The Fenwick Elliott Blog
Introduction
In February 2017, headed by Andrew Davies, we started the Fenwick Elliott blog.
The aim of these blogs is to provide everyone with short updates on topical legal or other issues in the industry, to share our opinions on a wide variety of subjects and to engage with you and share thoughts and ideas on these various matters through the comments facility. Your comments are very welcome.
In August 2017, Andrew Davies wrote about “smash and grab adjudications”.
Is the end nigh for “smash and grab” adjudications?
So called “smash and grab” adjudications are very common in the construction industry. They arise when the paying party fails to give either a payment notice or a pay less notice, the two notices introduced in 2009 by the amended Construction Act. If neither of these notices are given, the amount applied for by the payee becomes the “notified sum” which is payable by the final date for payment.
Following the decision in ISG Construction Limited v. Seevic College in 2014, the importance of such adjudications increased, as Edwards-Stuart J held that where there had been a “smash and grab” adjudication, no cross adjudication on the true value of the interim payment was possible. Edwards-Stuart J said that a failure to give the required notices meant that the sum applied for was “deemed to be the value of those works”.
I have never liked the term “smash and grab”, as it implies there is no entitlement to the sum applied for. In my view there is a clear entitlement to payment in these circumstances. Where there are two missed opportunities to give a notice reducing the sum applied for, and where the paying party or their appointed certifier is aware of the consequences of failure to do so, I have little sympathy with the payer’s or certifier’s failures and I support the payee’s entitlement.
It appears that Fraser J agrees with me about the terminology. In ICI Limited v. Merit Merrell Technology Limited, a lengthy judgment dealing with a number of issues to which we devoted the entire issue of our August Dispatch, Fraser J said that where paying parties or certifiers fail to comply with the amended Construction Act’s requirements, the payee becomes entitled to the sum for which he applied. Fraser J said that the term “smash and grab” was best avoided as the “phrase has clearly pejorative overtones”.
It was Fraser J’s comments in ICI on the ISG decision which caught my attention and which I want to discuss in this blog.
One of the issues in ICI, which arose out of works Merit carried out for ICI at a processing plant in Northumberland, was whether ICI could, following its termination of Merit’s employment, recover sums it claimed were overpaid to Merit during the project.
Merit argued, relying on ISG, that the sums ICI said were overpaid had been awarded following adjudications on interim payments where no notices had been given and that the value of those works had therefore been deemed accepted by ICI. Fraser J said ISG did not go as far as Merit contended. Fraser J looked at ISG and the cases which followed it to support this view.
Fraser J first considered MJ Harding Contractors v. Paice and Springall 2015, which concerned serial adjudications and a final account dispute. In Harding, the Court of Appeal allowed Mr Paice and Ms Springall to refer a subsequent valuation dispute to adjudication after a previous adjudication which arose from a failure to give a valid pay less notice.
Fraser J next looked at Brown v. Complete Building Solutions 2016, where the Court of Appeal found in respect of a final certificate that an adjudication on the value of the works was a different dispute from an earlier adjudication concerning what was payable where the required notices were not given.
Fraser J also considered Kersfield Developments (Bridge Road) Limited v. Bray and Slaughter Limited 2017 where O’Farrell J in the TCC said the mechanism under the amended Construction Act where the sum applied for became due in the absence of the required notices “simply regulates cash flow” and does not affect the parties’ “substantive rights”.
Fraser J’s summary of the cases following ISG was very interesting; he said that they “cast some real doubt on whether [ISG] would be decided in the same way now”. Fraser J did not say ISG was wrong, and pointed out that neither of the Court of Appeal cases he had considered had found ISG was wrong. He said that the reasoning in the later cases about the ability to recover overpayments or windfalls was different from the reasoning - and outcome - in ISG.
The key differences between ISG on the one hand and Harding and Brown on the other were that ISG related to interim payments whereas Harding and Brown related to a final account. This difference is critical because Fraser J said in ICI that ISG - and any other cases concerning interim entitlement to payment - related only to timing and not the parties’ substantive rights.
Fraser J’s judgment in ICI is not in my view the beginning of the end for “smash and grab” adjudications. In my view they will (and should) continue. What Fraser J helpfully clarified was that following ISG the courts have confirmed that the “smash and grab” adjudication is not the last word on the payee’s entitlement to payment; it merely settles the issue of cash flow for that interim payment cycle. If there is a windfall as a result of the payer or certifier’s failures, that can be corrected in the next interim payment cycle or at the final account stage. Fraser J confirmed that cross adjudications are possible at the final account stage.
What ICI also confirms is the importance to payers and certifiers of giving the required notices at the right time, given the impact it can have on a payer’s cash flow. This is a drum I have been banging since the original Construction Act introduced us to the delights of withholding notices in 1998.
We hope you will find the blog thought provoking and please feel to engage with us to discuss your thoughts and ideas on what we have written.