‘Smash ‘n’ grab’ claims the most common for UK adjudicators

For the past four years, experts at Pinsent Masons have worked to develop an adjudication analytics tool, based on a database of adjudicator decisions in the cases in which the firm has acted.

The tool contains data from more than 250 decisions and can provide valuable intelligence, not only on general trends, but also on how individual adjudicators tend to approach particular issues. According to the data, ‘smash ‘n’ grab’ claims are by far the most common type of dispute dealt with and amount to a third of all our cases in the UK.

The topic is straightforward and relatively easy to understand. Serve the right notices at the right time and everything will be fine. But fail to serve the right notices and the notified sum, usually the amount applied for, must be paid. If the notified sum is not paid, a payee can adjudicate to seek an enforceable decision that it should be paid.

The paying party cannot defend an adjudication based on lack of proper notices by referring the adjudicator to the actual value of the work done. These payment provisions arise from the Construction Act, which also created adjudication, intended to enable parties quickly to enforce the provisions and keep cash flowing in the industry.

As the caselaw in this area has evolved in recent years, many questions have emerged. In particular:

• How is the obligation to ‘pay up’ squared with the right under the Act to refer any dispute about the value of work to adjudication at any time? Which takes priority?
• When can a party on the wrong end of a smash ‘n’ grab claim start its own adjudication on the ‘true value’ of the application?
• Does a payee need to adjudicate to establish a notified sum which must be paid?
• Is a new payment notice or a ‘pay less’ notice required for every payment cycle? 

  After this year’s authorities, we have much greater clarity on these points.

  Pay now, argue later

  Until recently, it has been unclear whether a smash ‘n’ grab adjudication decision had to be paid before a true value adjudication can be started; or paid before a smash ‘n’ grab adjudication decision could be relied upon or enforced. Two cases have since clarified the position: Bexheat Ltd v Essex Services Group Ltd and AM Construction v The Darul Amaan Trust.

  Bexheat v Essex

  Bexheat lost in an adjudication about the valuation of one of its interim applications. The next month, Essex – the paying party – failed to serve proper notices in response to the next interim application. Bexheat then brought a smash ‘n’ grab adjudication and won. Essex resisted enforcement of the decision, arguing the second adjudicator lacked jurisdiction because large parts of the two applications were the same, and because the first adjudication had already decided the value of the application.

  The Court rejected Essex’s arguments, finding that the two disputes were not the same. It held that the dispute in the first adjudication concerned the valuation of the Bexheat’s entitlement in respect of the first application. The dispute in the second adjudication, meanwhile, was whether Essex had served a valid pay less notice in response to the second application.

  Although Essex had successfully fought a true value adjudication, because their next pay less notice was one day late, they were forced to fork out £500,000 more than Bexheat were probably due on a true valuation. However, Essex could and should have raised any valuation issues in a timely pay less notice. Having failed to do so, the sum claimed became the 'notified sum' and was due to be paid.

  AM v Darul Amaan

  In this case, the Court was asked to consider an application which had not been responded to by a payment or pay less notice, and to decide whether an adjudication on the value of the application could be started before the sum applied for – the notified sum – had been paid. The judge said that the adjudication could not be commenced until the notified sum had been paid. Without any notices, the notified sum arose from the application and no related adjudication claim was needed to establish it.

  The judge also considered the fact that there had been two competing applications for the same payment period. The judge said that only one application per payment period is permissible, but also found that only one of the applications had been valid, so once again the paying party found itself with a problem caused by failing to issue notices.

  New notices for each payment cycle?

  Advance JV v Enisca Ltd addressed the novel question of whether a single notice served by a paying party can function as a valid pay less notice in response to more than one payment application. Advance was working on a water treatment and hydro scheme in Cumbria and appointed Enisca as a sub-contractor for electrical works.

  There were two applications by Enisca which are relevant.  For the first, there were no notices issued in response, though notices were issued in response to the second. As it happened, the notices in response to the second application were issued before the deadline for a pay less notice in response to the first.

  Enisca won a smash ‘n’ grab claim based on the first application. Advance sought to avoid payment by issuing Part 8 proceedings, seeking a declaration from the Court that the pay less notice issued in relation to the second application could be relied upon in response to either that second application or the first. 

  Advance said that there was nothing in the Act, or the contract, to preclude a pay less notice from responding to two applications, provided that the pay less notice was served within the contractually stipulated time envelope. Bearing in mind the draconian consequences for payers if their notices are held to be ineffective, it is probably unsurprising that the Courts seem to take a relatively lenient approach to the content of payment or pay less notices.

  Generally, notices are to be construed with regard to the ‘contextual scene’ in which they were issued, and their purpose and a common sense and practical view is taken of the contents of a payless notice; rather than an unnecessarily restrictive interpretation.

  However, in this instance, the Court looked at the second pay less notice and found that it was clear that it did not respond to the first application and so could not be effective against it. This emphasises the need for clarity in payment and pay less notices about what they are responding to. The relevant application should be referenced clearly. It also underlines that new notices are required for each payment cycle.

  Key lessons from the analysis

  The theme which emerges from the latest authorities is that the Courts appear to consider the obligations created by the Construction Act to ‘pay now and argue later’ to trump the rights of the parties under the Act to adjudicate at any time. The reason for this is likely to be found in the background to the Act. It was originally enacted, and later amended, with the primary purpose of giving certainty of payment and maintaining cash flow in the industry.

  If adjudication on valuation can be used to ‘side step’ or delay the obligation to pay, the purpose of the Act might be thought to be undermined. This could explain the Courts’ approach, although there is really no basis for the Courts to interpret one part of an Act as being ‘more important’ than another, where the Act does not make that clear itself. This explains why, in all the cases which have come before the Courts on this topic, the Courts have based their findings on jurisdictional issues, which are within their power to determine.

  Ultimately, true value adjudication cannot be started unless the notified sum has been paid. This applies whether or not there has been a prior smash and grab adjudication. A true value adjudication is not binding on a subsequent smash ‘n’ grab. Even after a true value adjudication, you must ensure notices are served in subsequent payment cycles. Furthermore:

• The notified sum does not have to be established by adjudication;
• New payment and pay less notices are required for each payment cycle; and
• Notices must clearly reference the application to which they respond.

The overriding message is that if a company fails to serve a payment notice or pay less notice in the right form at the right time, it is likely to lose a lot of money. Once that money has been paid out, it can be very difficult to get it back and, at the very least, the commercial balance on the project is likely to be heavily tipped in the other party’s favour.

To find out more, watch a video of a recent Pinsent Masons event about adjudication.