Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
Social housing providers are accustomed to engaging contractors to deliver a wide variety of works, including responsive repairs, gas servicing and maintenance, development projects, and grounds maintenance.
Contracts for these activities are required by legislation to contain detailed payment mechanisms. The purpose of which is to ensure that contractors are paid on time to aid cash flow. This was recognised in the 1990s as a key issue in the industry which caused significant insolvency risks. A key feature of this statutory payment mechanism is a requirement for employers to issue payment notices each payment cycle and “pay less” notices if monies are to be withheld from the contractor. Since the case of ISG Construction Ltd v Seevic College (“Seevic”) the consequences of failing to issue a valid notice could be draconian, although the recent case of Grove Developments Ltd v S&T (UK) LTD (“Grove”) offers employers some relief.
The Seevic case confirms that where employers fail to issue a payment notice or pay less notice, contractors are entitled to commence an adjudication (a 28 day dispute resolution process), requiring employers to pay the sum contained in the contractor’s application for payment, even if that sum did not accurately reflect the true value of the works delivered. This practice became known as “smash-and-grab” and has been a constant feature of construction disputes over the past four years when employers have failed to issue valid payment notices or pay less notices. While it is always open to employers to correct any overpayment in the following payment cycle, they would have to first comply with the adjudicator’s decision and pay the contractor the amounts detailed in the application for payment. In Seevic, the contractor claimed £1,000,000 more than the employer had valued the works, the court ordered the employer to pay that sum. Seevic highlights why it is imperative for employers to issue a valid payment notice or pay less notice and demonstrates the risk of failing to do so.
Grove Developments Ltd v S&T (UK) Ltd
Social housing providers may receive some consolation from the judgment in Grove. The Court concluded, where a contractor commences a smash-and-grab adjudication due to lack of a valid payment notice or pay less notice, an employer is now able to challenge the true value of the works through a separate adjudication relating to the same payment cycle. Whilst this is a first instance decision and may be subject to appeal, it is a helpful case for employers, not least because employers no longer have to wait until the following payment cycle before determining the true value of the works delivered by the contractor.
Some commentators have suggested that the decision in Grove will mean the end of “smash-and-grab” adjudications. That would appear to be a very optimistic assessment. Contractors will still have the right to commence a smash-and-grab adjudication for payment of the sums in their application for payment and employers will still have to comply with any adjudicator’s decision made on this basis. Furthermore, it is likely that any decision requiring the employer to pay the contractor’s application for payment in full, would be made before the employer has the potential benefit of a decision in its favour regarding the true value of the works.
Grove may well act as a disincentive to “smash-and-grab” adjudications but is unlikely to do more than that. This case continues to highlight the importance for employers to comply with the payment provisions under their construction contracts, rather than relying on using adjudications to determine the value of works delivered.
For further information
For more information on the issues raised in this article, please contact Kieran Binnie.
 Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy Economic Development and Construction Act 2009
  EWHC 4007 (TCC)
  EWHC 123 (TCC)
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