24-08-2022
It’s
“Smash and Grab”! Says the defending lawyer of the big paying corporation, as
if some heinous criminal act has taken place in the payment process and the
payer has been somehow hoodwinked into a legally binding obligation to pay a
sum that is not the true value. Mr Adjudicator can you be reasonable and dismiss
the “Smash and Grab” claim and pay the true value? No is the answer.
The
first thing to say is there is no such thing as “Smash and Grab”, it is “Payment
due in Default”, in other words… What you ask for is what you get if the
payer breaches the contract by ignoring the payment application or failing to act
timely or correctly in the strict payment process imposed on them by the
contract or statute.
The updated Construction Act (LDEDC Act 2009) that came into force on 1st October 2011, made it mandatory for the parties to a construction contract to manage the payment process properly and establish a notified sum in each payment period, during and at the end of the works. If the contract requires an application for payment then that application becomes the “Notified Sum” due, if the payer fails to deal with it and fails to state what is to be paid, either in a Payment Notice or Pay Less Notice, which have become familiar terms. After all this time, parties still get confused about their payment rights and many are unaware that they have a default payment position until we evaluate their case! The construction law is on the side of the payee.
Get advice on construction payments and Adjudication
Example
The controversy arises when party A makes a payment application for £1.2M, when
it is worth a true value of £300,000. Party B falls foul of the process and an
Adjudicator makes a decision that £1.2M is due in default as claimed by party A.
So, if it is known that the true value is really £300,000 can party B avoid
payment by an escape in a second set of proceedings to establish the true value
of £300,000 and not pay the £1.2M ordered against them? The answer to that, is NO.
There is no escape, hence the term “Smash and Grab” gets used. Remember, “Smash
and Grab” can only exist if there is a Breach of Contract.
The
law is that party B must pay party A the full £1.2M before party B can
start a true value adjudication.
So this is what happens. The required payment application automatically becomes the “Notified Sum” in the absence of a valid payment or Pay Less Notice and the sum must be paid before attempting a true value adjudication. The rule is set out in S & T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448; [2019] Bus LR 1847.
All
straightforward you might think, however the parties get all manner of things
wrong making the notices they think they have served void.
A recent case with good examples on notices that tried to challenge the principle in S & T v Grove and failed is AM Construction Ltd v The Darul Amaan Trust [2022] EWHC 1478 (TCC). The precedent in S & T v Grove was further ratified but it also illustrates common errors by parties regarding what constitutes a valid Payment Notice (Payment Notice becoming the “Notified Sum” meaning a payment application, Payment Notice or Pay Less Notice).
Examples of Payment Notices failing to qualify as the “Notified Sum” are as follows:
- Contract
Compliance – Timing and Service not done as required by the contract – dates,
form of notice and delivery process as stated in the contract;
- Form,
substance and intent and free from ambiguity – the payment notice must state
the sum due and that it is unambiguously a request for payment and that it
includes a document that is the basis for calculation of that sum demanded – E.g.,
a final account assessment that does not ask for payment will not be a valid
payment notice. (Systems Pipework Ltd v Rotary Building Services Ltd
[2017] (TCC)).
- Where an application for payment has been made which subsequently becomes a default notice, a second notice served purporting to be a default notice is not permissible in that payment period (S.110B(4) of the LDEDC Act 2009). However, a second notice ought to be served if the first is clearly void. In AMC v DAT the payee AMC fell on some good luck than judgement when it’s first notice (found to be void as it was a final account negotiation document only) for £809,259.97 was followed by a second notice for £206,825.33 that made it clear it was payment application, became the “Notified Sum” as no payment or Pay Less Notices were served by DAT and that lesser sum became the sum due. Although it was a second notice, it was in effect the first one as the previous one was void.
Importantly,
AMC v DAT reinforces the principle that the payer must pay the “Notified
sum” in default, where a payment or Pay Less Notice has not been served before it
can dispute the account in a true value adjudication, which cannot be commenced
if payment is outstanding.
Any
kind of case for “Smash and Grab” getting the payer off the hook, is now
totally remote. It is after all breach of contract and payment due in default as
a result… not theft!
The
case also dealt with the validity of the Notice of Adjudication, that is
another topic, but it illustrates the importance of ensuring that contract
notices of all kinds must be drafted and served correctly. Substance,
form, intent, free from ambiguity and compliant with the contract.
Arbicon If you need to review your contract procedures, the Arbicon team are experts and can set you up so reducing the risk of error! For advice, please use our contact form or call our offices below:
01733 233737 Peterborough
0207 406 1494 London
0121 262 4086 Birmingham
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