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Sat April 20 2019

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New case muddies the water on smash-and-grab adjudications

11 Apr A landmark legal judgment expected to deter ‘smash-and-grab adjudications’ in construction has been complicated by a new ruling – but those involved in financial disputes should still pay promptly, explains Tom Collins, construction dispute expert at law firm Weightmans.

In March 2019 the Technology & Construction Court (TCC) handed down a ruling that could prolong the legal saga over the use of what have become known as ‘smash-and-grab’ adjudications in construction payment disputes. In Davenport Builders v Greer, the judge found that a client was within its right to commence a ‘true value’ assessment of some building work before paying its contractor, a step that builds on a recent landmark ruling and could deter ‘smash-and grab’ adjudications. The danger is that it could also encourage those engaged in disputes to hold off payment until they start their own legal challenge – a risky move that could have serious financial consequences.

By way of a quick reminder, ‘smash-and-grab’ adjudications are a common feature of construction industry pay disputes. The practice is rooted in the terms of the Construction Act (1996). When one party applies for payment, its client must either pay, or – if they dispute the cost – serve a pay less notice within the time frame agreed in its contract. If the client fails to do so, the party seeking payment is entitled to the full sum requested, which it can claim through adjudication. This has proved to be controversial when the paying party believes the sum applied for does not reflect the true value of the work actually carried out.

In February 2018, the hotly anticipated case of Grove Developments v S&T seemed to change the state-of-play, putting more power in the hands of clients. The judge found that Grove Developments was able to dispute the value of the works it was being asked to pay for by contractor S&T through a separate adjudication, even though it had not served a payment or pay less notice within the agreed timeframe. While the judge ruled that Grove had to first pay the full amount and then seek to recover the overpayment after the fact, the ruling led many to believe that this would set a precedent for counter adjudication which would make ‘smash-and-grab’ a thing of the past. A contractor could no longer pin its argument for full payment on the client’s failure to respond in good time.

The latest ruling

Davenport v Greer is the first case to cite Grove v S&T. But, instead of building on the clarity it offered, the case has only confused matters further. Davenport – the builder/contractor – applied for payment. The client, Mr & Mrs Greer, did not issue a payment or pay less notice, so Davenport referred the dispute and obtained an award for the full amount through a ‘smash-and-grab’ adjudication. At the same time, the Greers commenced a separate adjudication that found the ‘true value’ of the work and that they owed no money to Davenport.

When the two conflicting awards were weighed up by the TCC, Davenport was successful. Mr & Mrs Greer still had to pay the sum that Davenport had initially applied for because they had not responded in good time with a pay less notice. However,  critically – and contrary to the decision in Grove v S&T – the judge indicated that it may be acceptable for paying parties to commence adjudication to obtain a ruling on the ‘true value’ of works before making payment. 

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In practice, this could mean contractors that choose to use the smash-and-grab tactic have to reimburse any overpayment almost as soon as they receive the money they have fought for, because the counter ‘true value’ adjudication could begin simultaneously.

This potential outcome might further deter ‘smash and grab’ adjudications. However, frustratingly, the judge gave no clarity about the exact grounds on which a court would permit a ‘true value’ adjudication to be instigated before payment had been made – leaving the legal guidance open ended. For paying parties, there is a risk that any adjudication commenced before payment is made could become unenforceable if another court takes a different view.

Pay now, argue later

The outcome of Davenport v Greer means that if a developer, or indeed a contractor, receives an application for payment that they dispute, then the most sensible course of action is still to serve the proper payment or pay less notice promptly in accordance with the provisions of the Construction Act. This avoids the need for any further adjudication on the true value of a project

However, if a notice is not served, it is still possible to dispute the true value of works. However, until further judicial guidance is given, taking any action to do so without first making payment carries risk.

About the author: Tom Collins is a partner in Weightmans LLP’s built environment team, with experience advising contractors and developers on payment disputes

MPU

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