IS THE THREAT OF “SMASH AND GRAB” RECEDING?
Is manipulation of the prompt payment provisions on the decline?
There appears to have been a growing judicial unease with “smash and grab”claims, and the 28 February 2018 saw a further decision which undermined them, although not it should be noted removing or overturning the threat. This was Grove Developments Limited v S&T (UK) Limited.
For those who are not aware, “smash and grab” claims are a manipulation of the prompt payment provisions within the Local Democracy Economic Development and Construction Act 2009. The Act created a payment system where the payee may raise an invoice for an interim payment, and if it is not contradicted by an interim certificate or payless notice, then the invoiced sum becomes due. It is the content of the interim payment application which matters, and not the actual value of the works at the date of application. In the absence of correctly issued interim certificates or payless notices, the figure in the application is taken as an agreed figure.
The “smash and grab” element is where an interim payment invoice raised, and perhaps for a very substantial sum. When the invoiced sum is not correctly adjusted by an interim certificate or payless notice, the payee (usually the main contractor) applies for payment of the invoiced sum. If this is not forthcoming, an adjudication is raised regarding the issue. Past case law has established that the invoiced sum is payable (no matter how disproportionate), and adjudication will find in favour of the payee.
Or at least this was the original position, and instances of significant payments being demanded and paid have caused some judicial concern with a “blackletter” application of the law in this area.
In Grove Developments, the fundamental position established by the legislation was not overturned, and it remains the case that the invoiced sum would be due if it was not adjusted by an interim certificate or payless notice. The critical point raised however was that the Employer is not deemed to have accepted the invoiced sum, and therefore they are able to subsequently dispute the valuation of the works by commencing a second adjudication.
As such, it remains the case that the contractor must be paid, but the Employer now has an almost immediate power to try to adjust the situation and deal with the overpayment – rather than facing a delay until the next milestone in the payment schedule or the final account.
This means that the period of danger created by the overpayment can be reduced. However, it does not mean that the dangers have been removed.
As a quick summary of some of these dangers:
- A significant payment application can lead to substantial and unexpected payments being required, and therefore funding for a project can be critically affected
- Cashflow issues may render the Employer insolvent and threaten the continuation of the project
- Solvency of the contractor is a key issue, as they would effectively have been paid in advance
- Overpayment may fundamentally alter the approach to the project and relationships of the parties, as cash becomes tight. A more cost cutting approach may be taken, with detrimental knock on effects. More issues may become entrenched problems and turn into liability claims against any available target (ie the professionals)
As observed last year in an earlier article, it is therefore in the professional team’s interest to try to avoid these issues arising, even if they are not directly part of the billing process.
In addition to the previous suggestions there is now also the opportunity to encourage the timely and proactive resolution of significant overpayment issues which have arisen. It may benefit the project for a point of view to be expressed that it is now no longer a case of the employer sitting back and relying on a claim against the contract administrator if such problems have arisen. It is now incumbent on the Employer to take steps to mitigate any loss, if they are successfully to bring a claim against the contract administrator. As such they are obliged to take action regarding the overpayment, or they share a measure of responsibility for a resulting loss.
Leave to appeal has been given so the present Grove Developments position may be overturned. There is a concern here that the present principle does, on the face of it, go against previously established law. However abuses of the payment process and the legislation intended to support prompt payment are clearly creating inequities, with consequences for the construction and insurance sectors. As such it may be hoped that the appeal will be decided accordingly.