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Articles from the Silver Shemmings Ash Team on contractual matters, recent case law changes and items of interest in the construction and property world

Smash & Grab! Big Changes Afoot by Henry Hathaway

July 17, 2018 | Silver Shemmings

adjudicationsOne of the most significant judgements in terms of payment within the construction industry has been decided by Coulson J in his final judgement prior to his Court of Appeal appointment. This has a bearing on the payment mechanism of applications and in particular addresses the draconian position of “smash and grab” adjudications.

There is little doubt that despite the implementation of the Housing, Grants, Construction And Regeneration Act 1996 (as amended), there persists an extraordinary issue with respect to payments. The writer in many instances has dealt with corporate insolvency as a direct result of non-payments and various disputes in relation to payments within the construction industry.

Following 12 years within the construction industry, having qualified as a civil engineer and prior to becoming a solicitor, it is an area known all too well indeed, leading to a focus on assisting companies throughout its projects in terms of good practice and to meet the necessary evidential requirements of ascertainment of accounts and performance.

Since 2013, most payers within the construction industry have been aware of the significance of not issuing a Payment and/or Payless Notice either under the contract or in accordance with the Scheme for Construction Contracts. For those who were not aware of the ruling of ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) but were subjected to a “smash and grab”, they were soon aware that, in the absence of a valid payment and/or payless notice and in the absence of fraud, the full amounts would become due and payable upon a Decision. This represented a draconian position to which the merits and the true value became somewhat irrelevant. In fact, if the Decision was thereafter sought to be enforced, the only position available would be on a point of jurisdiction or breach of natural justice. This is because it is most likely that an Adjudicator’s Decision would be upheld and enforced. The merits would be irrelevant and immaterial. Significantly, there remains an issue with payment in the construction industry. This is despite the prevalence and accessibility of Adjudication.

Ultimately, a construction contract is an agreement based on terms and to which the payment mechanism is contained within, if the contract does not contain the adequate payment provisions, then the Scheme for Construction Contracts will be imported.

For those who are not aware of what a “smash and grab” adjudication means or what it’s effect is, it is borne from a Decision in 2013 when a matter came before Edwards Stuart J in the TCC. Essentially Seevic College, as the employer and the payer, had not issued a valid payment/payless notice in response to an application by the Contractor ISG. The Court decided that in the absence of a payment and/or payless notice, it must be that the full applied amounts thereafter become due and it is wholly irrelevant as to the true value or the merits of the account.

Since then, it has been a case of let the payer beware and spawned a plethora of adjudications that were run on this basis. In some cases it meant that a payer would be paying more than the actual value of work undertaken thus being exposed. The only answer to this was to either a) litigate or b) as case law developed wait until the final account. In some instances this would not be a suitable option owing to time and costs. But essentially, the rule of “pay now litigate later” was a strict mantra that the courts would uphold.

Everything would then become technical as to the nature of the timing, form and content of a payment and/or payless notice, even style. Every attempt would be made in this respect by a party in an adjudication and/or enforcement hearing to raise what were technical issues in nature. Such arguments are not in fact new, and in 2009, the courts  said that they would take a practical view of the contents of a withholding notice (as it was then) and “will not allow complaints as to form which maybe described as artificial and contrived”. It was many times that this particular quote would be used in adjudications to defend a payer especially post the ruling in ISG. In fact, in many instances (especially in 2015) the courts handed down a number of judgements that sought to deal with the issues that were raised as a result of the ISG v Seevic authority. In effect it was at one’s peril to not issue a payment and/or payless notice.

But now the question has arisen as to whether this avenue of a “smash and grab” has in fact been brought to an end. The proceedings were brought under what are known as Part 8 proceedings in the TCC before Coulson J. Ultimately, there were four issues that were brought before the court but principally it is issue three which is of interest here.

In terms of the background, both Grove Developments Limited and S&T (UK) Limited had a Decision from an Adjudicator, that Adjudicator had determined that the payless notice issued by Grove was invalid and that the sums of over £14m were due to S&T (UK) Limited on the basis of a “smash and grab”, that is there was no further enquiry into the merits or true value. The issues the court had to deal with were:

  1. Did Grove’s payless notice comply with the contract?
  2. If it was compliant, should the Decision be enforced?
  3. Is Grove entitled to commence a separate Adjudication in respect of the true value?
  4. Notice for LD’s.

When brought before the court, the court in fact disagreed with the Adjudicator. The court accepted that the incorporation by reference of the basis of calculation previously issued was in fact valid. This dealt with the first issue and thereafter, issue two fell away as there was nothing to enforce following determination of issue one.

What is then of interest is that Judge, once determining the issues in order to resolve, did not stop there. Even though he had arrived at the answer, he still dealt with issue three. In fact, such was his determination to resolve the matter, he stated that his resolution of issue three would not be held to be obiter, that is to say it will be binding in future matters.

Issue three essentially asked the following question – whether there is a right to adjudicate when an employer, whose payment notice is deficient or non-existent, pays the contractor the sum stated as due in the contractor’s interim application and then seeks, in a second adjudication, to dispute that the sum “paid” was the true value of the works for which the contractor has claimed.

Judge identified six reasons that the answer was to be a resounding yes. Carefully, each of the six reasons were explained and detailed both the previous authorities and statute law. Of particular interest was the reason of Equality and Fairness. Simply put, it was a case in which a contractor who is dissatisfied with the contents of a payless notice may adjudicate to ascertain the proper value, if that is right, to which it is, then why as a matter of procedure can it not be held the other way. Ultimately, S&T’s case as presented failed.

So, what in effect does this mean for the construction industry and what are the likely consequences? It was inevitable that at some point the courts would deal with smash and grab adjudications. In many instances, there was a noted and consistent course of action by payee’s who would rely on a deficient or non-existent payment and/or payless notice and it has been widely seen as being the mechanism to elicit payment either by a threat of adjudication or in fact referring it as  a dispute.

However, when one takes a step back and looks inward at the industry itself, the application of “smash and grabs” were, in effect, attempts by the payee in many instances to elicit payment and ultimately payment within the industry is still a major issue. Many companies will believe that corporate insolvency is a result of recessions, but in fact there is a growing number of companies who have grown beyond the means and liquidity available. In this environment, tendering and awards of contracts are in a better state but underpinning that growth is a requirement to enable cash flow in order to maintain it.

The judgment itself is welcomed especially by payer’s who now have an opportunity to have amounts paid on the true value. In effect, it is now perhaps worthless and costly to attempt a “smash and grab”.

What is clear in the judgement and the approach of the courts thus far is  to determine a result on the true value and to distinguish between the amount due and the amount stated as being due. What the judgement does not tell us is how to get there, nor was it meant to.

The overriding fear now within the next number of months will be the response of payer’s within the construction industry. The principle issue in this instance is to ask the question – what are the necessary elements that are required in all and any instances to demonstrate what the true value of a interim or final account needs to be? This will be an issue that will require determination by many adjudicators as it is now.

It requires a first principled approach that is continuous throughout a project and for  companies to adopt a cultural shift on how they maintain records and implement/discharge the agreement between the parties

It is very much the start, there is an issue within the construction industry with payments and maintaining a successful business will require implementation of the rules as they exist to provide the best opportunity to establish that the true value of an account

So what is the solution? It’s a matter of first principles to establish and ascertain the true value as they go along and in effect be ready at all times to prove the claim with the necessary evidence prepared and maintained. Ascertaining the true value of the account is not an activity to be left until the end of a project and in order to ensure payments under interim accounts are correct, you must be capable of ascertaining that true value at all times

Author Henry Hathaway is a Partner with Silver Shemmings Ash and is a graduate of Trinity College Dublin (Civil Engineering). He is a qualified Civil & Structural Engineer and has previously spent twelve years in the Construction Industry representing both Contractors and Clients in Engineering and Project Management, he specialises in Pre-Contract Negotiation, Contract Formation, Project Lifecycle, Tender Development, Identification of Delay & Disruption, Establishment of Claims, Ascertainment of Costs

At Silver Shemmings Ash, we provide seminars and training alongside our core activities in contentious and non-contentious matters, the purpose if these is to facilitate a greater knowledge and understanding of construction and property law. There remains a considered lack of training in such areas for companies and one to which we look to address.

 

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