Adjudications, which force employers to make payments under construction contracts even where there is a dispute over the value of the work, could become far less popular following an Appeal Court decision.
Under the Construction Act 1996, a contractor can demand payment for work completed. If the employer does not issue a valid ‘payment’ or ‘pay-less notice’, the employer is obliged to make the requested payment, irrespective of any dispute over the value of the work done.
The payment provisions were included in the Construction Act to improve cash flow in the industry. Unfortunately, some contractors have used them in conjunction with an adjudication to force employers to make large payments, despite disputes over the value of the work – colloquially known as “smash and grab” adjudications. Employers have often had to wait until the completion of the project, which may be months or years later to recover any over-payment.
In the case in question, Grove Developments had appointed S&T (UK) to build a new hotel at Heathrow Airport. S&T requested payment of £14 million more than the most recent valuation of the works, and subsequently alleged that Grove failed to issue a valid payment or pay-less notice. S&T took the employer to court to demand payment. See Brunel News, April 2018.
In court, Mr Justice Coulson ruled that Grove should pay the full amount requested. However, he also ruled that Grove could challenge the value of S&T’s payment through a separate “true value” adjudication. Success in this adjudication would result in S&T being required to pay back any over-payment. This decision meant that employers might be able to recover any overpayment far quicker, discouraging opportunistic adjudications by contractors.
S&T appealed the ruling, but in the latest chapter of the smash and grab phenomena, the Court of Appeal backed the first court’s decision. It ruled that Grove was obliged to make the payment requested, but that it could commence a true value adjudication immediately after.
“The principle of “pay now and adjudicate later” was asserted, which means that contractors will still be able to receive payments for work quickly, protecting their cash flow. This was the original intent of the legislation around prompt payment. But the judgement also means that abuse of these provisions is curtailed going forward as any overpayment can be quickly assessed and reclaimed by the employer by using a true value adjudication,” said James Burgoyne, Director – Claims & Technical, Brunel Professions. “This is likely to reduce the number of smash and grab situations, particularly in the light of the recent Grosvenor London Limited v Aygun Aluminium UK Limited decision regarding non-payment of an impecunious party, where it is feared money to be repaid later may be lost (see Brunel News, August 2018). It should be noted that the money applied for must still be paid, so it is still important that interim certificates and payless notices are issued properly. “Pay first” means that there may still be overpayment situations, impacts on cash flow, and the potential for E&O claims against the professionals responsible for improperly issuing certificates and payless notices.”
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