Smash and grab adjudications: A quick win or a costly gamble?

Introduction to smash and grab adjudications

Imagine completing a significant phase of work on a construction project, submitting your payment application, and hearing nothing back. In the world of UK construction law, that silence could entitle you to the full amount claimed. “Smash and grab” adjudications arise where a contractor or subcontractor takes advantage of an employer’s failure to respond to a payment application on time. This process can lead to the employer being obliged to pay the claimed amount promptly, often without the opportunity to dispute the sum’s accuracy at that stage.

Legal basis and evolution

The legal foundation for smash and grab adjudications is rooted in the Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009). This Act mandates that construction contracts must include provisions for interim payments and that specific notices (payment notices and pay less notices) must be served to contest or adjust the sums claimed.

A pivotal case in this context is ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC), which established that if an employer fails to serve a valid pay less notice, they must pay the full amount claimed by the contractor. This judgment significantly bolstered the position of contractors in payment disputes, leading to an uptick in smash and grab adjudications.

In practical terms, this meant that an employer who missed the deadline for serving a pay less notice could find itself liable for the full sum claimed, regardless of whether that sum reflected the true value of the work carried out.

Recent developments

However, more recent legal developments have introduced nuances to the adjudication landscape. In Grove Developments Ltd v S&T (UK) Ltd [2018] EWCA Civ 2448, the Court of Appeal ruled that while an employer must pay the amount claimed in the absence of a valid pay less notice, they can subsequently launch a true value adjudication to determine the actual amount due. This decision has somewhat mitigated the impact of smash and grab adjudications by allowing employers a route to challenge the sums claimed post-payment.

This means that while a contractor may secure an initial payment through a smash and grab adjudication, the employer retains the right to claw back any overpayment through a subsequent determination of the work’s true value.

Key considerations as to whether you should pursue a smash and grab adjudication

There are circumstances in which a smash and grab adjudication may be a legitimate and effective tool e.g., where an employer is persistently failing to engage with the payment process or where cash flow is critically impaired. However, before pursuing this route, contractors should carefully weigh the following considerations:

Short-term gains vs. long-term relationships: Leveraging procedural failures for immediate financial gain can damage long-term relationships with employers. Construction projects often involve extended collaboration, and adversarial tactics can undermine trust and future business opportunities.

Subsequent true value adjudications: Following the Grove decision, employers have the option to pursue a true value adjudication even after a smash and grab adjudication. This can lead to additional legal costs and uncertainty for the contractor, potentially nullifying the initial financial benefits.

Reputational risks: Frequent use of smash and grab adjudications can tarnish a contractor’s reputation within the industry. Employers may become wary of engaging with contractors known for exploiting procedural errors, impacting future contract awards.

Legal and administrative costs: Adjudications, while quicker and less formal than litigation, still incur legal and administrative costs. Repeated engagements in such disputes can strain a contractor’s resources and divert attention from project delivery.

Best practices to mitigate risks

To navigate the complexities of payment disputes without resorting to smash and grab adjudications, contractors and employers should consider the following best practices:

Clear contractual provisions: Ensure that contracts clearly outline payment procedures, including timelines for serving payment notices and pay less notices.

Robust administrative processes: Implement rigorous administrative processes to ensure compliance with contractual and statutory requirements, reducing the risk of missed notices.

Open communication: Maintain open lines of communication between parties to address payment issues proactively, potentially avoiding formal disputes.

Alternative dispute resolution (ADR): Explore other forms of ADR, such as mediation, to resolve disputes amicably without resorting to adjudication.

The bottom line

While smash and grab adjudications can offer a swift resolution to payment disputes, their drawbacks and the evolving legal landscape suggest a cautious approach. By fostering clear contractual terms, robust administrative practices, and open communication, parties can mitigate the risks associated with these adjudications and maintain healthier, more collaborative business relationships.

If you are facing a payment dispute on a construction project, whether you are considering a smash and grab adjudication or defending one, our specialist construction team can help you navigate the process and protect your interests. Get in touch today to discuss your situation.

Need expert legal advice? Contact Sophie Thornley or Warren Kemp for professional support.