Helen Young, from the commercial litigation and dispute resolution team at SA Law, shares some advice on avoiding disagreements over payment
‘Smash and grab’ adjudications make up the majority of construction disputes.
A King’s College London report, published in November 2024, found 63% of all disputes in the construction industry are ‘smash and grab’ adjudications.
Given the endemic tight margins as well as economic and geopolitics driving up the costs of planning, labour and materials over the last few years, it’s no wonder payment terms are the most frequently disputed. Many construction companies struggle with cash-flow and insolvencies are rife.
So what are ‘smash and grab’ adjudications?
Adjudication is a type of dispute resolution that is typically a quicker way to resolve what the parties are arguing about. With a ‘smash and grab’ adjudication the focus is money owed (rather than the true value of something, which would take it out of the realm of ‘smash and grab’).
So these are disputes where a payee (often the contractor) argues the employer (the payer) has either not served a Payment Notice (of what they will pay) or Pay Less Notice, or not served a valid one; or a valid Payment Notice has been served but not paid.
The Housing Grants, Construction and Regeneration Act 1996, “The Act” sets out a statutory regime for regular interim payments in construction contracts. Such contracts need to have adequate payment provisions so The Act also provides that a Payment Notice should be issued within five days of the payment due date.
This should include the amount due and how it has been calculated. Whilst it may seem odd, a Payment Notice must be given even if there is no sum due. If a payer doesn’t serve a Payment Notice then the payee’s application for payment becomes a Payment Notice by default – and needs to be paid by the final payment date.
What makes a Payment Notice valid? It must be within the time-frame outlined by the contract between the two parties and in the correct form. The contract must set out the payment provisions and when a Payment/Pay Less Notice must be served and the method of service. When followed correctly, payment provisions are designed to avoid project interruptions and disputes.
If the payer disagrees with the value of the works completed or the works agreed were not completed within the contractual time-frame, they must serve a valid Pay Less Notice within the contractual time-frame.
Otherwise, there is the risk of a smash and grab adjudication, which are typically decided by reference to the payment notice rules agreed in the contract, and not the quality or extent of the underlying works completed or not completed.
Hence the likening to a robbery, as it allows the payee to claim the full amount originally owed without providing evidence of whether it equates to the true value of the works.
These payment notice rules may seem unfair, but they exist to ensure parties within the construction supply chain are paid promptly throughout a project (waiting until completion – which could take years – isn’t economically viable).
So how can payers avoid a smash and grab dispute, or mitigate its impact? Prevention is key:
Review, refresh and understand your contractual payment provisions
Ensure you have a thorough, written contract in place. Many companies make the mistake of copying and pasting all terms and conditions from contract to contract, even if they govern different types of works.
Inaccuracies and ill-interpretations of payment notice provisions can leave payers more vulnerable in payment terms disputes, and could be at risk of paying more than the sum claimed.
Ensure each contractual arrangement is bespoke, and of course follows and does not contradict the laws around payment notice provisions; if the contract is silent on relevant provisions or doesn’t comply with the payment provisions of The Act then the Scheme for Construction Contracts (England & Wales) Regulations 1998 steps in and implies terms such as the final date for payment of a Payment Notice, as if those provisions were drafted into the contract in the first place – so do bear this in mind too.
The extent to which the provisions are implied depends on what is wrong or missing from the contract. For example a clause in a construction contract that says a party will be paid when they themselves have been paid is ineffective (unless it’s an upstream insolvency situation).
If possible, get legal assistance in drafting the contract, and ensure those executing these notices understand the payment provisions and the triggers for adjudication. Take early legal advice on its provisions so you can be pre-armed in the event of a dispute over payment.
Comply with them
Carefully diarise deadlines for Payment Notices, Pay Less Notices, and payments. Introduce clear record keeping of these being actioned. If a payee launches a claim, you’ll be more likely to successfully defend your position if you demonstrate you followed the contractual provisions and laws around payment.
These records also help your lawyers prepare your defence within the short time-frame between a Notice of Adjudication being served and the appointed adjudicator giving his or her decision – which is 28 days under The Act.
To avoid sending an invalid Pay Less Notice, which could you leave at risk of a claim, you can serve a Pay Less Notice later on in the payment cycle – but take specialist legal advice first. This can be appropriate in circumstances when you receive the application for payment from a payee, but by the time you judge the works aren’t of the value you originally agreed, you have missed the time-frame to serve a Pay Less Notice.
You will have to pay the amount claimed, but you can then recoup the payment in the next payment cycle by serving a Pay Less Notice, stating you overpaid in the previous application. This is in effect a ‘pay now, argue later’ situation. The real problem arises when the payment due is the final one, as there is no opportunity to correct it via this process.
Therefore you must be vigilant throughout all payment stages of a project, otherwise you’ll need to swallow the costs or be at risk of facing a claim if you dispute paying the last Payment Notice but fail to serve a valid Pay Less Notice in time.
Understanding and complying with the payment notice provisions is essential to avoiding these types of disputes. Being proactive, and working preventatively, will save you costs, ensure strong working relationships with your suppliers, and facilitate the continuation of projects and flow of cash within the construction industry.
Main image: Helen Young is senior associate solicitor in the Commercial Litigation & Dispute Resolution Team at SA Law
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