Supreme Court to consider ground-breaking decision on payment in construction contracts

08.07.19

The Court of Appeal’s decision in S&T (UK) Limited v Grove Developments Limited [2018] EWCA Civ 2448 sent ripples through the construction industry and was set to shift the utilisation of payment adjudications. This decision has now been marked for appeal to the Supreme Court.

Smash and Grab vs True Value

By way of reminder, a “smash and grab” adjudication can occur where a party has applied for payment and the payer (e.g. the employer or main contractor) has failed to serve a valid or timely payment or pay less notice in response. These notices are the payer’s opportunity to dispute that the amount applied for is due; otherwise the payee is due to be paid the full amount applied for in their application, regardless of whether those sums are properly due. If the sum is not paid, the payee can launch a “smash and grab” adjudication and seek an adjudicator’s decision that the sums applied for are due. If the payer has not served the necessary notices, the adjudicator is very likely to decide in the payee’s favour. A solution when the payer disagrees with the amount applied for has been to raise their own adjudication in parallel to the “smash and grab”, seeking a determination on the true value of the sums due. This has been a tactical strategy in order to try and trump the “smash and grab” adjudication.

All a matter of timing

Payer’s had in some cases been successful in utilising true value adjudications in order to avoid exposure to paying the full amount applied for by the payee. Concern was growing that this was compromising the objective of the Housing Grants, Construction and Regeneration Act 1996 which is to maintain cash flow in the industry. This tactic came under scrutiny in Mr Justice Coulson’s decision in Grove Developments Limited v S&T (UK) Limited [2018] EWHC 123 (TCC). Justice Coulson found that an employer was entitled to raise adjudication proceedings in order to determine the true value of the sums applied for. However, dealing with the key issue of timing he stated “The second adjudication cannot act as some sort of Trojan Horse to avoid paying the sum stated as due. I have made that crystal clear”. Therefore, Justice Coulson maintained that the amount applied for would always have to be paid first and any overpayment recovered later. The decision was appealed to the Court of Appeal, who re-iterated that before an employer could rely on a true valuation decision it required to pay the amount applied for as a result of the smash and grab adjudication first.

The next instalment

The Court of Appeal’s decision has been marked for appeal to the Supreme Court. The grounds of appeal have not yet been confirmed, but with this being one of the most hotly contested issues within the industry, further judicial guidance will certainly be welcomed.

In the meantime, employers and contractors are reminded to ensure payment and pay less notices are served on time and in accordance with the terms of their contract. The recent authorities highlight the difficulties which result when this mechanism is not properly observed and is a situation best avoided.