True value adjudications; don’t jump the gun!

As many reading this article will be aware, a “smash and grab” adjudication is where, absent a valid and timely payment notice or pay less notice, the payee claims for payment of the sum claimed in its application pursuant to section 111 of the Housing Grants, Construction and Regeneration Act 1996 (the ‘Construction Act’). The sum applied for should be awarded by default without the adjudicator carrying out a valuation of the application.  This means that there is the potential for the payee to receive an unjustified windfall where its application is overstated. Such an adjudication is to be contrasted with a “true value” adjudication where the adjudicator carries out a valuation of the application in order to determine its “true value”.

Prior to 2018, the courts had held that following a smash and grab adjudication, it was not open to a paying party to commence a ‘true value’ adjudication in relation to the same payment application. That changed in 2018 when the Court of Appeal held in Grove v S&T that an employer could in fact commence a true value adjudication notwithstanding that the same application had previously been the subject of a smash and grab adjudication.

The important caveat to this is that, in line with the cashflow policy underlying the Construction Act’s payment provisions, the paying party must first pay the sums awarded in the smash and grab adjudication. That principle has been confirmed in a number of subsequent decisions.

In the recent case of Henry Construction Projects Ltd v Alu-fix (UK) Ltd, a contractor had commenced a true value adjudication against its sub-contractor in relation to an interim payment which was already the subject of an on-going smash and grab adjudication. The court considered the question of whether the adjudicator in the true value adjudication had jurisdiction.

Facts

In June 2021, Henry engaged Alu-Fix under a JCT Standard Building Sub-Contract to carry out works at a boutique hotel development in central London. A dispute arose following which Alu-Fix terminated the sub-contract, triggering the termination account payment mechanism. Alu-Fix submitted an application for payment on 15 November 2022 for c.£260k plus VAT. The final date for payment was 13 December 2022.

No payment was made and therefore, on 15 December 2022 Alu-Fix commenced a smash and grab adjudication seeking payment of the full £260k plus VAT, arguing that no valid payment or pay less notice was issued by Henry.

On 18 January 2023, before any decision had been reached, Henry commenced its own true value adjudication claiming that Alu-Fix had in fact been overpaid and therefore owed Henry approximately £235k.

On 23 January 2023, Alu-Fix wrote to the adjudicator in the true value adjudication, Mr Molloy, requesting that he resign.

Meanwhile, on 27 January 2023, the adjudicator in the smash and grab adjudication, Mr Rayner, found in Alu-Fix’s favour and ordered Henry to pay the sum of c.£260k by 3 February 2023.

Mr Molloy stayed the true value adjudication pending payment by Henry of the £260k and confirmed he would resign if payment was not made. On 2 February 2023, Henry made full payment to Alu-Fix.

On 6 March 2023, Mr Molloy issued his decision, finding that Alu-Fix did in fact owe Henry £190k plus interest.

The enforcement proceedings

When Alu-Fix refused to pay the sum awarded by Mr Molloy, Henry commenced enforcement proceedings.

Henry sought to distinguish the present case from the previous authorities on the basis that, at the time the true value adjudication was commenced, there existed a ‘genuine dispute’ over whether a valid pay less notice had been issued. As such, until the smash and grab adjudication had been decided, Henry was not under an immediate payment obligation.

Henry argued that, should the court find that Mr Molloy lacked jurisdiction, this would mean that there was effectively an automatic removal of jurisdiction even though, at the point the true value adjudication was commenced, it was entirely possible that the smash and grab adjudicator could have found that Henry had issued a valid pay less notice.

The court disagreed. Whilst it agreed that there was some superficial merit in Henry’s argument, it considered that this would be at odds with the cashflow policy underpinning the Construction Act. The key point is that Henry should have made payment on 13 December 2022. Henry’s position would mean that a paying party could not only delay paying what may ultimately be the sum due (i.e. the sum stated in the payment application as no valid payment or pay less notice has been issued) but also then gain a strategic advantage by commencing a true value adjudication in the meantime.

The court did find that should the smash and grab adjudication go the way of the paying party, then the true value adjudication may proceed. This is on the basis that the paying party would not then be in breach of a payment obligation.

Thoughts

The court’s decision is not surprising. The courts have consistently made clear that they will uphold the principle that cashflow is sacrosanct when it comes to interim payment obligations under construction contracts.

A finding in Henry’s favour would have driven a coach and horses through section 111 of the Construction Act. A paying party which had failed to issue a timely payment notice and/or pay less notice could negate the impact of any smash and grab adjudication by immediately commencing a true value adjudication (albeit with the caveat that it would take at least some time to get such an adjudication off the ground). Would a successful party in a smash and grab adjudication really bother enforcing that decision if it knew it would have to hand back the money in what could be a matter of days?

Although the court did not completely close the door on ‘pre-emptive’ true value adjudications, it is difficult to see what merit there is in such a strategy. If the paying party lost the smash and grab adjudication, the true value adjudication would not be enforceable and would be a waste of time and money. If, on the other hand, it was successful in the smash and grab adjudication then there would be no need to have commenced the true value adjudication in the first place.

Ultimately, the best way for a paying party to protect itself is to ensure that it issues a payment notice or pay less notice on time.