Adjudication watch - review of the latest legal developments in adjudication

21 November 2013

In this fourth edition of 'Adjudication watch', our construction experts review cases involving challenges to adjudication enforcement on jurisdictional and natural justice grounds.

Enforcement challenges are becoming increasingly sophisticated with more cases involving adjudicators allegedly going off on a "frolic of their own". To counteract this, courts consistently remind parties that adjudication must remain a "rough and ready" form of justice and the detailed dissection of adjudication decisions is discouraged.

Despite such skillful challenges, it remains very difficult to persuade the court that the adjudicator's approach (as opposed to the decision he reached) was wrong.

We look at the following decisions:

  • CG Group Ltd v Breyer Group Plc - a "variety of permutations" was open to the adjudicator.
  • KNN Colburn LLP v GD City Holdings Ltd - acceptance of the adjudicator's timetable barred any jurisdictional challenge.
  • Pioneer Cladding Ltd v John Graham Construction Ltd - a novel point on stays of execution.
  • Brims Construction Ltd v A2M Developments Ltd - "esoteric" jurisdictional challenges are to be avoided.

Frolicking

"Frolicking" is emerging as a key battleground in adjudication enforcement challenges. Frolicking is where the parties have put forward their submissions but the adjudicator has used his own experience and knowledge in reaching a decision without seeking the parties' further submissions on his approach. This can constitute a material breach of the rules of natural justice.

This occurred, for example, in Herbosh-Kiere Marine Contractors Ltd v Dover Harbour Board (2012), where the adjudicator chose a particular method to assess what was due under a final account. Neither party in the adjudication had used that particular method, nor had they been given the chance to comment on the assessment method used.

Parties are also increasingly analysing what the actual scope or remit of the dispute was, the extent of the parties' submissions and evidence, and comparing all of that with what the adjudicator did and how he did it. This is in the hope that they can argue the dispute determined by the adjudicator was not the dispute referred to him.

The courts, however, do not like this approach of "combing through" decisions looking for any reason not to pay an adjudication award. This is best exemplified in the third of our decisions, Brims Construction Ltd v A2M Developments Ltd, where Akenhead J said parties should not engage in "contorted mental gymnastics" to determine what was referred to adjudication.

Given that adjudication is a "rough and ready" form of justice, the courts favour a broad-brush approach and will seek to break down the dispute into its essential nature. So in Brims, despite convoluted legal arguments, the dispute boiled down to what was due, and when.

The key is, of course, in carefully drafting the notice of adjudication (which defines the dispute) so as to ensure both parties and the adjudicator understand the scope of the dispute and hopefully avoid challenges.

G Group Ltd v Breyer Group Plc [2013] EWHC 2722 (TCC) - 3 September 2013

Simple is best

Akenhead J enforced an adjudicator's decision, holding that the adjudicator did not breach the rules of natural justice and that he did have jurisdiction. Breyer's challenge was two-fold: (1) the adjudicator decided elements of CG's disputed claim which were not part of the overall dispute, and (2) he did not give the parties, especially Breyer, the opportunity to deal with that specific argument.

Background

Breyer (a main contractor) engaged CG to carry out interior refurbishment works to kitchens and bathrooms in a development in East London. The sub-contract incorporated a sub-contract order from Breyer and its standard sub-contract conditions. Clause 8 of the conditions dealt with payment. Clause 16 provided for determination of the sub-contract by the contractor for default. In those circumstances, the contractor (Breyer) was to "be liable to pay only for such work as has been by that date properly executed and shall be entitled to recover any loss or expense caused by such determination."

Disputes arose as to periodic valuations and payments. CG left the site and alleged that there was a mutually agreed termination with no obligation on it to complete the works and that it was entitled to be paid appropriately for the work it had carried out to date. In contrast, Breyer argued there was a repudiation by CG which it accepted. Further, the basis upon which CG would be paid was not agreed.

CG submitted to Breyer a "Draft Final Account" which identified a total of approximately £457,000 as the value of the work. This included VAT but allowed for deductions for retention and main contractor's discount. It showed a net sum due of approximately £188,000. Breyer produced its own valuation which purported to show that CG had been overpaid by some £184,000 including VAT.

The adjudication

CG commenced adjudication proceedings. CG relied on the payment provisions in clause 8 but argued that there were inconsistencies and discrepancies between the payment provisions in the Sub-Contract Order, Pre-Order Quality Plan, the Sub-Contract Conditions, the Payments Plan and the later "fortnightly" payment plan.

Consequently, as far as they did not comply with the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), parts of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the Scheme) would be implied. CG argued that in the absence of a payment notice or pay less notice from Breyer, the Draft Final Account was a default payment notice. CG then set out a timetable giving a due date and final date for payment. Breyer argued that there was a determination agreement which governed any final payments due to CG. It admitted that clause 8 set out the payment mechanism, but alleged that any payment due to CG was under clause 16, the determination provision. Consequently, there was no requirement for payment and pay less notices. It denied there was any inconsistency in the payment terms.

The adjudication decision

The adjudicator decided that the contract was not determined by reason of CG's alleged repudiation and that the parties agreed CG was not to complete any further work and was to leave the site on the date of the agreement, 3 January 2013. The parties did not intend to terminate the sub-contract but rather CG's employment.

The adjudicator disagreed with Breyer that the terms of clause 16 were to apply to the termination. Rather, the payment clause (clause 8) applied. The adjudicator established his own payment timetable and awarded CG the sum due of approximately £188,000 under its Draft Final Account.

The legal proceedings

Breyer did not pay the adjudication sum and CG issued enforcement proceedings. Breyer resisted enforcement on the grounds that the adjudicator decided the case on a basis that had not been argued and therefore he had no jurisdiction to decide the case as he did; even if he did, he was materially in breach of the rules of natural justice. This is because, at the very least, Breyer should have been given the opportunity to address the point and would have had compelling arguments that the adjudicator was wrong as a matter of law.

The point which was not effectively put before the adjudicator or argued was whether clause 8 of the sub-contract conditions applied. Breyer had not argued that clause 8 applied. CG had argued that the Scheme applied to provide a payment regime post-termination.

CG argued that there could be no jurisdictional challenge because the overall dispute was largely defined as being whether Breyer had failed to pay what was claimed in the Draft Final Account. Further, there was no breach of the rules of natural justice because the adjudicator decided the adjudication on a point which was within what the parties had put before him.

The decision

The judge rejected Breyer's enforcement challenge and gave judgment for CG.

In analysing relevant case law, the judge referred to his own decision in ABB Ltd v Bam Nuttall Ltd (2013) and also the seminal decision in Carillion Construction Ltd v Devonport Royal Dockyard Ltd (2005).

The principles of the latter case are well-known. They confirm that firstly, "the objective which underlies the [Construction] Act and the statutory scheme requires the courts to respect and enforce the adjudicator's decision unless it is plain that the question which he has decided was not the question referred to him or the manner in which he has gone about his task is obviously unfair."

Parties should not "simply [scrabble] around to find some argument, however tenuous, to resist payment." Further, "[T]he need to have the 'right' answer has been subordinated to the need to have an answer quickly."

In ABB, the adjudicator's decision was not enforced because he breached the rules of natural justice by relying on a clause in the parties' sub-contract which neither party had relied on. The failure to share his approach with the parties and the failure to ask for further submissions constituted a material breach.

The decision also confirmed the breach had to be material to be effective. In ABB Akenhead J said, "[I]t is clear that the decision of an adjudicator who substantially decides a dispute on the basis of a legal point which has not been raised or covered by either party will not usually be enforced." It was necessary for the court to analyse the scope of the referred dispute and this could involve an examination of what happened before the adjudication was commenced.

Akenhead J also referred to the decision in Primus Building Ltd v Pompey Centre Ltd (2009) which confirmed that "[I]f the parties are effectively telling the adjudicator that they are agreed that a particular state of affairs was inapplicable, the adjudicator has no jurisdiction to decide the case on the basis of that state of affairs." The judge in that case also decided that the adjudicator was in breach of the rules of natural justice for failing to "go back to the parties with his new calculation."

Jurisdictional challenge

The judge said that it was difficult to see how any challenge on the basis of jurisdiction or natural justice could be maintained when the adjudicator identified the payment mechanism based on a combination of clause 8 of the sub-contract conditions and the Scheme.

The adjudicator set out what he understood the parties' arguments to be and made his decision accordingly. Specifically, he set out Breyer's arguments that there were no inconsistencies or discrepancies in the contract documents in relation to payment terms and even if there were, the payment terms applied. Breyer argued that it had not actually argued that the payment terms of the sub-contract conditions applied in the present case where there had been either a repudiation or a mutually agreed ending of the contractual relationship.

The judge rejected the jurisdictional challenge. He said that neither party had argued the dispute was anything other than a disputed claim for the net sum resulting from the Draft Final Account. Within that dispute were issues regarding the extent to which the Scheme applied and whether Breyer had given appropriate notices in time. The adjudicator answered the question put to him, namely, what (if anything) was due for payment to CG in relation to its Draft Final Account.

Natural justice challenge

The judge said that this was the real issue. Breyer's argument was that in the Referral, CG nailed its colours to the mast by asserting that because there were inconsistencies or discrepancies within the sub-contract documents, the Scheme applied.

Breyer argued that the adjudicator came up with a payment timeline which neither party had put forward. This was a breach of the rules of natural justice because Breyer was not given the opportunity to respond to the adjudicator's construction of the payment clause, clause 8. The breach was material because Breyer would have had at least respectable arguments as to why the adjudicator was wrong to adopt the approach he did in relation to clause 8.

Breyer's challenge was rejected. The judge decided that the adjudicator had not acted in breach of the rules of natural justice. One of the reasons he gave was that "[W]hilst it is true that the Referral Notice put forward a specific approach substituting and based on the Scheme arrangements, there were extensive issues raised on the written submissions between the parties which provided in effect a variety of permutations upon which the adjudicator had to decide." These issues included whether the Scheme applied in whole or in part. The judge stated that "[I]f the permutation as found is covered by the presented arguments, it should be a rare case for a natural justice breach to be found."

The judge's final ground was that "[T]he fact that there may have been (possibly good) arguments which Breyer could have deployed if it had realised that the adjudicator might decide as he did is not material because those arguments could have been deployed in any event as the permutational finding reached was open to the adjudicator once he accepted the very point which Breyer put forward which was that, whether or not there were contractual discrepancies, 'the payment terms of the Sub-Contract Conditions would prevail.'"

Commentary

This is a useful decision on the scope of disputes referred to adjudication. It is important that parties are clear as to the scope of the dispute so as to minimise subsequent enforcement challenges. Careful drafting of the notice of adjudication (which gives the adjudicator his jurisdiction) is key.

The parties should also ensure they maintain a consistent approach in their submissions. The court here analysed the adjudicator's role in arriving at his decision which, although not exactly in line with either parties' submissions, was based on one of a "variety of permutations" put to him by the parties. This decision-making approach of the adjudicator is one of the key current themes emanating from adjudication enforcement. Accordingly, adjudicators should ensure that their decisions are based on evidence and submissions put to them and where necessary, invite further submissions on their reasoning/analysis.

However, the judge warned that courts are not required to go through the permutations with a fine toothcomb so as to work out if the adjudicator stayed within his remit. As we know, statutory adjudication is meant to be a summary and interim form of justice without the sophisticated dissection of complicated legal arguments. CG's simple and logical approach to the scope of the dispute was favoured by the court.

The decision is also of interest because it is the first to consider the payment provisions of the Construction Act and Scheme, as amended. It does not, however, analyse them.

KNN Colburn LLP v GD City Holdings Ltd [2013] EWHC 2879 (QB) - 2 October 2013

No time to backtrack

The adjudication was the third between the parties. The first two adjudications were decided by one adjudicator and the third by a second adjudicator. The first adjudication established that GD Holdings Ltd (GD - the contractor) was entitled to approximately 13 weeks extension of time and that KNN Colburn LLP (KNN) would have been entitled to claim liquidated damages (LADs) had it served the appropriate withholding notice. However, the adjudicator did not decide what the correct level of LADs would have been.

KNN sought to enforce the third decision but GD resisted enforcement on the following grounds:

  • Late issue of the decision.
  • The first adjudicator had already determined the amount of LADs to be paid by GD to KNN.
  • KNN referred a decision to adjudication which had already been determined by the first adjudicator.
  • The second adjudicator had not considered a material line of defence.

Ground 1 - late decision

The adjudicator's decision was issued on 1 March 2013. GD argued that time ran from 31 January so the decision was due on 28 February (28 days later, as per the Scheme) and therefore out of time. In contrast, KNN argued time ran from 1 February so the decision was in fact issued in time. In the alternative, KNN argued that if time did run from 31 January, the time for issuing the decision was effectively changed to 1 March 2013.

By way of background, on 31 January KNN's solicitors sent an email to the adjudicator attaching a soft copy of the document described as "the Referral". It referred to and was intended to be read with six appendices referred to in the body of the Referral. The covering letter confirmed that a hard copy of the documents would be sent to the adjudicator by guaranteed next day delivery.

The adjudicator was also informed that the emailed letter with its enclosures had been copied to GD's solicitors and that a hard copy "of the Referral" would be sent by them by courier. KNN's solicitors also sent a letter to GD's solicitors on 31 January 2013 which stated "We enclose by way of service a copy of the Referral. A hard copy together with enclosures will be sent by courier."

The adjudicator responded that he would await receipt of the full copy of the referral before issuing any directions. On 1 February KNN's solicitors sent hard copies of the referral notice and appendices to the adjudicator. On the same day, GD wrote to the adjudicator objecting to him acting on the basis that the previous adjudications had already dealt with the current issue. Consequently, GD indicated it would not be preparing a response pending the adjudicator's reply.

The adjudicator wrote to the parties on 1 February confirming the Scheme applied. He calculated that taking 1 February "as day zero", day 28 fell on 1 March. On 5 February the adjudicator rejected GD's jurisdictional challenge. He also set out a timetable for the response and the reply to the response. GD's solicitors informed (that without prejudice to their client's position on jurisdiction) their response would be one day later than directed and the adjudicator consequently gave KNN a further one day to serve its reply.

The decision was issued on 1 March but GD argued that the decision was due 28 February being 28 days from 31 January, the date of the referral notice. The adjudicator's response was that he did not receive a full copy of the referral by email on 31 January but merely the "frontispiece". Proper service of the referral, i.e, with a copy of the contract and supporting documents, as per his directions, was not made until 1 February. GD solicitors responded that at no time had their client accepted the adjudicator's timetable.

The arguments

The Scheme requires the adjudicator to reach a decision within 28 days of the referral or such longer period as agreed by the parties.

The Scheme also provides that the "referring party shall, not later than seven days from the date of the notice of adjudication, refer the dispute in writing (the 'referral notice') to the adjudicator" (paragraph 7(1)).

The Scheme also provides that a "referral notice shall be accompanied by copies of, or relevant extracts from, the construction contract and such other documents as the referring party intends to rely upon" (paragraph 7 (2)).

The referring party is also required at the same time as he sends to the adjudicator the documents referred to in paragraphs (1) and (2), to send copies of those documents to every other party to the dispute (paragraph 7(3)).

Paragraph 19(1) of the Scheme provides that the "adjudicator shall reach his decision not later than - (a) twenty eight days after the date of the referral notice mentioned in paragraph 7(1)..".

GD argued that the "Referral" sent on 31 January was "the referral notice mentioned in paragraph 7(1)" so that the 28 day period referred to in paragraph 19(1) ran from 31 January 2013. It also relied on the following:

  1. the adjudicator's response of 31 January that he had been sent the referral notice within the meaning of paragraphs 7(1) and 19 (1);
  2. the fact that KNN's solicitors had said in their letter to GD that they were enclosing by way of service a copy of the referral with no qualification that additional documents were a prerequisite to service of the referral within the Scheme;
  3. the adjudicator's timetabling had no impact, and
  4. there was no request for an extension of time and none was agreed.

In response, KNN argued that (1) the referral notice without the appendices was ineffective to start time running - paragraph 7(2) required the referral to be accompanied by certain documents upon which the referring party intended to rely. It also argued that the "appendices were integral and necessary to a proper understanding of the dispute so that the referral notice itself was a nullity".

Specifically, a copy of the previous adjudication was necessary to determine the current dispute on LADs as it evidenced the revised completion date and the principle that GD was responsible for delay. Therefore, the date of the referral notice should be taken to be 1 February.

KNN also argued that in any event, it was too late for GD to argue the point; it should have objected at the time before the decision was issued, and since KNN was the referring party and consented to the adjudicator's timetable, the adjudicator had 42 days and not 28 days within which to reach his decision.

Decision

Soft copy referral was sufficient and received by adjudicator on 31 January

GD was correct - the Referral sent to the adjudicator on 31 January was appropriate for a referral notice within the meaning of paragraph 7(1) of the Scheme. The judge (Stuart-Smith J) commented that the adjudicator's "subsequent characterisation of the Referral document as merely a 'frontispiece' was inapt."

Referral notice started time running

The judge referred to Ramsey J's decision in PT Building Services Ltd v ROK Build Ltd (2008) which confirmed that paragraph 7(1) of the Scheme can be distinguished from paragraph 7(2).

Stuart-Smith J said that the decision demonstrated that "provision of the referral notice without the accompanying documents may be sufficient (as it was in that case) to vest the adjudicator with jurisdiction pursuant to paragraph 7 of the scheme. It is implicit in his decision that provision of the documents in that state not only vested the adjudicator with jurisdiction but would have been effective to start time running."

However, the judge also referred to an important passage in PT, which made it clear that "a breach of paragraph 7(2) could be so fundamental that it went beyond being a mere procedural irregularity."

The judge was not persuaded by KNN's primary argument that the accompanying documents were an integral part of the referral and without them time could not start to run. The referral itself identified the relevant, material facts and therefore it would be wrong to suggest that the nature of the dispute could not be identified without reference to the supporting documents or that the referral did not "refer the dispute in writing" as required by paragraph 7(1) of the Scheme.

Therefore, the judge concluded that the referral notice was received by the adjudicator and by GD's solicitors on 31 January.

GD had raised its objection too late and in any event KNN had consented to the adjudicator's timetable

The judge highlighted that GD could have decided to rely on its jurisdictional challenge alone and therefore taken no part in the adjudication proceedings. Instead, however, it chose to participate fully in the adjudication process in accordance with the timetable and indeed asked for an additional day for service of its response.

The issue was whether GD's full participation in the adjudication process in accordance with the timetable should be taken as acquiescence of the adjudicator's timeline, including the issue of the decision on 1 March. The judge said he was clearly of the view it should.

The judge said there could be "little doubt that if GD City had given any indication at all that it found the timeline objectionable, KNN would have implemented the terms of paragraph 19(2) of the scheme expressly so as to give [the adjudicator] the time that he had said he would take."

The judge referred to the decision in AC Yule & Son Ltd v Speedwell Roofing & Cladding Ltd (2007) which provided a warning that parties are under an obligation to make their objections plain and that silence could be taken as acquiescence. This was the case here - the judge said that "it was not open to GD City to do nothing until 1 March 2013 and then to attempt to spring a procedural trap without any prior warning. In fact, GD City went further than acting in accordance with the timetable without objection; it caused [the adjudicator] to change it giving them an extra day in which to respond."

Consequently, GD could not argue the decision was a day too late. Similarly, KNN's additional submission that its conduct as referring party in complying with and acting pursuant to the adjudicator's timetable, signified its consent to it such that the decision was within time. GD's arguments failed in their entirety.

Ground 2 - a previous adjudicator had determined the amount of LADs to be paid by GD to KNN; and Ground 3 - KNN referred a decision to adjudication which had been determined by a previous adjudicator

GD contended that the previous adjudicator had decided that (a) the correct amount of LADs was £20,000 (ground 2) but that (b) KNN was not entitled to LADs (ground 3).

KNN argued that the only decision made by the previous adjudicator was that KNN was not entitled to withhold any sum from the final account payment by reference to LADs.

Again, these two grounds of challenged failed. The judge agreed with KNN and said that "Since his decision ..was that monies could not be withheld from the final account payment because of the absence of a valid withholding notice, it was not necessary for him to decide what would have been the correct amount of liquidated damages if his decision on withholding had gone the other way; and he did not do so." Consequently, it was open to the adjudicator to decide what he did.

Ground 4 - breach of natural justice - the second adjudicator did not consider a material line of defence

GD relied on clause 2.17.4 of the contract which provided that the contractor's (GD's) liability was limited to the amount actually recovered from any consultant or subcontractor who had carried out work in connection with the employer's claim.

"Employer's claim" was defined in the contract as "any claim by the Employer including without limitation a claim under this Agreement, for breach of this Agreement, tort (including negligence), a breach of statutory duty but not including claims for death or personal injury."

The adjudicator did not deal with the 2.17.4 defence in his decision but the judge considered the omission to have been inadvertent. GD argued that the clause 2.17.4 defence provided the complete answer to KNN's claim for LADs and that the adjudicator's failure to address the defence constituted a breach of natural justice which rendered his decision unenforceable. KNN's response was that just because the adjudicator did not refer to the clause in his decision, did not mean that he had not considered it.

In relation to the applicable legal principles, the judge adopted and endorsed the judgment of Coulson J in Pilon Ltd v Breyer Group Ltd (2010). Coulson J in that judgment said that "[T]he inadvertent failure to consider one of a number of issues would "ordinarily" not render the decision unenforceable." However, whether or not an adjudicator has fairly disposed of the dispute referred to him will depend on the facts of the case.

The judge decided that this fourth ground of challenge should also fail. Clause 2.17.4 did not apply on the facts of this case "where GD City has not attempted to show that any Consultant or Sub Contractor carried out work in connection with the claim for liquidated damages that was being advanced by KNN in the adjudication." Further, GD's earlier non-reliance on the clause supported this view.

Commentary

The main interest in this case is GD's jurisdictional challenge on the basis the decision was issued late. Unfortunately for GD, not only had it participated fully in the adjudication but it had also objected to the adjudicator's timetable far too late in the day and therefore was taken to have consented to the decision being due on 1 March 2013.

As with any jurisdictional challenge, it should be made as soon as possible failing which the right to challenge can be lost. Also of interest was the judge's view that the soft copy of the referral was an effective referral of the dispute despite it not being accompanied by supporting documents as required by the Scheme. The safest course of action is to serve the Referral with the supporting documents so as to avoid this type of challenge.

Pioneer Cladding Ltd v John Graham Construction Ltd [2013] EWHC 2954 (TCC) - 4 October 2013

This was an unusual and interesting adjudication enforcement hearing with the judge (Coulson J) referring to it as "one of those rare occasions when, notwithstanding the relatively high hurdles noted in Wimbledon v Vago, the defendant has made out a good case for a stay of execution." He also said the points raised on the stay were novel. This concerned whether the court should consider Pioneer's actual position as it was at the time of the sub-contract or its financial position as represented to it. Issues also arose in relation to unenforceable contractual adjudication provisions.

The contract

Graham instructed Pioneer to carry out cladding and curtain walling sub-contract works. The contract incorporated Graham's standard terms and conditions.

The dispute resolution provisions provided that adjudication should be carried out in accordance with the Construction Act and the Model Adjudication Procedure (MAP) published by the Construction Industry Council, subject to amendments. The provisions provided that regardless of the MAP procedure, the adjudicator's fees were to be borne by the referring party - Clause 21(iii).

The dispute resolution provisions also provided that, in the event that the adjudicator made a monetary award in favour of the sub-contractor (Pioneer), "Graham shall place on deposit the amount of the Adjudicator's award with Northern Bank Limited in the joint names of the solicitors acting for Graham and solicitors acting for the Sub-Contractor within seven days from the date of receipt by Graham of the Adjudicator's decision." (clause 21 (v)).

The adjudication

Pioneer referred two disputes under the sub-contract to two separate adjudications. The result was that there was a net sum due to Pioneer of approximately £193,000.

Enforcement proceedings

Graham did not pay the sums due. It argued that pursuant to the sub-contract, the monies could not be paid to Pioneer immediately and had to be placed in an escrow account. In response, Pioneer argued that clause 21(v) was contrary to the Construction Act and contrary to the principles behind the Construction Act: "pay now, argue later", where the need for the 'right' answer is subordinated to the need to have an answer quickly (Carillion v Devonport Royal Dockyard (2006)).

Scheme implied into the sub-contract

Coulson J agreed with Pioneer. The provision would deprive a claiming party of the money it had been awarded and therefore would discourage adjudication (Yuanda (UK) Ltd v WW Gear Construction (2010) and Sprunt Ltd v London Borough of Camden (2012)). The clause was unlawful and could not be enforced. It followed that the adjudication provisions in their entirety fell away including clause 21(iii) (adjudicator's fees to be borne by referring party) and were replaced by the adjudication provisions of the Scheme.

The judge said that even if this was wrong, the clause was unenforceable per se, being contrary to the Construction Act and the Scheme. Therefore, each party was liable for half of the adjudicator's fees. Since Graham had paid some of the adjudicator's fees on behalf of Pioneer, it was agreed that some £4,000 had to be deducted from the £188,000 due to Pioneer.

Stay of execution

Graham requested a stay on the basis that Pioneer would be unable to repay the £188,000. The judge referred to the seminal decision in Wimbledon Construction Company 2000 Ltd v Derek Vago (2005). That decision underlined that adjudication decisions are intended to be enforced summarily and the successful party should not be kept out of its money.

However, the inability of the claimant to repay the judgment sum may render it appropriate to grant a stay. If the claimant is in insolvent liquidation, a stay will usually be granted. However, even if the claimant's present financial position suggested it was probable that it would be unable to repay the judgment sum, that would not usually justify a stay if (1) the claimant's financial position had not changed since the contract was made or (2) its financial position was due, in part or wholly, to the defendant's failure to pay the relevant sums.

The issues were:

  1. Was it probable that Pioneer would be unable to repay the adjudication award if that was the outcome of the ongoing arbitration?
  2. Was Pioneer's financial situation the same/similar to its position at the time the contract was made?
  3. Was Pioneer's financial position due either wholly or in significant part to Graham's failure to pay the sums awarded by the adjudicator?

The judge was clear that Pioneer would be unable to repay the adjudication award - it was technically insolvent. Consequently, Graham had made out its case thus far. It was the second issue which was interesting - had Pioneer's position changed since the date of the contract? Pioneer argued that it had not - the last few years' accounts showed a very small sum in credit and effectively showed that what Pioneer had earned, it had paid out.

Therefore, Graham could not "now complain that Pioneer's financial position was unstable because they knew that it was when they contracted with them in June 2011." Graham responded that on analysis of the financial information that Pioneer provided to Graham before Graham entered into the sub-contract, Pioneer misled Graham into thinking they were a much more substantial and successful entity than they actually were and that the sub-contract was entered into on false premise. Therefore, Pioneer could not rely on their bleak financial position to avoid the stay, being the opposite of what they had said to Graham at the time.

Decision

The judge agreed with Graham on the following grounds (1) the accounts (which were abbreviated balance sheets) were "un-illuminating" (2) Graham had made extensive investigations to check Pioneer was financially sound - there was evidence of Pioneer working on million-pound schemes at the time of the contract; the architects had positively endorsed Pioneer and it was alleged (and was probably likely) that the relevant Pioneer director had said that Pioneer had £1.2 million cash in the bank.

The judge was satisfied that Graham had entered into the contract on a false premise. Despite various exchanges, Pioneer was not a substantial and financially stable company. Thus, Pioneer could not defeat Graham's application for a stay on the basis that Graham knew what they were getting into - in fact, the opposite was true - Pioneer had misled them.

In the alternative, Pioneer argued for avoiding the stay on the basis that they were only in their financial position because of Graham's failure to pay.

The judge rejected Pioneer's argument that this was merely a question of mathematics - it was not as simple as that. There were two problems for Pioneer - the lack of credibility of their director and the fact that Pioneer was in trouble on other jobs which the judge referred to as "nothing short of calamitous".

In summary, there was a "clear and unambiguous pattern" where Pioneer "never had sufficient cash reserves to run their business properly" and "were always robbing Peter to pay Paul". Pioneer's failure to perform on other projects had nothing whatsoever to do with Graham's failure to pay. Judgment was given in Pioneer's favour, but was stayed pending the outcome of the ongoing arbitration.

Commentary

What swayed the court here was that Graham had entered into the sub-contract on a false understanding of Pioneer's financial position. Despite carrying out its own due diligence to the extent that it was able, Graham could not have known, as Pioneer alleged, what it was getting itself into. Pioneer could not be permitted to present its financial position as best suited it depending on the factual circumstances and then retrospectively rely on its true financial position so as to avoid a stay.

This was indeed a novel point but one which was dealt with practically and succinctly by the court. Parties can be held to account when they have made false or misleading representations upon which the other party has relied to its detriment. Parties therefore need to think even more carefully about what they say, (and, indeed, do not say in certain circumstances) to avoid any unwanted consequences.

Brims Construction Ltd v A2M Developments Ltd [2013] EWHC 3262 (TCC) - 28 October 2013

No mental gymnastics please!

Brims Construction Ltd (Brims) sought to enforce an adjudication decision and issues arose concerning the adjudicator's jurisdiction and whether he breached the rules of natural justice. The key issue was whether the notice of adjudication was sufficiently broadly drafted, and if not, whether there had been a waiver of the jurisdictional challenge based on the way the case was argued before the adjudicator. If this was not the case, there was a final issue as to whether the adjudicator wrongly shut out A2M Developments Ltd (A2M) from presenting evidence.

Background

In October 2012, A2M employed Brim to construct a new care home in Newcastle-upon-Tyne. The contract was in the JCT 2011 form of the Intermediate Building Contract with contractor's design. The adjudication provisions incorporated the Scheme.

Payment dispute

The contractual payment clause provided that the first due date for monthly interim payments was to be not more than one month after the Date of Possession, that being 25 June 2102. Practical Completion was certified on 12 July 2013.

Issues arose in relation to payment due up to and including June 2013

The timeline was as follows:

  • 28 June 2013 - Brims issued a detailed "Interim Application for Payment and Payment Notice" for June 2013 showing a net sum due (including VAT) of £391,630.37.
  • 8 July 2013 - Brims then met with the quantity surveyor (QS) when its application was considered in detail but with no resulting agreement as to what the QS would recommend to the architect.
  • 15 July 2013 - the architect issued an interim certificate in the net sum of £120,340.30.
  • 18 July 2013 - A2M's solicitors purported to issue a pay less notice indicating a sum due to Brims of £62,940.30 reflecting deductions for alleged defects and alleged culpable delay.

Brims argued its 28 June application was in fact a payment notice and that the full amount was due because no pay less notice was served in time.

A2M's position was that Brims' 28 June "application" was not an interim application at all. A2M's solicitors' letter went on to refer to the meeting between Brims and the QS on 8 July 2013 and argued that if the date of Brims' application was relevant to the determination of the Due Date, the date of the application was 8 July and not 28 June. Alternatively, by requesting the QS not to issue any evaluation of Brims' application until it had met with Brims, Brims was estopped from relying on an earlier application date.

The adjudication

Brims issued its notice of adjudication which described the dispute as relating to Brims' entitlement for work done until 28 June 2013. It argued it was entitled to payment of sums due to it pursuant to either: (1) the 28 June application, or (2) the interim certificate of 15 July.

A2M's response was that both the interim certificate and the pay less notice were properly issued. It did not include a reservation as to jurisdiction in the response. It only raised its jurisdictional challenge (to the effect that the referral improperly extended the payment arguments in the notice of adjudication) in reply to the adjudicator's request for submissions on the effect of clause 4.11.4 (dealing with payment notices) on the dispute.

The adjudicator rejected A2M's jurisdictional challenge and awarded Brims the sum of £263,418 (plus VAT).

Grounds of challenge

Jurisdictional - the Notice of Adjudication "defined and constrained" what the dispute between the parties was, "saying that the dispute was limited to the claims for the specific amounts of money (in the alternative) as asserted in the Notice of Adjudication".

In any event, there was no waiver because even though A2M did not raise the challenge in its referral, it did do so in a later e-mail to the adjudicator. A2M argued that the adjudicator only invited or directed "submissions" on the clause 4.11.4 point "and that by necessary implication or interpretation he did not ask for evidence." A2M argued that it could have presented evidence which would have fully undermined if not resulted in the claim being dismissed.

Brims responded that the notice of adjudication "was essentially and simply a disputed claim for the two alternative amounts and that the alternative arguments [were] not restrictive so as to reduce the scope of the referred dispute."

Further, the point was challenged on the merits in the response but not on jurisdictional grounds; Brim's Counsel argued that A2M had "waived its right to challenge on jurisdictional grounds because his client continued to incur cost in the adjudication assuming as was the case that there was no jurisdictional challenge and has therefore acted to his detriment." A2M's solicitors had raised the challenge too late, it argued. The adjudicator raised the point and invited submissions and did not therefore "go off on a frolic of his own."

Material breach of the rules of natural justice - A2M argued that when requesting submissions on the 4.11.4 point, the adjudicator had failed to give the parties the opportunity to submit further evidence relating to the work undertaken by Brims up to the end of June 2013.

The decision

The judge (Akenhead J) decided the adjudication decision should be enforced and that there should be judgment in favour of Brims. He was of the clear view that the adjudicator had jurisdiction to decide what he did.

It was the ambit of the referred dispute which gave rise to the jurisdictional challenge.

Akenhead J referred to the decisions in Witney Town Council v Beam Construction Ltd (2011) where the court reviewed relevant authorities and concluded that the "Notice of Adjudication and the Referral Notice are not necessarily determinative of what the true dispute is or as to whether there is more than one dispute. One looks at them but also at the background facts...".

Reference was made to the earlier decision in Cantillon Ltd v Urvasco (2008) where the court said that "one should look at the essential claim which has been made and the fact that it has been challenged as opposed to the precise grounds upon which that it has been rejected or not accepted... The adjudicator or arbitrator must then resolve the referred dispute, which is essentially the challenged claim or assertion but can consider any argument, evidence or other material for or against the disputed claim or assertion in resolving that dispute."

The judge highlighted the essence of statutory adjudication and that "Esoteric arguments on jurisdictional grounds should be discouraged. In determining what is being referred to adjudication, one should not have to engage in contorted mental gymnastics."

The judge concluded that the real issue between the parties was whether, and to what extent, Brims was entitled to what it claimed in the 28 June 2013 application document. The adjudicator had decided the dispute which he was asked to decide, being the failure by A2M to which Brims was entitled for work done up to 28 June 2013 by the final date for payment.

Waiver

Akenhead J said that in any event, even if in some way the argument based on the payment application having been made on 8 July 2013 was not part of the referred dispute as per the notice of adjudication, it was clear that A2M had waived any right to raise a jurisdictional challenge on that point.

A2M had made no hint of any jurisdictional challenge in its response and had only done so a week before the decision was due. The judge said there were thus "the key elements of waiver: words or conduct by the waiving party which are intended to be relied upon and are actually relied upon by the other party (with time, money and resource expended by it)."

Natural justice

The judge found that there had been no breach, and certainly no material breach, of the rules of natural justice by the adjudicator.

He found that "if he [the adjudicator] always had the jurisdiction to address the issue upon which he ultimately decided the case in favour of Brims, particularly as it was spelt out in the Referral Notice, he can hardly be criticised for then deciding the case on that basis."

The judge said that A2M could have addressed the point in even more detail in its response than it did and deployed whatever evidence it wished to support its defence on that point. He said the adjudicator "behaved absolutely properly in raising with the parties a point upon which he believed he had not been fully addressed. This he did in his letter of 20 August 2013. It can not be said that he was in some way going off 'on a frolic of his own'. But even if it might be said that this was the case, he was putting to the parties for their response a particular point."

Commentary

There are two clear messages here. The first is to raise any jurisdictional challenges as soon as possible and the second is to be careful not to stretch the courts' patience in combing through decisions looking for ways of avoiding payment. This approach of course, sits uncomfortably with the rationale of statutory adjudication; that it should be interim, quick but also a "rough and ready" form of justice.

Whether or not parties stop presenting complex arguments forward, particular in relation to the scope of the dispute, is another question. In this case, Brims asked the court to award its costs on an indemnity basis but this was rejected as A2M's challenge was not unreasonable or out of the ordinary.

The key issue, in many cases, is identifying the essential nature of the dispute (both in the notice of adjudication and events leading up to it) and taking a sufficiently broad-brush approach to it. This is clearly illustrated by Akenhead J, where he said that ultimately the dispute concerned payment due to Brims up to the end of June 2013. The fact that the notice of adjudication did not include one of A2M's alternative arguments was not relevant because it was "simply an alternative way of putting the case".

This is the second case after CG Group v Breyer (above) dealing with the amended payment provisions in the Scheme. As with the Breyer, there was no analysis of the relevant provisions but such cases may begin to filter through in the near future.


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