The importance of payment and pay less notices: How a smash and grab claim can succeed even where there has been a prior true value adjudication

The Court of Appeal confirmed in S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448 that where an adjudicator has issued a decision ordering payment of a notified sum arising under an interim application for payment, that sum must be paid before the payer can commence a true value adjudication.

Section 111 of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”) creates an immediate obligation to pay the notified sum. If a party succeeds in a 'smash and grab' adjudication then the losing party must pay up before it can try to recover any over-payment through a true value claim. The recent case of Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC) concerned the effect of a prior adjudicator's decision regarding the true value of interim application 22 on a subsequent 'smash and grab' adjudication regarding interim application 23.Bexheat had commenced a first adjudication regarding the true value of its interim application 22. It had some success in that and Essex Services (“ESG”) was ordered to pay Bexheat £141,646.35.  The adjudicator's decision was dated 12 October 2021. ESG complied with the decision. Bexheat then commenced a second adjudication on 18 October 2021 seeking payment of a notified sum relating to interim application 23 on the basis that ESG had failed to serve a valid pay less notice by the deadline of 14 October 2021 (i.e. after the first adjudicator's decision). Bexheat was successful and ESG was ordered to pay £706,029.62 (taking into account the amounts ESG had paid in respect of the first adjudicator's decision).On enforcement of the second adjudicator's decision ESG argued that the second adjudicator lacked jurisdiction because the dispute they had been asked to determine was the same or substantially the same as that which had already been decided by the first adjudicator. The Court held that the disputes were not the same or substantially the same: There was a difference between a dispute regarding the true value of an interim application and a dispute whether a notified sum had arisen. The Judge concluded that Section 111 creates an immediate obligation to pay the notified sum where a valid payment or pay less notice has not been issued. Whilst there is a right to refer a true value dispute to adjudication “at any time” under Section 108, that right is subjugated to the immediate payment obligation under Section 111.The Court may also have been influenced by the fact that the adjudications related to different interim payment periods. ESG sought to rely on a contractual set-off clause to set-off sums claimed by ESG against the second adjudicator's decision. The Court confirmed that the contra-charges ESG was seeking to set-off did not arise out of the first or second adjudication decisions and none of the other exceptions from Thameside Construction Co. Ltd v Stevens [2013] EWHC 2071 (TCC) applied. The set-off was contrary to Section 108 of the  Act and was struck down as unenforceable. The Court also confirmed that a joinder provision in the parties' contract did not permit ESG to join a dispute regarding the true value of interim application 23 with the 'smash and grab' claim commenced by Bexheat. The judgment reinforces the important of serving valid payment or pay less notices. If a payer considers it may have failed to issue a valid payment or pay less notice and the payee is entitled to payment of a notified sum based on its application there may be little that the payer can do to prevent a 'smash and grab' claim by the payee. Bexheat shows that commencing a true value adjudication on a preceding application for payment will not assist the payer. Whilst the Court did not expressly deal with the situation where a true value adjudication is commenced in relation to the same interim application as a smash and grab adjudication, this seems unlikely to be a successful tactic. First, the Court confirmed that Section 111 creates an immediate payment obligation and the right to adjudicate on the true value under Section 108 is subjugated to that. The right to payment on or before the final date for payment would arise following the payer's failure to issue a valid payment notice, assuming the payee's application constituted a valid notice under S.110B(4). That obligation to pay can of course be avoided by service of a valid pay less notice. Second, in practical terms, the timetable for a smash and grab adjudication is likely to be shorter than that for a true value adjudication. Many adjudications extend beyond the 28 day timetable.   Whilst, in theory, an initial 14 day extension beyond the statutory 28 days is entirely in the gift of the referring party, most parties are loathe to cause difficulty for the adjudicator by insisting on adherence to the 'standard' timetable if the adjudicator requests more time. Therefore, even if a payer commenced a true value adjudication immediately upon realising it had failed to serve a valid pay less notice, the payee could commence a 'smash and grab' adjudication immediately and be likely to obtain a decision earlier. Third, even if the true value adjudication resulted in a decision earlier than the 'smash and grab' adjudication, the judgment in Bexheat indicates that the adjudicator in the 'smash and grab' adjudication would not be trespassing on the dispute referred to the adjudicator in the true value adjudication and so, it seems, would be entitled to continue to issue a binding decision. The message is clear: Ensure you know when and how valid payment and pay less notices need to be served under your contract. If you are a payee, then ensure your applications comply fully with the contract so that you may be able to rely on them as payee's default payment notices if the need arises.

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