“Smash and grab” vs “true value” adjudications: the final word?

A recent TCC decision has clarified the extent to which a successful “smash and grab” adjudication will prevent the bringing of “true value” adjudications prior to payment of the “smash and grab” amount. Such true value adjudications will only be permitted where the claims they involve could not have been raised in response to the payment application which is the subject of the “smash and grab” adjudication. The court’s decision may be the final word on this long running debate and upholds a significant limitation on the right to adjudicate by parties who find themselves on the receiving end of a “smash and grab” claim.

“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 S&T (UK) Ltd v Grove Developments Ltd the Court of Appeal considered the tension between the immediate payment obligation arising under section 111 of the Housing Grants Construction and Regeneration Act 1998 (as amended) (the “Construction Act”) and the right for parties to adjudicate “at any time” under section 108 of the Construction Act. The Court found that the “adjudication provisions are subordinate to the payment provisions in section 111” and that “both the Act and the contract must be construed as prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation” (the “Grove principle”).

The application of the Grove principle has since been tested in a number of cases. For a recent summary of these developments, please click  for our earlier Law-Now in October this year.here

A TCC decision last month has now provided further clarity by addressing how widely the Grove principle operates to prevent the commencement of an adjudication by a paying party in default of its immediate payment obligation.

Lidl Great Britain Ltd v Closed Circuit Cooling Ltd

Lidl engaged Closed Circuit Cooling Ltd (“3CL”) to carry out refrigeration works at one of its distribution centres. The dispute between the parties concerned 3CL’s payment application number 19 (“AFP19”) which claimed £781,986.22. Lidl issued a payment notice stating that nothing was payable due to incomplete and/or defective work and a deduction of £765,000 for liquidated damages for the period from 18 June 2022 to 29 September 2022, the date of AFP19. Lidl had given an “ex gratia” extension of time from the original completion date of 25 May 2022 until 18 June 2022.

3CL successfully brought an SGA adjudication claiming that Lidl’s payment notice was invalid. Lidl resisted enforcement but was ultimately ordered by the TCC to pay the amount of AFP19.

Prior to making payment of AFP19, Lidl brought two further adjudications:

• A second adjudication claiming the cost of instructing a third party to repair 3CL’s defective work. Lidl obtained a decision for £757,845.63.
   
• A third adjudication claiming a declaration that 3CL was not entitled to any extension of time from 25 May 2022 until practical completion on 26 October 2022. Lidl was again successful.

3CL resisted enforcement of the second adjudication, and claimed that the decision in the third adjudication was unenforceable, on the basis that both adjudications were commenced prior to Lidl’s payment of AFP19 and therefore offended the Grove principle.

The Grove principle elaborated

Three broad positions were argued before the TCC:

1. Lidl contended for a “same payment cycle true value adjudication prohibition” meaning that the Grove principle was limited to a TVA in respect of the same payment cycle as that which the unpaid immediate payment obligation related to. Lidl claimed that neither the second nor the third adjudication fell within this prohibition.
    
2. 3CL contended for an “any adjudication prohibition” which would prevent a party from commencing any adjudication until it has complied with an immediate payment obligation under section 111.
    
3. Alternatively, if the Grove principle was limited to “true value” adjudications, 3CL contended for an “any true value adjudication prohibition” whereby any adjudication which sought to re-value the account between the parties would be prohibited.

His Honour Judge Stephen Davies rejected the any adjudication prohibition as far too wide and concluded that the correct approach was that a TVA could not be commenced prior to the payment of a notified sum in relation to any claims “which could have been the subject of a payless notice served in respect of the particular notified sum in question”.

In relation the second adjudication, the court accepted that the majority of the amount awarded concerned defects which had come to Lidl’s attention after AFP19. However, 3CL had raised an arguable case that £260,899.61 of the amount awarded overlapped with items raised by Lidl in its AFP19 payment notice. This part of the decision was not, therefore, enforceable.

As regards the third adjudication, the court found that the adjudicator had no jurisdiction to deal with the period of delay that Lidl had claimed for in its AFP19 payment notice (i.e. 18 June 2022 to 29 September 2022), but did have jurisdiction to deal with the period from 25 May 2022 to 18 June 2022 and from 29 September 2022 to 26 October 2022. It is unclear why jurisdiction was upheld for the earlier period despite this being a period which seemingly could have been claimed for in Lidl’s AFP19 payment notice.

Conclusions and implications

This is a important decision which provides much needed clarity over the precise ambit of the Grove principle. Subject to any further guidance from the Court of Appeal, this would appear to be the last word in this long running legal debate.

Although not as wide as argued for by 3CL, the position adopted by the court still imposes a significant limitation the right to adjudicate for parties who fail to meet an immediate payment obligation under section 111. Whilst SGA’s are often used merely to gain bargaining position, the restriction on commencing TVA’s can become of great importance where insolvency risks are at play. As noted by the Court of Appeal in S&T (UK) Ltd v Grove Developments Ltd, the potential for contractor insolvency means that:  

“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 employer 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 employer 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 Grove principle will prevent any accommodation being made.

References:

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

 [2023] EWHC 3051Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3cl)