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An uncertain future for Smash & Grab adjudication

A recent decision in the Technology and Construction Court has prompted the industry to once again reflect on the well-documented cases of ISG v Seevic and Harding v Paice, from which the phrase “Smash & Grab” adjudication was born. You can find our commentary on those two cases here, and below we summarise why it appears that a change may be on the horizon.

For those unfamiliar with the term, a “Smash & Grab” adjudication involves one party to a construction contract claiming payment from another in circumstances where:

  • The claiming party has previously made an interim application for payment; and
  • The paying party has failed to issue either a payment or a pay less notice in respect of that interim application.

The amount claimed in the interim application is therefore deemed (for interim purposes at least) to be accepted by the paying party as the true value of the relevant works. The paying party must pay the full amount and is not entitled to challenge the proper valuation of the application, regardless of whether they dispute it.

This position has now been reconsidered in Imperial Chemicals Industries Ltd v Merit Merrell Technology Ltd [2017].

The Facts

This case was a melting pot of legal issues, one being whether ICI could recover a perceived overpayment in respect of two previously adjudicated MMT interim applications.

ICI employed MMT on NEC3 terms for the provision of piping at a new paint manufacturing plant, but subsequently sought to terminate the contract by acceptance of MMT’s repudiatory breach. Unfortunately for ICI, the court later determined that MMT had committed no such breach, and in fact, that ICI had affected repudiation by wrongfully seeking to terminate.

To top things off, ICI had been ordered to pay over £8m to MMT following two successful smash and grab adjudications, an amount ICI believed to be in excess of the true value of the works. The question at hand was whether ICI could, after their repudiation, make a recovery of the perceived overpayment.

The Argument Against

MMT sought to apply the principles of ISG v Seevic and argued that in the absence of proper notices, the amounts paid by ICI were in fact the deemed value of the relevant works. They went further to suggest that as a consequence of the repudiation, ICI had lost its right of recovery. As such, the decisions in each adjudication were both final and binding on the parties, and could not be revisited.

The amount claimed in the interim application is therefore deemed (for interim purposes at least) to be accepted by the paying party as the true value of the relevant works.

The Decision

The court disagreed with MMT’s argument and noted that a party’s existing rights would survive the termination of a contract by repudiation. ICI was therefore entitled to challenge the true assessment of the value of the works, and to recovery of any overpayments.

More interesting were the comments of Fraser J in reaching that conclusion, who said that the decisions in ISG v Seevic and Harding v Paice were “difficult to reconcile” with each other. He went on to suggest there was “real doubt” that ISG v Seevic would be decided in the same way now. In doing so, Fraser J cast similar doubt over whether the current assumption that paying parties who have failed to serve a payment or pay less notice cannot challenge the value of works in a second adjudication is correct.

Comment

The implications of Fraser J’s commentary are not to end a contractor’s entitlement to adjudicate for payment in the absence of a proper payment notice. That would be to contradict the government’s intention to encourage cashflow. They do however open the door to the possibility of cross-adjudications, whereby paying parties could seek the proper assessment of the true value of works claimed under a contractor’s interim application.  We wait for further guidance from the TCC, and perhaps the Court of Appeal, on ISG v Seevic and the future of “Smash and Grab”.

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Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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