Current legislation implies into all construction contracts the right to adjudicate; it is a form of speedy dispute resolution that is designed as a “pay now, argue later” mechanism providing a binding, but not final, decision to ensure cash flow during construction projects. It was introduced to address the high levels of insolvency in the construction industry relating to unfair payment practices where contractor’s payments were withheld due to amounts in dispute, causing the contractor to become insolvent.
The legislation also requires paying parties to give a payment notice (setting out how much is considered due to the payee) or pay less notice (where the payer intends to pay less than the amount set out in the payment notice) to the payee in relation to each payment. A failure to provide the proper notices means that the payer is obliged to pay the sum applied for regardless of any dispute over the actual valuation of the work.
These rights spawned the use of so called “smash and grab” adjudications. In circumstances where the employer does not issue a valid payment notice or pay less notice but refuses to pay the sum applied for by the contractor, the contractor is entitled to full payment of the sum applied for and can adjudicate on that basis, regardless of the true value of its work (hence the term smash and grab).
Since the introduction of the updated interim payment rules in 2011, there have been numerous cases that gradually restricted the circumstances where a smash and grab adjudication would be successful. The recent landmark case on this issue is Grove Developments Limited v S&T (UK) Limited . It clarified, on appeal to the Court of Appeal, that a contractor is entitled to proceed with a smash and grab adjudication to preserve the cash flow objective. However, the employer is also entitled to commence adjudication proceedings after paying the adjudication sum to determine what the true value of the work was.
The subsequent case of M Davenport Builders Limited v Mr Colin Greer & Mrs Julia Greer (2019) seems to have somewhat diluted Grove by saying that, while the employer is under an immediate obligation to pay the smash and grab adjudication sum, the court would not restrain the commencement of the true value adjudication in all circumstances; but, in order to rely on the decision of the true value adjudication, the employer must first pay the smash and grab adjudication sum.
There has been significant debate following the Grove decision and legal opinion has been divided; so, when the case was given leave to appeal to the Supreme Court, the construction industry was hoping it would provide some clarification. Unfortunately (for the industry) the matter settled before the Supreme Court could consider it. So, for now, Grove remains good law.
The takeaway message for all parties in construction contracts therefore is still one of caution. It is vital to make sure that applications for payment, payment notices and pay less notices are all issued correctly. If a smash and grab adjudication is started, there is the right to a second adjudication to have the payment application properly valued but the contractor must always first be paid the sum in the application for payment.