Guarding against a “smash & grab” adjudication
Do you need to include a clause in your contracts to help avoid being the victims of a “smash & grab” adjudication?
The ISG v Seevic decision has seen the rise of the “smash & grab” adjudication – ie, where the payer fails to serve a valid pay less notice in time, the other party is entitled to the full amount set out in its application, even where that amount does not reflect the true value of the works. Since that decision employers and contractors have been pondering whether they should include clauses in their contracts to help them avoid a “smash & grab”.
Before looking at whether this approach could work, it is worth bearing in mind that in recent cases such as Estura, Caledonian Modular and Henia, the courts have attempted to stem the “smash & grab” tide and/or limit the financial effect of such an adjudication. Although the recent decisions are helpful, could you do more?
Most of the angst surrounding “smash & grab” adjudications relates to interim applications. This short article will, therefore, focus on this part of the payment cycle.
Project management The simplest way to avoid a “smash & grab” is to ensure that all paperwork (particularly the pay less notice) is served in accordance with the contract and/or the Construction Act. This is an obvious point, but the recent “smash & grab” cases demonstrate that employers, contract administrators and others continue to miss deadlines or serve incomplete and incorrect paperwork.
Valid interim application Recently the courts have taken a tough stance when deciding whether an interim application is valid and/or served in accordance with the contract. For example, in the Caledonian Modular case, Coulson J made it clear that “stealth” interim applications (ie, an interim application disguised as a simple letter or email) would not entitle a party to enforce a “smash & grab” adjudication. This line of authority may help payers.
It may be possible for the paying party to specify the form it expects each interim application to take. If the other party fails to adopt the required form for a particular application, the payer may be able to rely on Caledonian Modular and other decisions to argue that the application is a “stealth” application and therefore invalid. A prudent payer may also wish to specify which supporting documents should accompany an interim application. If the application does not include the specified supporting documents, then arguably that application would be invalid. However, there should be a degree of reasonableness regarding the extent and nature of the required supporting documents.
A number of cases revolve around the timing of the applications. In the Caledonian Modular case an interim application that was made too early in a payment cycle was deemed to be invalid. In the Henia case, however, the judge commented that a contractor could submit applications ahead of a payment cycle, provided that the application identifies the payment cycle to which it relates. This appears to contradict the Caledonian Modular decision. To avoid confusion and the risk of a “foot fault” by either party, it may be clearer to include a table setting out the “window” in which each interim application should be made. If any application is made outside its “window”, then the parties agree that it will be invalid.
Separate default payment notices Another gripe often arises where the interim application is deemed to be the default payment notice. The perception is that this approach is far more likely to lead to a successful “smash & grab” adjudication. To avoid this, the payer may want to include a provision in its contracts to make it clear that the interim application will not be deemed to be a default payment notice and that the recipient is obliged to serve a separate default payment notice where the payer fails to issue an interim certificate. If the recipient is obliged to serve a separate default notice, the contract could also set out the format and nature of that notice. If the notice does not comply with the contract, then it is likely that the notice would be held to be invalid.
Given the importance of the default payment notice it may also be advisable to include separate notice requirements which apply to default payment notices (eg, a copy has to be served on the payer’s company secretary). This should help to ensure that a default notice reaches the relevant people in good time, so that if the amount set out in the notice is disputed, the payer can serve a pay less notice.
Other mechanics Some commentators have suggested that the payer should have the ability to issue negative certificates. This would mean that if a party has benefitted from a “smash & grab” adjudication, the payer can issue a negative certificate in the next payment cycle and use this to avoid having to pay out more than the value of the works, etc. This could be viewed as an aggressive step by many in the industry, particularly contractors and sub-contractors, given that there is a risk that this type of mechanic could be abused by others. This type of provision may not be required if some of the protections set out above are incorporated into construction contracts.
It may also be the case that “claw back” provisions could find their way into the guarantees. This could mean that where a subsidiary has a “smash & grab” decision in its favour, the parent company may be obliged to pay back amounts which the employer can show are not “properly due”. This is unlikely to be used on the majority of standard construction projects, but funders could start to ask for it on more complex capital projects.
Conclusion It is apparent that large parts of the industry are nervous about the financial consequences of a “smash & grab” adjudication. It may be that the Court of Appeal provides more comfort for “payers” when it reaches its decision on the Harding v Paice case. In the meantime, you may wish to consider including clauses in your construction contracts which clarify the payment cycle and reduce the risk of an unforeseen “smash & grab”. The simplest option, however, remains good project management.