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New ruling does not resolve 'smash and grab' adjudication uncertainty

ANALYSIS A new court ruling leaves us little further forward on an employer's right to adjudicate the true value of the sum due under a construction contract after failing to serve payment notices and without first paying the amount demanded by the contractor.27 Feb 2019

In a case between M Davenport Builders and Colin and Julia Greer the judge in the High Court granted summary judgment to a building contractor enforcing a so-called 'smash and grab' adjudication for £106,000. He did so despite the employer going on to successfully obtain a separate adjudication decision about the true value of the account finding that no sum was payable.

Mr Justice Stuart-Smith was required to consider whether the employer was entitled to commence or rely upon a true value adjudication without having first made the immediate payment required by the smash and grab adjudication: a term which refers to the pursuit by the payee of the other party for the full amount where no valid payment or pay less notice is served.

The utility of such a judgment where, once paid, the employer would be entitled to repayment is baffling, but the decision was predictable in light of the clear statements made by Sir Rupert Jackson in the case between construction firm S&T and developer Grove Developments last year.

Timing and the Grove decision

The Court of Appeal decision in the Grove case confirmed that, contrary to a 2014 ruling in a dispute between ISG Construction and Seevic College, a payer is obliged to pay the notified sum but it can then adjudicate the correctness of the value. That was not a great surprise. But what was particularly interesting was the Court of Appeal's consideration of timing and the question of when such a 'true value' adjudication can be commenced.

Whether it is open to a payer who fails to serve a payment or pay less notice to immediately start an adjudication about the true value and not pay the notified sum in the meantime is an important question. Uncertainty about the timing of the value adjudication has the potential to undermine the effectiveness of the amendments to the payment provisions of the Construction Act because it might be open to the payer to start a value adjudication and get a decision in its favour as quickly as the payee could enforce its right to payment of the notified sum.

Sir Rupert Jackson addressed this critical issue in his judgment in the Grove ruling. He described a hierarchy of obligations in the Act and said that the adjudication provisions are "subordinate to the payment provisions". Given that section 111 of the Act is all about cash flow - generating a provisional figure for immediate payment - it must not be trumped by the right at any time to refer disputes to adjudication.

The Act must therefore be construed as "prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation". In Jackson's view, a value adjudication cannot be commenced until the notified sum has been paid.

Despite the clarity of this judgment, there remained considerable uncertainty as to how this would work in practice:

The judgment seems to assume that the notified sum has been established in adjudication, but what if that is not the case and there is uncertainty about whether a valid payment or pay less notice has been served? What is to stop the payer referring the true value dispute to adjudication before the payee starts a notified sum adjudication, or before it is completed? In other words, could the payer commence a true value adjudication before the immediate payment obligation that Jackson identifies actually arises?

It was also unclear how, in practice, a potentially premature adjudication about value would be stopped. Is it a point that goes to jurisdiction of the adjudicator, or would the court grant an injunction?

This being the case, it was doubtful that the Grove case would be the final chapter in the case law.

The decision in the Davenport case

In the Davenport case Mr Justice Stuart-Smith held that the employer was not entitled to set off the true value decision where nothing was due) against the smash 'n' grab decision where £106,000 was due.

For the judge, in light of the Grove decision, it "should now be taken as established that an employer who is subject to an immediate obligation to discharge the order of an adjudicator based upon the failure of the employer to serve either a payment notice or a pay less notice must discharge that immediate obligation before he will be entitled to rely upon a subsequent decision in a true value adjudication. Both policy and authority support this conclusion and that it should apply equally to interim and final applications for payment".

But what about the more difficult issues outstanding from the Grove decision, as set out above? According to Mr Justice Stuart-Smith, the decisions of Mr Justice Coulson and the Court of Appeal in Grove are "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".

However, whilst it is correct that clear statements were made to this effect in Grove, their application remains uncertain. Indeed Mr Justice Stuart-Smith goes on to say: "That does not mean that the court will always restrain the commencement or progress of a true value adjudication commenced before the employer has discharged his immediate obligation ...It is not necessary for me to decide whether or in what circumstances the court may restrain the subsequent true value adjudication and, in these circumstances, it would be positively unhelpful for me to suggest examples or criteria and I do not do so".

Lawrence Davies is a construction disputes expert at Pinsent Masons, the law firm behind Out-Law.com.