‘Smash and grab’. Do I have to pay?

Introduction

The Housing Grants, Construction and Regeneration Act (1996) (as amended) (Construction Act) introduced mandatory payment terms that each construction contract for the provision of construction operations must contain. This includes:

• A requirement for the payer to issue either a payment notice and/or apayless notice if it does not agree with the payee’s valuation.
• An ability for the payee to issue an application for payment, which may become a default payment notice (the sum due) in certain circumstances.

If the contract fails to provide an adequate mechanism to incorporate the mandatory terms required by the Construction Act, those terms will be implied (as necessary) into the contract.

Pay first, argue later

This payment process was designed to facilitate cash flow in the construction industry and has led to a practice called ‘smash and grab’ payment disputes. This is where a payee applies for payment, and in the absence of a valid payment notice and/or payless notice, the payee seeks payment in full of the sum applied for (termed the Notified Sum).

There were a flurry of cases before the courts in the period 2014-2018 as construction parties adopted various strategies to manage the risks arising from a smash and grab, before the Court of Appeal confirmed in the case of S&T (UK) Limited v Grove Developments Ltd[1] that a payer must pay the Notified Sum before it can commence a ‘true value’ adjudication to seek recovery of any overpayment.

This scenario may create concern for a payer that: (a) it may be unable to recover any overpayment due to the financial position of the payee; and (b) it will be forced to incur the costs and time involved with any recovery exercise.

Are there any defences available to a 'smash and grab'

In the absence of a valid payment notice and/orpayless notice, the payer’s defence to a smash and grab often focuses on the validity of the application for payment relied upon. This is because the courts have emphasised that to rely upon the “draconian consequences” of the Notified Sum payment process, a payee must get its application right.

Each matter will be fact-specific and require an assessment of the relevant contractual terms, but some of the strategies adopted by parties in previous matters include:

1. An application must be submitted ‘in accordance with the contract’.

In ISG Retail Ltd v FK Construction Ltd [2], the court held that FK’s application was not issued in accordance with the contract because it was issued one day late. Similarly, in Leeds City Council v Waco UK Ltd [3], the court held that Waco’s application was issued too early and thus invalid.

Some contracts include bespoke provisions in relation to the method of service of and requirements of an application for payment, which may be relevant here.

2. A default payment notice must be ‘clearly and unambiguously’ a default payment notice.

In Caledonian Modular Ltd v Mar City Developments [4], the court held that a document that was submitted as part of account negotiations was not a valid application for payment. This was because it was not clearly and unambiguously an application for payment and did not alert the payer to the actions required.

3. An application for payment must set out the sum considered to be due at the due date for payment.

This is a requirement of the Construction Act. In Jawaby Property Investment Ltd v Interiors Group [5], the application was invalid because it did not set out the sum due on the due date for payment.

4. An application for payment must set out the basis on which that sum is calculated.

This is also a requirement of the Construction Act. In S&T (UK) Limited v Grove Developments Ltd it was held (in the context of a pay less notice) that it is permissible for the breakdown to be contained in a separate document to which the notice refers.

5. Has an interim payment arisen?

An application for payment can only be construed as a default payment notice if, in fact, the due date for payment has arisen. Notably:

a. In the case of Balfour Beatty Regional Construction Ltd v Grove Developments Ltd [6], the court addressed a scenario whereby the parties had amended the payment terms so that payments arose in accordance with the dates set out in a payment schedule. Once that schedule had expired (absent an agreement between the parties), no further payment became due until the final payment.

b. The case of Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL [7] confirmed that the final date for payment cannot be linked to the receipt of a VAT invoice. There must be a fixed period of time between the due date for payment and the final date for payment. The court was not required and therefore did not consider if the due date is adjustable by reference to receipt of certain documents, such as a VAT invoice.

6. No genuine belief in the sum assessed.

In Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd [8], the court held that a ‘holding payment notice’ from the payer was invalid because a payment notice must set out the sum the payer genuinely considers to be due.

This is a fact-specific case, but a principle that may be relevant on other matters.

Key takeaways

• The practice of smash and grab disputes remains prevalent in the construction industry, and the best strategy to mitigate risk for a payer is to serve a valid payment notice and/or payless notice.
• In view of the draconian consequences of a smash and grab, the bar is set high for an application for payment to be construed as a default payment notice, and depending on the particular circumstances, there may be avenues that can be used as a defence to a smash and grab.

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