Smash and grabs: when are true value adjudications allowed?

Aidan Steensma is of counsel in the infrastructure, construction and energy disputes team at CMS London

A smash and grab adjudication (SGA) involves a party claiming a sum that was applied for but never challenged in a valid payment or pay-less notice (or the ‘notified sum’). The paying party must pay the notified sum before it is permitted to bring a true-value adjudication (TVA) seeking to dispute the true value of the application and, if less than the notified sum, to recoup the overpayment. A Technology and Construction Court (TCC) decision has now resolved precisely which types of TVAs can and can’t be commenced while the notified sum remains outstanding.

Lidl v 3CL concerned a contract for refrigeration works at one of Lidl’s distribution centres. The dispute between the parties concerned 3CL’s payment application number 19 (AFP19), which claimed £781,986.22. Lidl issued a payment notice stating that nothing was payable due to incomplete and/or defective work and claimed a deduction of £765,000 for liquidated damages for the period from 18 June 2022 to 29 September 2022 (the date of AFP19).

“This decision provides much-needed clarity over when TVAs are permissible”

3CL successfully brought an SGA adjudication claiming that Lidl’s payment notice was invalid and Lidl was ordered to pay the notified sum, being the amount of AFP19. Before making payment, Lidl brought two further adjudications:

  • A second adjudication claiming the cost of instructing a third party to repair 3CL’s defective work. Lidl obtained a decision for £757,845.63.
  • A third adjudication claiming a declaration that 3CL was not entitled to any extension of time from 25 May 2022 until practical completion on 26 October 2022. Lidl was again successful.

3CL claimed that both adjudications were unenforceable as they were commenced prior to payment of AFP19. 3CL argued for a wide rule that prohibited any adjudication that sought to revalue the account between the parties until the notified sum had been paid. The TCC rejected this as far too wide. The correct approach was that a TVA could not be commenced prior to the payment of a notified sum in relation to any claims “which could have been the subject of a pay-less notice served in respect of the particular notified sum in question”.

In relation to the second adjudication, the court accepted that the majority of the amount awarded concerned defects that had come to Lidl’s attention after AFP19. However, 3CL had raised an arguable case that £260,899.61 of the amount awarded overlapped with items raised by Lidl in its AFP19 payment notice. This part of the decision was not, therefore, enforceable.

The court found that the third adjudicator had no jurisdiction to deal with the period of delay that Lidl had claimed for in its AFP19 payment notice (i.e. 18 June 2022 to 29 September 2022), but did have jurisdiction to deal with the period from 25 May 2022 to 18 June 2022 and from 29 September 2022 to 26 October 2022.

The right to adjudicate

This is an important decision that provides much-needed clarity over when TVAs are permissible. Although not as wide as argued for by 3CL, the position adopted by the court still imposes a significant limitation on the right to adjudicate for parties who fail to pay a notified sum.

This limitation can be of great importance where insolvency risks are at play. Payment of the notified sum may be swallowed up by secured creditors before a TVA can be commenced. Or a party may be unable to pay the notified sum, meaning that no TVA is possible, leaving it to pursue court proceedings over many years, which it may not be able to afford either.

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