Smash and Grab Adjudications – Is there hope for Payors?
30 / 01 / 2018
“Smash and grab” adjudications may get you some short term cash but beware of the payor’s right to seek a proper valuation of the works and recover overpayments in subsequent adjudications or court proceedings.
The judgement in Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd  EWHC 1763 (TCC) covered a multitude of contract law principles, too many to cover in this short article, but one of the key findings was that an employer can recover overpayments which it made as a result of previous adjudicators’ decisions in relation to interim payments.
Interesting to note is that the case related to interim claims for payment rather than final claims. It had previously been thought that the Court distinguished between the two mainly because interim payments could be corrected whereas final payments could not. Therefore, even though it may seem that this case is a slight departure from that approach, the scenario in this case was, in effect, a final payment scenario on repudiation and so the Court found a way to avoid any potential unfairness.
In late 2012 ICI engaged MMT to carry out the manufacture, construction, installation and commissioning of steelworks at a new paint factory in Northumberland. The contract was an amended NEC3 with an initial contract price of a relatively modest £1.9 million. The scope of the contract was expanded significantly and as at the date of the issue of the claim, ICI had paid MMT £20.9 million, despite the fact that ICI claimed that the actual value of the works was approximately £10 million. Problems started occurring as a result of MMT’s alleged defective welds in mid-2014. There were four adjudications, two of which concluded that ICI must pay MMT an aggregate of circa £8.5 million due to lack of pay less notices. ICI eventually instructed MMT to leave site claiming that MMT had committed repudiatory breach of contract (mainly due to defects).
The Judge found that ICI had in fact repudiated the contract by instructing MMT to leave site.
However, could ICI claim repayment of overpayments made up to the date of repudiation, (assuming that there had, in fact, been overpayments) despite the last two interim payment applications being the subject of adjudicators’ decisions? MMT argued that the adjudicators’ decisions were final and binding until a later payment certificate was due and so ICI had no right to challenge the interim payments.
The Judge disagreed with MMT and held that:
- neither a consent order nor an enforcement order of an adjudicator’s decision was a finally binding decision and did not amount to a “judgment on the merits”; and
- ICI had a right to valuation of the final amounts in two ways:
- that it still had the right accrued up to the date of repudiation to recover any overpayment; but if he was wrong about that,
- adjudicators’ decisions on amounts deemed payable following an employer’s failure to serve a pay less notice are deemed valuations of the works at the relevant contractual valuation date and may be challenged:
- in subsequent payment claims, and/or considered on final account; and/or
- if the amounts are the subject of an adjudicator’s decision by way of a final determination of the value.
This decision casts doubt over the effectiveness of “smash and grab” adjudications and the decision in ISG v Seevic. Perhaps that decision would have been different if it was made now.