This article considers the latest in a long line of cases dealing with smash and grab adjudications. The case was Advance JV v Enisca Ltd [2022] EWHC 1152 (TCC). Associate Director Nigel Jackson explains the practical relevance to industry practitioners…

Introduction

This recent TCC judgment contains important points of practical interest to anyone involved in the Commercial administration of construction contracts.

The contract in this case was NEC3. However, the discussion is relevant to any contractual payment regime that is compliant with the Housing Grants, Construction and Regeneration Act (‘the Act’).

The takeaway from this judgement is: Once the payment provisions in your contract are agreed, stick to them rigidly and treat each (usually monthly) payment cycle as self-contained. This applies equally to the payer and the payee!

• If you are the payer, make sure you issue the correct notices at the correct time. If you miss issuing a Payment Notice, then issue a Pay Less Notice. Crucially, avoid any ambiguity. State exactly which payment cycle the notice applies to, and the basis on which your valuation is calculated.
• If you are the payee (the party receiving payment) then make your Application for Payment (AfP) every month, with the sum you believe you are due. Make sure this includes for variations and any loss and expense, even that which has been previously rejected by the payer. If the payer does not comply with the payment terms, you can launch a smash and grab adjudication to receive the full amount by default.

Background

This case originally piqued my interest because it concerned a large infrastructure contract here in Cumbria. The works form part of the United Utilities West Cumbria water supplies project which will be familiar to most of my construction colleagues up here in Cumbria, or anyone who has visited the North/ West lakes during the last 4 years or so.

The most visible aspect to passers-by has been the pipeline installation that cut a path from Thirlmere reservoir through Keswick and beyond. The pipeline takes water to a new treatment works near Cockermouth.

The case that went to the TCC was a dispute between the Main Contractor (Advance) and a Subcontractor (Enisca) on the water treatment works.

Smash and Grab Recap

Absent fraud, in the absence of a payment or pay less notice issued in time by the employer, the contractor becomes entitled to the amount stated in the interim application irrespective of the true value of the work actually carried out. The employer can defend itself by serving the notices provided for by the contractual provisions. ISG v Seevic College[1]

‘Smash and Grab’ describes an adjudication which is launched by the payee. In this case that means by the Subcontractor Enisca [the payee] against the Main Contractor Advance [the payer].

Where the payer does not provide a valid payment notice or pay less notice, then the sum stated in the payee’s AFP becomes the notified sum. This means the payer must pay the sum stated in the AFP by the final date for payment.

Here is an example based on typical payment terms.

• You are a Subcontractor, and you issue your monthly AFP for £1m.
• The Main Contractor thinks the value of the works is £500,000, but it fails to issue a payment notice in time.
• The £1m in your AFP becomes the notified sum.
• The Main Contractor will get a second bite at the cherry because it can issue a Pay Less Notice some time before the final date for payment, stating that it will pay less than the notified sum.
• If it misses that chance, then it must pay the £1m value by the final date for payment.

If the Main Contractor does not pay, a dispute has crystallised which can be referred to adjudication.

The adjudicator will almost certainly decide that the £1m is due to the Subcontractor. The Main Contractor will fail if it tries to argue that the value of the work is £500,000.

It had two chances to do that already by issuing either a Payment Notice or a Pay Less Notice. It must pay the £1m now and argue about the ‘true value’ later (by referring the matter to adjudication or adjusting the sum in a future Payment Notice).

This means the sum must be paid due to a technicality regarding notices, without consideration of the true value of the works. Hence the phrase ‘smash and grab’.

Not a Typical Adjudication Enforcement Case

The first point of interest is the type of proceedings brought by the payer.

Typically, where an adjudicator’s decision is challenged, the payee will need to bring enforcement proceedings against the payer to force it to pay.

In this case however, the payer was the claimant. Enisca held off from enforcing the decision (very generously considering the adjudicator had ordered Advance to pay it £2,717,992.88). Instead, it allowed Advance to bring Part 8 proceedings to the TCC, seeking a declaration that a Pay Less Notice issued in November 2021 could apply to the current and the previous AFP.

The deal was that Advance would pay within 7 days if it lost.

It makes sense that it was done this way; if the adjudicator’s decision had been enforced the matter would not be settled there, because Advance certainly would have brought this case later anyway; a classic ‘pay now argue later’ situation.

Credit to Enisca for holding its nerve; it must have been tempting to pocket the £2.7m first.

Facts of the Case

A visual summary may assist here:

Enisca issued valid AFPs on 22 October (AFP 24) and 19 November (AFP 25).

Advance did not provide a Payment Notice against AFP 24 as required under the contract by 12 November 2021. Therefore AFP 24 became the notified sum for that cycle. Advance could however issue a Pay Less Notice up to 26 November 2021 against AFP 24.

On 25 November, Advance provided a Payment Notice and Pay Less Notice in response to AFP 25.

This created an unusual set of circumstances. Advance responded to AFP25 only 6 days after it was issued. This meant its response was within the time period for a Pay Less Notice to be issued against AFP24.

This notice stated the sum Advance considered due to Enisca, which was -£164,288.02 (because of an alleged previous overpayment).

Crucially, the notice served by Advance made no reference to it being a Pay Less Notice for AFP 24.

Advance stated in its claim that:

• the notice was issued prior to the Pay Less date for AFP 24 (i.e., 26 November), and
• because it demonstrated that it did not plan to pay Enisca more money, it was a valid Pay Less Notice against AFP 24, even though it was titled as the Payment Notice for AFP 25.

Enisca disagreed and launched a smash and grab adjudication to recover the sum it applied for in AFP 24, which it won.

Analysis and Judgment

The judgement is well worth a read, as it contains a summary of the statutory regime for payment and gathers the authorities for the interpretation of the various notices required by the Act.[2]

A highlight of the judgement discussing payment provisions is at paragraph 36, which is key to the final judgement:

[The statutory payment] regime depends on the issue of a series of notices whereby the payer becomes liable to pay “the notified sum”. It is therefore necessary to identify the notice which, by trumping all others, contains “the notified sum”

For the discussion of interpreting notices, Smith J pulled together some familiar cases at paragraph 46 and 47, summarised thus:

• The construction of a notice should be seen from the viewpoint of the recipient; what would they understand the notice to be?[3];
• Is the recipient familiar with the contract and the purpose of the notices?[4] – ‘in respect of contracts and contractual notices the contextual scene is always relevant’;
• As a matter of fact, what was the intended purpose of the alleged notice? Was it ‘free from ambiguity’?[5];
• Generally, notices do not need to have a title specifying what they are if their purpose can be plainly understood[6];
• Ask whether the content of a pay less notice would ‘[provide] an adequate agenda for an adjudication as to the true value of the Works…’’[7]. This is a good test of the validity of the notice.

Advance’s Argument

Advance’s main argument was that there was a distinction between a Payment Notice and a Pay Less Notice. It argued that:

• a Payment Notice must state the sum that the ‘payee considers will become due on the payment due date’[8] and is pinned to a specific payment cycle’s due date,
• a Pay Less Notice need only state what is due ‘on the date the notice is served’[9].

The notice in question stated what Advance considered was due on 25 November, and it should have been plain to Enisca that nothing would be paid against AFP 24.

Judgement

Although Advance’s argument was attractive, upon a close reading of the Act, the judge decided that a Pay Less Notice must still respond to a specific payment cycle.

The reasoning was that:

“[the payer may] give to the payee a notice of the payer’s intention to pay less than the notified sum’[10].

The notified sum is the key – hence why the quote from paragraph 36 is a highlight. Although Advance’s purported Pay Less Notice was issued within the timescale allowed under the contract, and stated the sum considered due on that date, it was not a response to the notified sum established in AFP 24.

Per paragraph 57(v)

‘On its face it was in substance and form a response to Application 25. It did not give notice of an intention to pay less than the notified sum in Application 24.’

Final Thoughts: Keep it Simple to Avoid a Smash and Grab

Seeing a quick summary of the case, I initially assumed Advance’s case would be weak. Reading the full judgement certainly changed that impression. Advance may have believed that there was no point in producing a separate Pay Less Notice for AFP 24 and effectively duplicating paperwork, when its assessment at that date was clear. The message from the courts seems to be that you play around with the payment cycle at your peril.

This is probably for the best. It reduces the opportunity of ‘sharp practice’ from a payer. It also delivers what the Act is designed to provide: consistent cash flow through the construction supply chain.

The specific circumstances of this case are unusual. It is not often a Payment Notice/PLN is issued within the notice period for documents from the previous payment cycle.

Advance may have been trying to keep things simple by providing everything in a single document.  In practice, it created a far more complicated situation, leading to lengthy proceedings and a costly decision.

The lesson is obvious: when it comes to payment cycles, keep things plain and simple.  Otherwise, you may risk a smash and grab.

 

ALA has acted in over 100 adjudications over the past 25 years. We also have extensive experience in negotiations and mediations.

Contact Us if you would be interested in discussing any issues you may be having on your project. We would be happy to provide a free initial consultation.

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[1] [2014] EWHC 4007

[2] The statutory payment regime means the requirements stated in section sections 110, 110A, 110B and 111 of the Act.

[3] Grove Developments Ltd v S&T (UK) Ltd [2018] BLR 173

[4] Mannai Investment v Eagle Star [1997] AC 749

[5] Henia Investments Ltd v Beck Interiors Ltd [2015] BLR 704

[6] Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd [2017] BLR 189

[7] Henia Investments Ltd v Beck Interiors Ltd [2015] BLR 704

[8] section 110(B)(4) of the Act

[9] section 111(4)(a) of the Act

[10] section 111(3) of the Act