The end of "smash and grab" adjudications?
The decision is likely to put a large dent in this practice, and will allow employers to challenge, via separate adjudication proceedings, the valuation of a contractor’s payment application, even if no valid payment notice or pay less notice has been issued.
The judge also issued important guidance about:
- the requirements for the content of pay less notices; and
- the operation of the notice regime in the JCT forms of contract to allow the employer to claim or deduct liquidated damages for delay.
“Smash & grab” adjudications
Under the line of cases beginning with ISG v Seevic, an employer who fails to issue a valid payment notice or pay less notice is required to pay the full sum demanded within a contractor's interim payment application – the employer is not subsequently able to ask an adjudicator to open up, review and revise that valuation so that they can recover any overpayment. This principle underpins so-called “smash & grab” adjudications, where a contractor claims the full amount of its application because an employer has failed to serve the correct notices. This is because it prevents the employer subsequently seeking a decision as to the “true” value of a contractor's interim payment and reversing any unjustified “windfall” obtained by the contractor, at least until the next interim certificate or, more often, the final account (which may be months or even years later).
In his judgment, Mr Justice Coulson has tackled this issue head-on and decided that the case law beginning with the ISG decision had been wrongly decided. He confirmed that an employer is entitled to bring its own adjudication to decide the “true” value of the interim application, even if it had not issued a valid payment or pay less notice (although payment of the application amount may still have to be made in the meantime).
This is good news for employers and may go some way to resolving the problems of "smash & grab" adjudications. If an employer has not served the right notices, it may still have to pay the full amount of the contractor’s application. However, now it can quickly seek return of any overpayment through its own adjudication claim.
Pay less notice requirements
A second issue decided by the case is whether or not an employer can, in a pay less notice, incorporate documents by reference. For example, can the employer specify in the pay less notice the basis on which the sum the employer intends to pay has been calculated by incorporating by reference the valuation breakdown in a payment certificate served out of time? S&T's claim was that an employer cannot do so, and instead needs to attach any documents to its pay less notice.
The judge confirmed that documents can be incorporated by reference into a pay less notice. Therefore, Grove had successfully incorporated its valuation into the pay less notice by referring to the breakdown in Grove’s (invalid) payment notice.
We would assume that a very large number of pay less notices rely upon incorporating information by reference, and so this decision provides important clarity on the law. A decision the other way likely would have resulted in a large number of “smash & grab” adjudications by contractors suddenly able to claim that a pay less notice was invalid.
However, whether or not a document is successfully incorporated by reference may still depend on the precise circumstances. As a result, the safest approach remains to attach a copy of any material to the pay less notice, if this is practicable.
Liquidated damages notices
Finally, the case tackled the requirements under the JCT Design & Build 2011 form of contract for service of the notices forming pre-conditions to the deduction of liquidated damages for delay. Under most JCT forms of building contract, before the employer can deduct or claim liquidated damages for delay, it must first issue:
- a notice stating that the employer may require payment of, or may withhold or deduct, liquidated damages (a “warning notice”); and then
- a notice confirming that the employer requires the contractor to pay liquidated damages and / or will withhold or deduct liquidated damages (a “deduction notice”).
S&T argued that the contract required the employer to leave sufficient time between service of the two notices for the contractor to first read, understand and digest the warning notice before receiving the deduction notice. In this case, there had been only approximately seven seconds between S&T’s receipt by email of the two notices, which S&T claimed was insufficient and so the deduction notice was invalid.
The judge rejected S&T’s argument and confirmed that the period of time between the two notices is irrelevant, as long as they are received in the right order. Again, this is good news for employers and provides important clarity on the interpretation of the JCT contract forms.
Employers and those advising them must ensure that the notices required under the JCT are sent sequentially, and in order. Despite this decision, it is also advisable in practice for sufficient time to be left between sending each notice to ensure that there can be no debate over whether or not the contractor received the notices in the right order – for example, if the notices are to be served by post, they should be sent on separate days.