Background

Henry Construction Projects ("Henry Construction"), the contractor appointed to develop a boutique hotel in Central London, employed Alu-Fix as a sub-contractor. The Sub-Contract was terminated in November 2022, and Alu-Fix subsequently submitted an application for payment in the sum of around £257,000 which was due to paid on 13 December 2022.

Henry Construction failed to make payment in time without justification, and Alu-Fix subsequently issued a smash and grab adjudication. In that case, the adjudicator ruled that: i) the final date for payment was 13 December 2022, ii) no valid pay less notices had been served and iii) Alu-fix was entitled to payment of the notified sum.

Henry Construction claimed it had served two potentially valid pay less notices before the date for payment, and claimed that, as a result of over payment, Alu-Fix owed it circa £235,000. It therefore commenced a true value adjudication against Alu-Fix in January 2023.

Alu-Fix sought to argue that the adjudicator lacked jurisdiction in that case on the basis that an immediate payment obligation must be satisfied before a true value adjudication could be commenced. It considered that the case law and underlying policy on this issue was clear, any immediate payment obligation must be paid to assist with cashflow "without risk of any Trojan Horse style mischief undermining this".

Henry Construction asserted that there was a genuine dispute as to the validity of one of the pay less notices served. As such, until the adjudicator in the smash and grab adjudication determined that the notice was invalid, no immediate payment obligation arose.

Instead, Henry Construction claimed, the obligation arose when the adjudicator ruled the pay less notice was invalid. Accordingly, this situation should not be considered a jurisdictional issue, but rather an issue regarding Henry Construction's entitlement to rely on the true value adjudication.

The adjudicator in the true value adjudication stayed the adjudication pending payment, confirming that he would resign if payment was not made in accordance with the smash and grab decision.

Henry Construction accordingly made payment in full, and thereafter made a summary judgment application during Part 7 proceedings to rely on the true value adjudication which determined that Alu-Fix owed Henry Construction over £191,000.

Decision

In considering the principles set out under, Bexheat¹ , M Davenport² and Grove v S&T³, District Judge Baldwin found in Alu-Fix's favour and made the following determinations:

1. He saw no reason to conclude differently to the adjudicator's rulings in the smash and grab adjudication that the final date for payment was 13 December 2022, and that no valid pay less certificates had been served. In that regard, his decision in this case was consistent with Bexheat.
2. Accordingly, Henry Construction was not entitled to commence a true value adjudication without first having discharged its immediate payment obligation, and having failed to make such payment before starting the true value adjudication, the adjudicator in that case lacked jurisdiction.

The judge also highlighted that Henry Construction's argument as to a genuine dispute preventing an immediate payment obligation arising would enable paying parties to "steal a march on the other party" by being permitted to commence a true value adjudication, when the notified payment should have been made all along.

The judge also noted that any potential to rely on a true valuation adjudication "must be subsidiary to the clear prohibition on embarking upon or the lack of entitlement to commence a premature true value adjudication".

Commentary

This case highlights the importance of meeting any payment obligations before issuing a true value adjudication and re-asserts the 'cash flow' principle underpinning the Construction Act as laid down in Bexheat and many others.

Whilst the district judge did not close the door completely on commencing a true value adjudication prior to the outcome of a smash and grab adjudication, this approach would involve considerable risk to the referring party.

The case highlights again that the best way to insulate against a smash and grab adjudication is to ensure that timely / valid payment notices or pay less notices are issued in the course of each payment cycle.

[1] Bexheat v Essex Services Group [2022] EWHC 936 (TCC)

[2] M Davenport Builders Ltd v Greer [2019] Bus LR 1273, [2019] BLR 241

[3] Grove v S&T (2018) 181 ConLR 66, [2019] Bus LR 1847,