‘Tis the season to be jolly, and this week, we get in the festive mood by considering “smash and grab” and “true value” adjudications. Scrooge, I hear you cry …

As most readers of this blog will be aware, a “smash and grab” adjudication is one where, in the absence of a valid and timely payment notice and/or pay less notice, the payee claims for payment of the sum claimed in the relevant payment application. In such adjudications, the adjudicator is not concerned with the valuation of the payee’s application, and no valuation of that application is undertaken. By contrast, a “true value” adjudication is one in which the adjudicator carries out a valuation of the payee’s application in order to determine the “true value” of that application.

We are often asked whether a paying party can commence a “true value” adjudication in circumstances where it has failed to issue the required payment and/or pay less notices – and, if so, when? With mince pies and mulled wine to hand, we discuss these questions below.

Is a paying party entitled to commence a “true value” adjudication in circumstances where it has failed to issue the required payment and/or pay less notices?

Our regular readers will be aware of the Court of Appeal’s judgment in the leading case of S&T (UK) Limited v Grove Developments Limited [2018] EWCA Civ 2448, which upheld the judgment of Coulson J (as he then was) in the TCC. Prior to Grove, the judgment in ISG Construction Ltd v Seevic College [2014] EWHC 4007 provided that the paying party’s failure to issue a valid payment notice or pay less notice was deemed acceptance of the value of the payee’s application, and the paying party was not entitled to commence an adjudication on the “true value” of the payee’s application in that payment cycle.

In Grove, however, Coulson J in the TCC and Sir Rupert Jackson in the Court of Appeal agreed that a paying party is entitled to adjudicate on the true value of a payee’s interim application, even in circumstances where no payment notice or pay less notice was given and the payee has been successful in a “smash and grab” adjudication.

The payee has been successful in a “smash and grab”. When can the paying party commence a “true value” adjudication?

Grove confirmed that a paying party may commence a “true value” adjudication, even where it has failed to issue the required notices and the payee has succeeded in a “smash and grab”. The key question, of course, is when? Can the paying party commence the “true value” adjudication immediately, without paying the sum awarded in the “smash and grab” adjudication? Or, must the paying party first make payment of that sum? 

In this regard, Coulson J stated that the paying party could only adjudicate on the true value of the works once it had paid the sum awarded to the payee in the “smash and grab” adjudication:

“An employer who has failed to serve its own payment notice or payless notice has to pay the amount claimed by the contractor because that is 'the sum stated as due'. But the employer is then free to commence its own adjudication proceedings in which the dispute as to the 'true' value of the application can be determined." [Emphasis added]

Sir Rupert Jackson in the Court of Appeal agreed:

“… both the Act and the contract must 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.”

So, the position is straightforward then? The paying party must first pay the “smash and grab” award before commencing a “true value” adjudication? Well, it seems so, but …

A few months after the Court of Appeal’s judgment in Grove, the enforcement case of M Davenport Builders Limited v Greer [2019] EWHC 318 (TCC) came before Stuart-Smith J in the TCC. In Davenport, the payee was successful in a “smash and grab” adjudication against the paying party, but rather than pay that first adjudication award, the paying party commenced a second adjudication seeking a determination of the “true value” of the works. In that second adjudication, the adjudicator decided that no sum was due for payment to the payee. When the payee sought to enforce the decision in the first “smash and grab” adjudication, the paying party resisted enforcement by seeking to set off the second “true value” award against the first decision (as that “true value” award had confirmed that no sums were due to be paid to the payee).

Consistent with the judgments of Coulson J and the Court of Appeal in Grove, Stuart-Smith J held that the paying party was not entitled to use the “true value” decision to resist enforcement of the initial “smash and grab” decision, whether by way of defence, set-off or counterclaim, because the paying party had not made payment of the “smash and grab” award before commencing the “true value” adjudication:

“The decisions of Coulson J 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, in his judgment, Stuart-Smith J also referred to the Court of Appeal’s decision in Harding (t/a MJ Harding Contractors) v Paice and anr [2015] EWCA Civ 1231. In Harding, the payee was successful in a “smash and grab” adjudication relating to its final account, but the paying party did not make payment of that award and, instead, commenced a “true value” adjudication. The paying party was not restrained from continuing with the “true value’ adjudication,” and whilst it later paid the “smash and grab” award, in subsequent related proceedings before the TCC (and then the Court of Appeal), the courts did not take issue with the paying party having commenced the “true value” adjudication before first paying the “smash and grab” award. It is likely that, as the adjudications concerned a final account, which meant that there were no further payment cycles in which the “smash and grab” windfall could be corrected, this was a factor in Harding.

In light of the Court of Appeal’s judgment in Harding, Stuart-Smith J said that, whilst the judgments in Grove meant that the paying party had to make payment to the payee before commencing a ‘true value’ adjudication, “that does not mean that the Court will always restrain the commencement or progress of a true value adjudication commenced before the [paying party] has discharged his immediate obligation [to make payment to the payee].” Those obiter comments have somewhat muddied the waters on the question of when the paying party can commence a “true value” adjudication where the payee has been successful in a “smash and grab”, particularly given that Stuart-Smith J did not give any examples of circumstances in which the court may (or may not) restrain “true value” adjudication proceedings.

The paying party has failed to issue a payment and/or pay less notice, but the payee has not yet obtained a “smash and grab” award. Has the paying party’s “immediate payment obligation” arisen? When can the paying party commence a “true value” adjudication?

The courts’ judgments in Grove (as followed in Davenport) make it clear that the paying party must comply with its “immediate payment obligation” under s.111 of the Act before it can commence a “true value” adjudication. But, when does that “immediate payment obligation” arise?

In light of Grove – and notwithstanding the Court of Appeal’s earlier judgment in Harding and Stuart-Smith J’s obiter comments in Davenport – we would suggest that where a “smash and grab” award has already been obtained by the payee, the paying party is subsequently restrained from commencing a “true value” adjudication until it has complied with its immediate obligation to make payment of the “smash and grab” award.

However, it seems to us that the position is less clear-cut where the paying party has failed to issue the required notices, but the payee has yet to obtain a “smash and grab” award in its favour (whether because the payee has not yet commenced adjudication or because adjudication proceedings are ongoing). In our view, it is arguable that the “immediate payment obligation" has not yet arisen – and so “true value” adjudication proceedings can be commenced and/or progressed – where the payee has commenced a “smash and grab” adjudication but the paying party genuinely disputes the validity of the payee’s payment application and/or the payee’s entitlement to issue that application. For example:

(i)          Where the paying party is defending the “smash and grab” adjudication on the basis that the payee’s payment application was invalid because it failed to clearly and unambiguously set out the sum considered by the payee to be due or the basis on which that sum had been calculated; and/or

(ii)         Where the paying party is defending the “smash and grab” adjudication on the basis that the payment schedule in the parties’ contract has expired and the payee was not, therefore, entitled to issue the payment application. This was the case in Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (TCC), in which Coulson J (as he then was) found that where the parties’ agreed payment schedule had expired, the payee had no entitlement to issue further interim payment applications. The payee’s “smash and grab” on an application issued after the expiry of the payment schedule therefore failed; and/or

(iii)        There has been some other procedural irregularity, such as a failure to comply with a proscribed method of service, that meant the application was invalid.

In the above circumstances, it is arguable that it is only upon the adjudicator deciding that the paying party’s defence fails – and so issuing a decision in favour of the payee – that the paying party’s “immediate payment obligation” arises. It is also arguable, therefore, that a paying party is entitled to commence and proceed with a “true value” adjudication where it is defending a “smash and grab” adjudication on any of the above (or indeed other arguable) bases.

We would suggest, however, that if the paying party intends to commence a “true value” adjudication in such circumstances, it should do so as soon as possible after the “smash and grab” adjudication commences. This will minimise the period between the two adjudication decisions, which should, in turn, minimise the risk of the paying party’s “true value” adjudication being restrained before the adjudicator issues his/her decision.

Conclusion

Following Grove, a paying party will generally not be permitted to commence a “true value” adjudication before discharging its“immediate payment obligation”. The point at which that “immediate payment obligation” arises, however, may well be arguable in any given case. 

Where the payee has obtained a “smash and grab” award, the “immediate payment obligation” will have arisen, and the paying party will be required to make payment before it can start “true value” adjudication proceedings. However, where a “smash and grab” award has not yet been obtained by the payee, in our view, there are certain circumstances (such as those discussed above) where it can be argued that the “immediate payment obligation” has not yet arisen – and that the paying party is, therefore, entitled to commence and/or progress “true value” adjudication proceedings notwithstanding its failure to issue payment and pay less notices. 

In any event, following Stuart-Smith J’s obiter comments in Davenport, we would suggest that further clarity is needed as to the circumstances in which the court may decide not to restrain a “true value” adjudication commenced before the paying party has complied with its immediate payment obligation. We await further guidance from the courts in this regard.

In the meantime, however, we wish all our readers a very Merry Christmas and a Happy New Year. See you all in 2022.