'Smash and Grab' and the Correction Principle

J & B Hopkins Ltd v Trant Engineering Ltd

10 July 2020

Author: John Dugdale
Practice Area: Construction Law

Law_books_(2)

Seemingly prevalent within the construction industry in Northern Ireland and Great Britain, a 'smash and grab' adjudication enables a contractor to claim payment of the amount stated in an interim application (whether, or not, it represents the 'true' valuation of the work), due to a failure by the paying party to serve either a payment notice or a pay less notice.

While such a failure can be corrected in the next interim payment cycle, a recent judgment of the High Court of England and Wales has provided clarity on the impact of a correction to reflect the true value of the work on later applications.

Background

The case arose out of works at a recycling plant on the Isle of Wight. A main contractor, Trant Engineering Ltd (Trant), had engaged J & B Hopkins Ltd (J & B) as a mechanical and electrical subcontractor.

The original subcontract sum was £1.669 million, but the scope of the works was varied considerably during the project and that value increased. The amount of the increase was in dispute.

In July 2019 J & B issued interim application 26, through which it claimed the sum of £812,000. A pay less notice was served by Trant but it was held to be invalid by an adjudicator. The adjudicator therefore decided that J & B was entitled to be paid the sum stated in interim application 26 plus interest.

That adjudicator was appointed in January 2020, by which time J & B had made further applications for payment in subsequent interim payment cycles, which were the subject of valid pay less notices. Trant argued that J & B “having gone along with subsequent payment cycles” meant that the sum payable on foot of interim application 26 had been superseded and corrected.

It followed, on Trant’s case, that enforcing the adjudicator’s decision would be inconsistent with, and undermine, the principle that interim payments can be corrected in the next interim payment cycle.

The Law

The Construction Contracts (Northern Ireland) Order 1997 (the 1997 Order) is the legislation that governs adjudication and payment in 'construction contracts' in Northern Ireland.

If a payer (in this case, Trant) does not serve a payment notice or pay less notice, the payee (in this case, J & B) will be entitled to the amount claimed in its interim application for payment.

There is no escaping the statutory rules on payment – if a construction contract does not comply with the rules, then the relevant provisions of the Scheme for Construction Contracts in Northern Ireland will take effect as an implied term.

Under the 1997 Order, a party to a 'construction contract' also has a statutory right to refer a dispute to adjudication at any time. An adjudicator's decision is binding on an interim basis, that is, until the dispute is finally determined by arbitration, litigation or agreement.

The regime in England and Wales is similar, albeit different legislation applies.

Decision

J & B’s participation in subsequent payment applications did not mean that it lost its ability to adjudicate on whether or not the relevant notices were served in respect of interim application 26.

In the Judge’s view, Trant’s case ignored J & B’s right to adjudicate "at any time". It was also the case that disputes on earlier applications do not “disappear” or “cease to exist” because a subsequent application is made.

Another practical point considered by the Judge was that payment cycles in construction contracts are often monthly, meaning that it would be “verging on impossible” for a party to adjudicate over non-payment of an interim application before the next application fell due.

In short, it was open to J & B to choose to adjudicate over interim application 26 even though Trant’s failure to serve the required notices had been rectified on subsequent interim applications.

Carson McDowell View

Although the judgment was given by an English court, it is likely to be persuasive to a court in Northern Ireland tasked with determining the same issue.

At a time when the importance of cash flow has been accentuated by the impact of COVID-19, it seems that there is an opportunity for payees (which can include main contractors, subcontractors and consultants) to review old interim payment applications and potentially seek to adjudicate if the required notices have not been served.

In the meantime, the best way for paying parties to mitigate against the risk of a 'smash and grab' is to ensure that payment and pay less notices are served properly and in good time.

If you have any queries the Construction team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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