Resisting the 'smash and grab' adjudication: the importance of a valid payment application
29 September 2015
Another case in the Technology and Construction Court has highlighted the risk of 'smash and grab' adjudications - although this time the employer was able to defeat the contractor's claim.
The latest in a line of judgments on...
Recent judgments by the Technology and Construction Court such as ISG Construction v Seevic College, have highlighted the risk to both employer and contractor of 'smash and grab' adjudications, whereby an employer who fails to serve a timely payment or pay less notice may find that it is ordered to pay the full amount claimed in a contractor's payment application - even if the application considerably over-values the works. The dangers are well illustrated by the latest case in this line: Henia Investments v Beck Interiors LTd  EWHC 2433 (TCC).
Henia Investments Inc v Beck Interiors Ltd
Henia Investments (the employer) entered into a JCT Standard Building Contract 2011 with Beck Interiors for fit out works to a Knightsbridge property. In accordance with the Housing Grants, Construction and Regeneration Act 1996, this contract provides that a contractor's interim payment application becomes due by default if the contract administrator fails to serve an interim certificate.
On 28 April 2015, Beck issued an Interim Application 18 for £2.9m. The contract administrator subsequently issued an Interim Certificate 18 for £226,000. However, both the Interim Application and the Interim Certificate were issued late.
The following month, Beck did not issue an interim application at all, while the contract administrator was late in issuing an Interim Certificate 19 (by three minutes).
Perhaps seeing a 'smash and grab' opportunity, Beck argued that, in the absence of a valid interim certificate for May, the Interim Application 18 should become due by default in respect of the May payment due date.
Beck also argued that Henia's subsequent pay-less notice was not valid to the extent that Henia had challenged the valuation of the works (rather than merely deducting liquidated damages).
The court disagreed with Beck:
A pay-less notice can deploy the employer's own valuation of the works in addition to raising deductions and set-offs.
In any event the Interim Application 18 was clearly intended for the April due date, rather than the May payment due date and therefore it could not become due by default for May, even if no interim certificate had been issued.
So in this instance, the contractor was unable to capitalise on the contract administrator's failure to issue interim certificates on time (no doubt to the great relief of the contract administrator). However, it is likely that the result would have been very different if the contractor had issued an effective interim application and the employer had served an ineffective pay-less notice.
Again, the Technology and Construction Court has provided a clear warning to employers and contractors alike that both the timing and content of contractual notices must be correct, otherwise the financial consequences can be significant.
This article was written by Andrew Keeley.
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