Parties to a construction contract who have not been paid have a right to refer their payment claims to adjudication under the Housing Grants, Construction and Regeneration Act 1996 (the Act), in what is an essential mechanism for parties to enforce their contractual payment rights.
However, under “smash and grab” adjudication, if the paying party fails to serve a valid or timely payment notice or pay less notice in response to a payment application, the full sum applied for becomes due to be paid, regardless of whether the full amount is properly due. If it is not paid, the payee can commence adjudication to promptly recover payments they have applied for.
This ‘pay now, argue later’ approach was the aim of the adjudication procedure established under the Act, to allow parties to a construction contract to maintain cash flow during an ongoing project.
However, if it disagrees with the amount applied for, a solution has been for the paying party to commence its own cross adjudication in parallel seeking a determination of the true value of the sum due. However, this conflicts with the ‘pay now, argue later’ principle.
In the first instance decision in S&T (UK) Ltd v Grove Developments in March of this year, the court cast the future of “smash and grab” adjudications into doubt.
Coulson J found that the payer may adjudicate the “true value” in a separate adjudication where no payment notice or pay less notice was given. However, in relation to timing he stated “The second adjudication cannot act as some sort of Trojan Horse to avoid paying the sum states as due” and maintained that the sum applied for would have to be paid first and any overpayment recovered later.
The Court of Appeal upheld Coulson J’s decision, reaffirming that, if payment of the notified sum has been made, the absence of a payment notice or pay less notice will not prohibit a separate “true value” adjudication.
S&T challenged the Court of Appeal’s decision and on 22 May 2019, the Supreme Court granted leave to appeal in what could prove to be a significant decision.
As the decision is now subject to appeal, one should guard against the assumption that a party is entitled to commence a separate adjudication having served a defective payment or pay less notice, or indeed having failed to serve one at all.
Extra care should continue to be taken to issue payment notices and pay less notices, as failure to do this would still amount to an acceptance of the payee’s value of their application, binding the paying party to make a potentially onerous payment.
Only time will tell as to the decision of the Supreme Court, but the latest twist in the “smash and grab” saga seems to be approaching a definitive end.