Smash and grab vs true value adjudications: where are we now?

A series of recent TCC decisions has brought significant clarity to the interaction between “smash and grab” and “true value” adjudications. It is now clear that valid “smash and grab” arguments will prevent the commencement of a “true value” adjudication as a matter of jurisdiction, not mere discretion. This strict approach has the potential to give rise to injustice where very large “smash and grab” awards are made and it remains to be seen whether exceptions will be made in extreme cases.

“Smash and grab” and “true value” adjudications

A “smash and grab” adjudication (an “SGA”) involves a contracted party claiming a sum that was applied for but never challenged in any valid payment or pay-less notice (the “notified sum”). The employing party is obliged to pay the notified sum regardless of any dispute as to the proper value of the payment application (the “immediate payment obligation”). A true value adjudication (a “TVA”) involves an actual valuation of the application, which, if found to be less than the notified sum, will entitle the employing party to recoup its overpayment.

In M Davenport Builders v Greer, the TCC found that while the existence of an unsatisfied SGA award did not necessarily preclude commencement of a TVA, the outcome could not be relied upon until such time as the immediate payment obligation had been satisfied. In practical terms, this meant that an employing party cannot offset the decision in a TVA against that in an SGA. It would have to pay the full notified sum, regardless of the TVA decision, and then seek to recoup any overpayment. For our earlier Law-Now on the Davenport decision please click here.

In Bexheat Ltd v Essex Services Group, a stricter line was taken with the Court finding that an employing party’s entitlement to commence a TVA was also secondary to its immediate payment obligation, not just the ability to rely upon the outcome of the TVA.  In other words, until the employing party has paid the notified sum, it will not be entitled to commence or rely upon a TVA.

Two more recent decisions from the TCC have sought to challenge the strictness of the Bexheat position.

AM Construction v The Darul Amaan Trust

In this case, the employing party sought to distinguish the case from Bexheat as there had not in fact been any SGA. Having failed to issue a pay-less notice, and seeking to avoid the consequences, the employing party commenced a TVA before the contracted party commenced any SGA. Having received a favourable decision, the employing party sought to enforce the outcome, but the Court declined, stating that:

“… where no Pay Less Notice has been served, the Employer must pay before disputing the amount outstanding.”

The important point is that the immediate payment obligation arises the moment the employing party fails to issue a valid payment or pay-less notice, not once an SGA has been decided. The contracted party should not have to commence an SGA to recover that payment, and the employing party has no right to commence a TVA until such time as payment has been made.

Henry Construction Projects v ALU-FIX (UK)

In this most recent case, the employing party argued that it had not been precluded from commencing a TVA as, when doing so, a “genuine dispute” had existed in the SGA. The order of events was as follows:

• The contracted party commenced an SGA. In that adjudication, the employing party argued that it had submitted two valid pay-less notices.
• While the SGA was ongoing, the employing party commenced a TVA.
• The SGA concluded that neither pay-less notice was valid, and the employing party duly paid the notified sum by the ordered date.
• Finally, the TVA concluded that an amount had in fact been owing in the opposite direction, with the employing party having overpaid under the SGA decision.

Unsurprisingly, the employing party sought to enforce the TVA at court and recover its overpayment. However, the contracted party resisted on the basis that the employing party had not satisfied its immediate payment obligation before commencing the TVA (per the principle in Bexheat). In response, the employing party contented that the usual rule did not apply in circumstances where there had been a "genuine dispute" as to the validity of the pay-less notices. It was suggested that: (i) no immediate payment obligation arose until that “genuine dispute” was resolved; (ii) once the dispute was resolved, the date to comply with the SGA decision effectively became the final date for payment; and (iii) it could not be right that, even if it was found that a valid pay-less notice had been issued, the early commencement of the TVA would nevertheless negate the outcome.

The Court rejected these arguments. The date for compliance with an SGA decision was not a revised final date for payment, but instead could best be described as “the final date for late payment”. As to the potential impact of a “genuine dispute”, the Court remarked that, “it would risk tipping the balance unfairly towards the disputing party and prejudicing the ultimately vindicated right of the payee to be paid”. However, the Court added that in circumstances where the pay-less notice had been valid, or the payment application successfully challenged, there would have been no notified sum and therefore no immediate payment obligation, such that, “the TVA may well not, on the facts, be found to be premature and reliance upon it might well be permitted.”

Ultimately, the Court concluded that, “the outcome in this case, whilst not closing the door on commencing a TVA prior to the outcome of an SGA … ought to discourage such a course in areas of spurious SGA dispute, but not deter those who have a sufficient level of confidence that any dispute raised should result in a finding of no immediate payment obligation having been established.”

Conclusions and implications

The starting assumption, when considering whether to commence a TVA, should be that the immediate payment obligation must first be satisfied, regardless of the position in respect of any SGA. As for contracted parties who receive TVAs in the absence of payment, we would encourage them to seek advice, as in most cases, there will be solid grounds to argue that the TVA should not proceed to decision.

The position reached on these cases does raise some potential difficulties. As noted by the Court of Appeal in S&T (UK) Ltd v Grove Developments Ltd, the prospect of contractor insolvency may deprive a TVA of any efficacy:

“The employer may pay out a large sum (in a scenario like the present some £14 million), which is then swallowed up by secured creditors before there is any re-valuation of the works. … [the] answer to that hypothetical argument is that in any case where there is a perceived risk of insolvency the employer would (or at least should) be scrupulous to protect itself by serving timeous Payment Notices or Pay Less Notices.”

On the other hand, an employing party with limited funds who has not been scrupulous in its notice-giving may find that it is unable to satisfy its immediate payment obligation, which may reflect a highly contentious position adopted by the contractor in its payment application. The employing party will not be entitled to commence a TVA and may not be able to afford the cost of court proceedings or the time needed for those proceedings to reach judgment. Worst still, the construction contract may contain a mandatory adjudication provision, preventing any course of action other than satisfying the immediate payment obligation.

It remains to be seen whether something like a “manifest injustice” exception will be permitted by the court to address these more extreme circumstances or whether the jurisdictional nature of the restriction on commencing a TVA will prevent any accommodation being made.

References:

S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ

M Davenport Builders Ltd v Greer [2019] EWHC 318 (TCC)

Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC)

AM Construction v The Darul Amaan Trust [2022] EWHC 1478 (TCC)

Henry Construction Projects Limited v ALU-FIX (UK) Limited [2023] EWHC 2010 (TCC)