Case Update – Guarding against ‘Smash & Grab’ adjudications

Grove Developments Ltd v S&T (UK) Ltd

The Facts

S&T (UK) Limited (S&T) were engaged by Grove Development Ltd. (Grove) to design and build a Premier Inn Hotel at Heathrow Terminal 4. S&T were engaged using an amended JCT Design and Build Contract 2011. The contract sum was in excess of £26m, with contractual completion on 10 October 2016. Practical completion was not reached until 24 March 2017.

Once practical completion was achieved, but prior to certification, the following happened:

  1. S&T issued an interim application of £14m.
  2. Grove disagreed with the sum due and provided their own valuation in their Payment Notice (13 April 2017) (Payment Notice);
  3. Grove issued a Pay Less Notice (18 April 2017) (Pay Less Notice) which made reference to its earlier Payment Notice.
  4. S&T commenced an adjudication over the validity of the Pay Less Notice.

S&T’s argument was that the Pay Less Notice was not valid as it did not contain a detailed breakdown or reasoning. Grove argued that because the Pay Less Notice referred to the detail in the Payment Notice, it satisfied the requirements of the Contract.

S&T were successful in their claim and were entitled to be paid in excess of £14m.

The Dispute

Grove commenced Part 8 proceedings to contest the adjudicator’s decision, raising the following issues (Note: a further issue was raised over liquidated damages; however, this will not be covered in this article):

  • Issue A: Did the Pay Less Notice comply with the contract?
  • Issue B: If not, should the adjudicator’s decision remain enforceable?
  • Issue C: Is Grove entitled to commence a separate adjudication to ascertain the ‘true’ value of the interim payment?

Court Findings

The court found in favor of Grove on all three issues.

Issue A: Despite Grove not re-attaching the basis of their valuation in their Pay Less Notice, Coulson J found that the calculation presented in the Payment Notice was sufficiently detailed to allow a reasonable recipient to understand how the Pay Less Notice was calculated. Grove carried the risk that the Payment Notice could not have been received, thereby rendering the Pay Less Notice invalid. However, this was not the case and at no point did S&T suggest that they did not know precisely what was being referred to.

Issue B: The adjudicator’s decision was regarding the content of the Pay Less Notice. With Coulson J finding in favor of Grove for Issue A, the only permissible conclusion of Issue B is that the Adjudicator’s decision was no longer enforceable.

Issue C: Coulson J concluded that the court, and by extension an adjudicator, has to the inherent power to “open up, review and revise any existing certificates, notices and applications”. This allows for a second adjudication to ascertain the ‘true’ value of the works claimed as a defense to smash and grab adjudication.

However, in reaching his conclusion, Coulson J found that the principal reason for the decisions in ISG v Seevic [2015] and Galliford Try v Estura [2015] i.e. the concept of deemed agreement, was erroneous and/or in-complete.

The provisions of the contract make a clear distinction between ‘sums due’ (understood as ‘true’ value) and ‘sums stated as due’ (e.g. a contractor and/or an employer’s interim valuation). By failing to serve a valid and timely notice, an employer will lose their ability to contest the ‘sum stated as due’. However, it is not to be taken as a deemed agreement to the ‘true’ value, as this would have a draconian effect on an employer’s ability to contest the ‘true’ value.

Points to Note

  • The judgement does not deal with when a second adjudication can commence. As such, the door is left open to parallel adjudications, whereby the employer can immediately commence a second adjudication to ascertain the ‘true’ value concurrently with the ‘smash and grab’ adjudication. This tactic may mean that the employer would not need to pay the amount stated as due in the ‘smash and grab’ adjudication before the result of the ‘true’ valuation is heard.
  • The decision is likely to reduce the amount of ‘smash and grab’ adjudication.

This is yet another lengthy case regarding the enforceability of notices and reinforces the important of serving notices with the appropriate content and timings as stated in the Contract. This case serves as another reminder that competent commercial management during the works can avoid costly disputes later.

 

A full transcript of the case can be read here.

An article written by Alexandre Dansette and Tom Lamb


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Disclaimer: This article is provided for information only and is not intended to provide legal advice. No reliance should be placed on the information contained herein.