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Interim payment & smash and grab adjudications – the beginning of the end?

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Most standard or bespoke construction contracts provide for interim payment during the works.  If the contracting parties have failed to set out contractual terms for interim payment the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act”) will imply interim payment terms into the contract via The Scheme for Construction Contracts (England and Wales) Regulations (“the Scheme”).

Essentially the regime is as follows:-

  • Contractor or Subcontractor (“payee”) makes an application for payment, valuing works up to an agreed or default “due date”
  • Shortly after the due date the Employer or Main Contractor (“payer”) should issue a response to the application.  This is called a “payment notice” and must specify the sum the payer considers is “due” at the due date and the “basis on which that sum is calculated”
  • If a payment notice has not been issued and / or if the payer decides it wants to pay less than the sum set out in the application or payment notice it can issue a “pay less notice”.  This pay less notice must be issued not later than the agreed number of days before the “final date for payment”
  • The final date for payment is, by default, 17 days from the due date but is usually amended to be 14 or 28 days from the due date
  • This exchange of applications and notices should take place as determined by the parties or as set out in the Scheme
  • If no payment notice or pay less notice is served by the payer the amount set out in the application becomes the “notified sum” due for payment.  Otherwise the amount set out in the payment notice or, if served, the pay less notice, is the notified sum that the payer must pay by the final date for payment.

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Change in the law?

A key question for construction parties is what happens if a payer does not respond to a payee’s application for interim payment.

Until February 2018 the answer was the payee’s application became the notified sum due for payment and the amount set out in the application was deemed to have been agreed for the purpose of that payment round.

The net result was that the payer could not challenge the valuation of the works until the next payment round.

If the application was made in the last payment round (i.e. just before or after PC) the payer generally had to wait quite a long time before it could challenge the valuation of the work via the final account.  In extreme circumstances money could be lost if payees went bust before the payer had an opportunity to challenge the amounts due.  This was because the payer had to make payment of the notified sum regardless of whether it thought that sum was due in part or at all.  The resulting adjudications to force payment of a notified sum have become known as “smash and grab” adjudications because payees would use the legislation to “grab” money from payers.

In his last judgment in the Technology and Construction Court, Mr Justice Coulson held that the concept of “deemed agreement” is not only unjustified but is also an unnecessary complication of provisions of the Construction Act.

In Coulson’s view, the purpose of the Construction Act, which is to maintenance of cash flow in construction projects, is best served by allowing parties to determine the “true value” of interim works as those works progress, regardless of whether appropriate notices have been served.

Notified sums will still be due and payable but the payer is no longer stuck with its “deemed acceptance” of value.  This means once payment of the notified sum is made a payer can immediately start proceedings on value and, hopefully, can obtain the money back.

This seems to be a very pragmatic and sensible way forward, and will no doubt be a relief to those payers who have failed to serve payment notices or pay less notices within the contractual or statutory timelines.

The decision may be appealed; however, we anticipate Coulson’s view will be upheld by the Court of Appeal if that body is asked to review the matter.

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