payment notice or valid pay less notice (as the case may be) must be paid to the contractor by no later than the relevant final date for payment. Cash flow has been described on numerous occasions by the Courts as being the “lifeblood” of the construction industry. The philosophy behind the statutory “notified sum regime” and the related right to Adjudicate is all about “paying now, arguing later”.
In practice, your perspective on the merits of “smash and grab” Adjudications will probably depend upon which side you end up on within any Adjudication. An Employer may feel that a “notified sum” adjudication (based on a technical deficiency on a payment notice issued) is an opportunistic attempt by the Contractor to be paid a sum which it doesn’t want to have properly assessed and valued by an adjudicator. The Contractor will likely feel like it is an entirely legitimate means of relying on its statutory entitlement to be paid a “notified sum” – in a situation where the Employer may have been consistently failing to issue timely and clear payment notices or paying them the amount legitimately claimed on time.
There has been a spate of recent TCC decisions regarding the “notified sum” regime over the last few years, which have discussed how the “notified sum” regime sits with the potentially conflicting right which parties have under Section 108 of the Construction Act to Adjudicate any dispute at any time.
In practice, what has happened is that a party who has to defend a “notified sum” Adjudication would immediately seek to launch a “true valuation” cross referral to Adjudication – with the aim of seeking to mitigate the risk of having to pay out a large sum of money to a Contractor. The outcome of the “true valuation” dispute would almost always result in a lower valuation than the amount applied for by the Contractor. The paying party’s strategy would be to try and delay the enforcement of any “notified sum” decision to allow the “true valuation” decision to be issued – thereby trying at least to reduce the timescale between having to pay the “notified sum” and getting a decision ordering a repayment from the Contractor, or perhaps avoiding paying out at all in respect of the notified sum
Parties have an almost unfettered right to Adjudicate at any time pursuant to the Construction Act.
Recent case examples
The Courts in recent years have grappled with the need to preserve this unfettered right to Adjudicate with the need to support and enforce the “notified sum” regime.
The most famous of these cases was Grove Developments Ltd v S&T (UK) Ltd – in which the Court of Appeal held that where a party is required to pay the “notified sum” by reason of its failure to issue a valid Payment Notice or Pay Less Notice, such party is entitled to embark upon a “true valuation” adjudication in respect of that sum, but only after it has complied with its immediate payment obligations under Section 111 of the Construction Act.
In that case, Coulson J in Grove at first instance stated that “the second adjudication cannot act as some sort of Trojan horse to avoid paying the sum stated as due” …
In Davenport Builders Ltd v Greer the judge held that the decisions of Coulson J and the Court of Appeal in Grove were clear and unequivocal in stating that the Employer must make payment in accordance with the contract or in accordance with section 111 of the Amended Act before it can commence a “true value” adjudication.
There was however a degree of uncertainty following these decisions as to precisely when and in what circumstances an Employer is prohibited from commencing the “true valuation” Adjudication.
That is because Stuart-Smith J in his judgment in Davenport stated that courts may not always restrain the right to adjudicate on a second, true value dispute before the Employer has discharged his immediate obligation; however the wording in that judgment (and lack of examples/criteria) seemed to suggest that this would be the exception, rather than the rule.
The decision in Davenport therefore left a small degree of uncertainty with regard to whether an Adjudicator appointed on a true valuation Adjudication whilst a “notified sum” was outstanding or running lacked jurisdiction.
In Bexheat v Essex Services Group the Court provided welcome clarification on this point.
O Farrell J reminded the parties of the relevant parts of Section 111 of the Construction Act and the Decisions in Grove and Davenport and concluded by stating that:-
- Where a valid application for payment has been made, an Employer who fails to issue a valid Payment Notice or Pay Less Notice must pay the notified sum pursuant to Section 111 of the Construction Act.
- Section 111 creates an immediate obligation to pay the “notified sum”.
- An Employer is entitled to Adjudicate pursuant to S108 of the Construction Act to establish the “true valuation” of the work, potentially requiring a repayment by the Contractor of the notified sum.
- The entitlement to Adjudicate is subrogated to the immediate payment obligation in Section 111.
- Unless and until the Employer has complied with its immediate payment obligation under Section 111, it is not entitlement to commence, or rely on a “true valuation” adjudication under section 108.
So, it now seems to be fairly clear and settled law that if there is a “notified sum” in existence, the Employer must pay first and argue later.
Henry Construction Projects Limited v Alu-Fix (UK) Limited
In the very recent case of Henry Construction Projects Limited v Alu-Fix (UK) Limited the Technology and Construction Court provided some further guidance on this point in considering the timing of the commencement of a True Value adjudication in the event of a live Notified Sum Adjudication.
The facts of Henry were briefly as follows:-
- Alu-Fix referred a Notified Sum claim to Adjudication.
- Henry defended and participated within that Adjudication and argued that it had issued two valid Pay Less Notices in response to Alu-Fix’s application.
- At the same time, and before the conclusion of the “notified sum” Adjudication, Henry launched its own “true valuation” dispute.
- Alu-Fix raised objections to the Adjudicator’s jurisdiction and asked him to resign, however he agreed to stay the True Value Adjudication until the outcome of the Notified Sum Adjudication had been decided and any sums awarded had been paid.
- Alu- Fix was successful in the Notified Sum Adjudication. The Adjudicator awarded it the full sum claimed. Henry made full payment of the awarded “notified sum” and the stay in the True Valuation Dispute was then lifted.
- The Adjudicator in the True Valuation Dispute determined that Alu-Fix had to repay £191,753.88 plus interest to Henry.
- Alu-Fix refused to pay that sum and resisted enforcement of the Decision, contending that the commencement of the True Valuation Adjudication before payment of the “notified sum” resulted in the Adjudicator lacking Adjudication.
Decision of Henry
The Court agreed with Alu-Fix and held that Henry was not entitled to commence the True Valuation Adjudication without having first discharged its immediate payment obligation. The True Valuation Adjudicator therefore lacked jurisdiction and the Decision was not enforced.
The Judge stated that the approach taken by Henry undermined the “cash flow” policy underlying the procedure in the Construction Act.
The Judge also made some interesting comments regarding how he would expect parties to resolve matters.
Interestingly, the Judge seemed to suggest [at paragraph 40 of the Decision] that if the Employer was to commence a true valuation adjudication whilst the notified sum one is afoot but then subsequently win on the notified sum – so, in effect, it was decided that there was no legitimate notified sum claim the true valuation Adjudicator did have jurisdiction all along – because there was no immediate payment obligation – and the decision in the true valuation Adjudication would be valid and enforceable.
The reality is that any party who does commence a “true valuation” dispute whilst a rival “notified sum” dispute is running will likely encounter an Adjudicator resigning or, at best, staying the True Valuation Adjudication in the meantime pending the outcome of the “notified sum” Adjudication.
Commentary following Henry
Following the latest line of authorities, it seems to us that an Employer could in practice take the same steps that Henry did in this case:-
It could launch its own true valuation dispute whilst the Notified Sum one is ongoing – and be told to stay it pending the outcome of the “notified sum” Adjudication (or worse, risk the Adjudicator simply resigning) – but if the Employer does defeat the “notified sum” claim, then the Adjudicator can recommence the stayed Adjudication and would have always had jurisdiction – because there was no immediate payment obligation under Section 111 of the Construction Act.
The flip side of this scenario and real risk would be that if the Employer was to lose the “notified sum” Adjudication, then even if it subsequently paid the notified sum awarded, its “true valuation” dispute would have been issued prematurely and the Adjudicator lacked jurisdiction.
In all fairness, the construction industry has needed the Courts to “get behind” the notified sum regime properly for a while; and (as the Courts will often say themselves), you can avoid all of this by getting your valid notices in on time.
The reality is that “true valuation” disputes only tend to come about anyway because the Employer is trying to mitigate a “notified sum” issue, otherwise why would they trigger one and risk a poor decision?
Conclusion
The recent decisions of the TCC make it clear that they are prepared to act to ensure that cash flow is the priority. The entire purpose of the Construction Act is to ensure a philosophy of “pay now argue later”.
The recent case law makes great strides in supporting the “notified sum” regime and clarifying the restriction on that right to Adjudicate at any time. That restriction has been limited to not being permitted to pursue a “true valuation” dispute in respect of an interim or final application where there is a legitimate outstanding notified sum claim.
In the light of these cases, it is quite clear that Smash and Grab Adjudications are going nowhere – and will remain a very useful weapon for any Contractor to use to get paid promptly.
As for Employers – quite clearly, the best advice is to simply ensure that your payment notices are issued validly and timeously – to avoid any of these costly issues occurring.
Speak to a specialist
Please contact senior associate Mark Christie if you have any questions or queries about the issues above.
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