Adjudication Watch - March 2014

24 March 2014

In this fifth edition of 'Adjudication watch', we review cases involving challenges to enforcement on jurisdictional and natural justice grounds.

Only one of the above challenges was successful which further underlines the court's continuing robust approach to enforcement: maintaining cash flow is essential and enforcement challenges will only succeed in exceptional circumstances.

A recap on enforcement

The key theme in construction adjudication is 'pay now, argue later'. This is based on the temporarily binding nature of adjudication decisions. A decision cannot be appealed and is binding until finally determined by litigation, arbitration, or agreement between the parties.

Challenging an adjudicator's decision

An adjudicator's decision can be challenged where the adjudicator has acted:

  • without or in excess of his jurisdiction; or
  • in serious breach of the rules of natural justice.

It is irrelevant that an adjudicator may have made a mistake in relation to adjudication procedure, fact or even the law.

Acting without or in excess of jurisdiction

Jurisdiction is important because if the adjudicator acts without, or in excess of his, jurisdiction, any decision he reaches will be invalid. This principle applies to the preliminary stages when an adjudicator is considering his appointment and extends throughout the adjudication.

There are various reasons why an adjudicator may not have jurisdiction. Such reasons include: the contract was not a construction contract; the adjudicator was not properly appointed; there was no dispute or the adjudicator purported to decide more than one dispute.

Breach of the rules of natural justice

These rules determine that each party has the right to a fair hearing before an impartial tribunal, failing which an adjudicator's decision will be unenforceable.

Breaches of natural justice by the adjudicator may include procedural irregularity, failing to act impartially or the existence of bias or apparent bias.

This can include cases where the adjudicator has considered without prejudice correspondence or where an adjudicator has used his own experience and knowledge without seeking the parties' views (i.e. gone off on a frolic of his own).

Westshield Ltd v Whitehouse

In this case, Akenhead J dismissed a referring party's application to enforce an adjudication decision due to that party being subject to a CVA. This was because the defendant in the enforcement proceedings had made a claim in the CVA which would need to be set off against the amount owed by the defendant pursuant to the adjudicator's decision.

Background

In August 2007, Mr and Mrs Whitehouse ("the Whitehouses") employed Westshield Ltd ("Westshield") to carry out sub-structure work for a house in Cheshire. Although no practical completion certificate was issued, the works were finished late, around April 2009. Subsequently, Westshield claimed sums well over the original contract sum of £262,074.07, attributing the increases to variations and delays. Westshield had received approximately £371,000 from the Whitehouses.

At the end of 2010, due to financial difficulties, Westshield sought a CVA for itself and produced a CVA Proposal which nominated "supervisors" to administer the CVA. As the CVA was approved by 75% of Westshield's creditors, the CVA came into effect on 7 December 2010. All creditors were bound by its terms and were bound to accept the dividends payable in full and final satisfaction of their debt although the list of creditors at that stage did not include the Whitehouses.

The CVA incorporated "Standard Conditions for Company Voluntary Arrangement", which included a set-off clause at Clause 23(e) stating that:

"Where before the Proposal is approved there have been mutual credits, mutual debts or other mutual dealings between the Company and any person claiming to be a creditor of the Company, an account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other. Only the balance (if any) of the account owed by the Company to the creditor shall be claimable by the creditor."

In May 2011, Westshield submitted a further interim valuation in the sum of £644,717.63; allowing for the payments already made by the Whitehouses, over £270,000 was said to be due. The Whitehouses did not react to this.

The adjudication

In March 2013, Westshield served on the Whitehouses a Notice of Adjudication claiming a total of £279,956 together with other relief. The Whitehouses challenged Westshield's ability to commence an adjudication, alleging that no dispute had crystallised and reserved their position in respect of jurisdiction.

After an adjudicator was appointed, as well as maintaining their jurisdictional challenge, the Whitehouses raised for the first time allegations of a counterclaim for negligence and drainage defects at the property. The Whitehouses cited Clause 23(e) of the CVA conditions, arguing that the supervisor would need to address the extent of the mutual dealings between the parties and set off any amounts due to Westshield against any amounts due to the Whitehouses.

The adjudicator considered that he did have jurisdiction to decide the matter and produced his decision in April 2013. The decision awarded £132,667.56 to Westshield. The Whitehouses paid the adjudicator's fees but did not pay Westshield.

Enforcement proceedings

In September 2013, Westshield issued proceedings seeking to enforce the adjudicator's decision. The Whitehouses contended that there was no crystallised dispute and that, even if the adjudication decision was binding, it simply established a debt to Westshield. They argued that, under the CVA arrangements, the Supervisor must deal with the Whitehouses' counterclaim first before any debt owed to Westshield could be considered.

Decision

Akenhead J relied upon the case of Bouygues (UK) Ltd v Dahl-Jensen UK Ltd [2000] EWCA Civ 507. In that case, Chadwick LJ's judgment considered closely Rule 4.90 of the Insolvency Rules, which has a "striking similarity" to Clause 23(e) of the CVA conditions, and concluded that the Rule prevented enforcement of an adjudicator's decision in favour of an insolvent company if there were mutual debts that had to be set off against that award.

On the facts, the court held as follows:

  • The existence of the CVA was not a bar to commencing an adjudication - Westshield was not aware of any counterclaim as nothing had been registered for the CVA prior to adjudication;
  • It followed that, prima facie, the adjudication decision was enforceable;
  • The Whitehouses were bound by the terms of the CVA regardless of their knowledge of its existence - they had taken what they believed was an informed decision not to lodge a claim in the CVA;
  • The Whitehouses did, albeit belatedly, raise an arguable counterclaim as well as credible challenges to the adjudicator's decision;

For these reasons, Akenhead J decided to dismiss the application for summary judgment and ordered that any further steps in the proceedings had to await the outcome of the Supervisors' account under Clause 23(e).

Commentary

This judgment is contrary to previous cases involving CVAs and adjudication decisions which have come before the TCC. For example, in Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC), Coulson J granted summary judgment and refused to order a stay of execution, holding that the existence of the CVA could not prevent judgment being entered against the defendant but was relevant when considering whether the court should grant a stay of execution. The issues in Mead, however, were different to those in the instant case.

JG Walker Groundworks Ltd v Priory Homes (East) Ltd - 6 December 2013

The court enforced an adjudicator's decision in this case and deemed the defendant's arguments unmeritorious.

Background

Priory Homes (East) Limited ("Priory") engaged JG Walker Groundworks Limited ("JGW") in January 2013 to construct roads, sewers and groundworks for a project to build eight new bungalows. JGW claimed that variations and additions to the works were agreed during the course of the project and the value of these was included in applications for payment that it then submitted to Priory. JGW submitted three applications for payment as follows:

JGW/15 24.02.13 £63,127.57
JGW/24 04.04.13 £28,876.34
JGW/28 30.04.13 £66,216.06
  Total: £158,219.97

Priory paid JGW/15 and JGW/24 in full. It did not pay JGW/28. However, in June 2013 it made a payment on account of £20,000. It refused to pay anything further. In September 2013, JGW referred the dispute about the non-payment of the balance of JGW/28 to adjudication. The adjudicator awarded JGW the sum claimed of £38,832.51 and directed that Priory also pay his costs.

Legal proceedings

Priory's initial skeleton argument, which Edwards-Stuart J described as "wholly misconceived", was abandoned. It then submitted a new skeleton on the morning of the hearing which questioned the jurisdiction of the adjudicator.

Priory argued firstly that the adjudicator had to ignore any variations when determining what was due under the contract because the definition of "the Contract" used by JGW in its Referral Notice, and adopted by the adjudicator in his decision, referred only to the initial contract and did not include reference to the variations which were purported to have been agreed verbally.

Priory secondly sought to allege that the dispute was in relation to JGW's final account, rather than what was due under an interim valuation.

Decision

Edwards-Stuart J dismissed Priory's first argument, saying that it had "no merit whatsoever". This was on the basis that paragraph 1 of the Scheme for Construction Contracts clearly states that it is the Notice of Adjudication (and not the Referral Notice) which defines the scope of the dispute being referred to adjudication.

JGW's definition of "the Contract" in the Notice of Adjudication clearly included the variations. The judge went on to decide that Priory's second argument had no more merit than their first and granted the application for summary judgment.

Commentary

Although the decision in this case, and the court's stance in relation to Priory's arguments, may not come as a surprise, many may question Priory's decision to oppose the summary judgment application given that the amount involved, being the sum awarded by the adjudicator and his costs, came to a total of less than £50,000. This case serves as a warning to those who would seek to resist enforcement on less than meritorious grounds.

Alexander and Law Ltd v Coveside (21BPR) Ltd

In this case, Coulson J granted summary judgment for the claimant, holding that the existence of a winding-up petition against the claimant, which might or might not be successful, should not be a reason not to enter judgment to enforce the adjudicator's decision. The defendant successfully sought, in the alternative, a stay of execution of any judgment ordered due to the likelihood of the claimant being unable to repay the money at a future date.

Background

The claimant building contractors, Alexander and Law Limited ("A&L"), were engaged in 2011 by the defendant, Coveside (21BPR) Limited ("Coveside"), to carry out extensive works at their development at 21 Buckingham Palace Road in London. By March 2013, A&L was in financial difficulties and Coveside terminated its contract. A&L ceased trading not later than the date of termination and possibly before.

There were issues between the parties as to non-payment of certified sums, defects, delays, and the validity (or otherwise) of the termination. A winding-up petition was presented in relation to A&L in June 2013. It was supported by at least eight companies, including Coveside. Coveside put the debt to them at £471,000.

The adjudication decision

At the same time as the on-going winding-up proceedings, A&L commenced and completed two separate adjudications. The first, which was a claim for retention monies, failed as a consequence of the termination of the contract. The second claimed that the termination was wrongful and that, as a result, considerable sums were owing to it. The adjudicator produced a lengthy decision concluding that the termination was invalid although he was not comfortable with that conclusion. The adjudicator concluded that certain sums were due to A&L in the total amount of £197,690.70 plus interest of £4,230.04.

Legal proceedings

A&L applied for summary judgment to enforce the adjudication decision. The application was resisted by Coveside, who alternatively sought a stay of execution of any judgment that might be ordered. The disputes between the parties concerned the relevance, or otherwise, of the on-going winding-up proceedings against A&L which remained to be decided.

Coveside's principal submission was that A&L was insolvent within the meaning of s123 of the Insolvency Act 1986, both because of the existence of an unsatisfied judgment and because the evidence demonstrated that they were unable to pay their debts as they fell due. Accordingly, Coveside submitted that A&L was likely to be wound-up shortly which would present difficulties as, pursuant to s 129(2) of the Insolvency Act 1986, the insolvency would then relate back to the presentation of the petition which pre-dated the adjudication and the enforcement application.

In relation to the stay of execution, there were two main factual issues to be decided:

  • whether there was a high risk of an inability to repay at the time when any repayment would be due to be made; and
  • if so, whether A&L's poor financial position was due wholly or in a significant part to Coveside's failure to pay the sums found due by the adjudicator. Consideration was given to Rules of the Supreme Court (RSC) Order 47.

Decision

The court ruled that summary judgment should be granted for the following reasons:

  • The general approach is that an adjudicator's decision would be enforced by the court, provided that the adjudicator had the jurisdiction to reach the conclusion that he had done. Where an adjudicator had to deal with a complex issue of fact and law such as termination, and plainly had reservations about his own decision, that might be a relevant factor to be taken into account by the court on enforcement.

    However, there could be no such 'near miss' theory. Once an adjudicator had decided the dispute, then - whatever his possible reservations might be as to the outcome - that was the end of the matter. Provided that he had the jurisdiction to reach the decision he had done and provided that he had not gone about it unfairly, his decision would be enforced. Any lessening of that principle would give rise to numerous arguments about whether an adjudicator's frank assessment of the parties' respective cases should be a factor in favour of the party resisting enforcement.

    Moreover, as errors of fact and law have not been considered to be reasons to prevent enforcement then a decision which contained no such errors, but which might, because of the difficulty of the issues, ultimately be wrong, had to be enforced.
  • Different principles might apply to a claimant who was seeking to enforce the decision of an adjudicator but who was, in one way or another, insolvent. However in the instant case, to reach a decision in advance of the hearing of the winding-up petition, as to whether or not that petition would be successful would be unsatisfactory for a number of reasons. In any event, the judge felt that the two proceedings ought to be kept very separate.

The court held that the judgment granted be stayed until after the resolution of all the disputes between the parties for the following reasons:

  • In an application to stay the execution of summary judgment arising out of an adjudicator's decision, the court had to exercise its discretion under RSC Order 47 while considering the following principles:
    • adjudicators' decisions were intended to be enforced summarily;
    • the claimant (being the successful party in the adjudication) was not generally to be kept out of its money;
    • the probable inability of the claimant to repay the judgment sum at the end of the substantive trial might constitute special circumstances within the meaning of RSC Order 47 r 1(1)(a) rendering it appropriate to grant a stay;
    • if the claimant was in insolvent liquidation, or there was no dispute on the evidence that the claimant was insolvent, then a stay of execution would usually be granted;
    • even if the evidence of the claimant's present financial position suggested that it was probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:
      1. the claimant's financial position was the same or similar to its financial position at the time that the relevant contract was made; or
      2. the claimant's financial position was due, either wholly, or in significant part, to the defendant's failure to pay those sums which were awarded by the adjudicator.
  • On the facts, the judge found that there was a high risk that A&L would not be in a position to repay the judgment sum. While Coveside's non-payment of the certified sums might have had some minor impact on the figures overall, it had neither caused nor significantly contributed to the fact that A&L was not in a position to repay the judgment sum if the judgment was not stayed.

Commentary

The message from the court appears to be clear: an adjudicator's decision will be enforced except under very limited grounds. This is of little comfort to a losing party reluctant to pay up on receipt of enforcement proceedings due to uncertainties over the winning party's financial status given the possibility that the money may be ordered to be repaid upon final determination of the dispute.

The court's conclusion that the defendant's failure to pay a substantial sum certified under the contract did not significantly impact the claimant's cash flow, and consequent ability to settle its debts, has also raised questions. However, the judgment is testament to the continuing uncertain economic times faced by the construction industry.

Wales and West Utilities Ltd v PPS Pipeline Systems GmbH

In this case, despite the referring party's first attempt to narrow the scope of the dispute referred by expressly stating in the adjudication notice that certain issues were not being referred, Akenhead J concluded that an adjudicator did have jurisdiction to give decisions in respect of two adjudications commenced in relation to disputes arising under a contract.

Background

PPS Pipeline Systems GmbH ("PPS") was engaged as contractor by Wales & West Utilities Ltd ("WWU") for the supply and construction of a new gas pipeline in Snowdonia. Under the terms of the NEC3 Engineering and Construction contract provision was made for disputes to be referred to and decided by an adjudicator. PPS was due to start work in January 2012 and complete in October 2012.

The major part of the works involved excavating and laying the steel pipe in trenches. The pipes were to be laid in places with a coating (a wrapping material) which was clearly intended to guard against abrasive damage to the pipes. This was to be used, if required, in areas where the excavation had been in rock and the steel pipe needed to be protected against damage from the rock.

Compensation event

The contract provided for early warning to be given to the project manager or contractor (as the case may be) of events which might increase costs, cause delays or impair performance of the completed works and then to cooperate as to how to overcome or address such events. However, during contract negotiations, both parties agreed to delete a standard compensation event relating to the encountering of "physical conditions... which an experienced contractor would have judged at the Contract Date to have such a small chance of occurring that it would have been unreasonable for him to have allowed for them" (clause 60.1(12)).

In October 2012, PPS wrote to WWU stating that certain compensation events had occurred which entitled PPS to additional payment due to the works information (upon which the tender was based) being inaccurate and misleading as to the quantity of rock to be excavated and the amount of materials required to be put in place to protect the pipe. Later that month, PPS sent to WWU an "Early Warning Notification" in respect of the increased quantities of rock encountered. WWU wrote to PPS disputing that there were grounds for a compensation event arising under the terms of the contract.

The first adjudication took place in relation to adverse weather conditions.

The second adjudication

WWU served a Notice of Adjudication in February 2013 headed "Dispute regarding a claim in respect of rock". WWU asserted that PPS did not have any contractual right to a compensation event in respect of the alleged existence of rock referred to in correspondence. This was because, inter alia, by accepting the deletion of the compensation event at clause 60.1(12), PPS had accepted the contractual risk for physical conditions including in respect of rock and that, in any event, no compensation event had ever been notified pursuant to the relevant clause of the contract.

WWU also sought to narrow the scope of the dispute referred under the adjudication notice by specifying that it did not extend to "consequential issues such as the quantity of rock encountered, alleged time or quantum impact".

PPS replied that, as it encountered increased quantities of rock in the installation of the pipeline, it was entitled to a compensation event. It had to increase the quantities of pipe protection installed and the amount of rock excavated. This constituted a change in the works information for which the project manager should have issued an instruction.

WWU challenged the jurisdiction of the adjudicator, alleging that the dispute did not encompass any of the issues relating to the recoverability for the supposedly additional quantities of pipe protection. However, the adjudicator issued his decision and made it clear that he believed he had jurisdiction to address the pipe protection issues. He decided that although PPS had no entitlement to a compensation event in respect of physical conditions including rock, the project manager's failure to instruct a change to the works information related to the quantity of pipe protection installed should be reviewed and revised.

PPS submitted a claim for £607,659.72 for the pipe protection installed. There was no agreement about this claim and no project manager's instruction was received which recognised either the claim itself or the basis of it.

The third adjudication

In October 2013, PPS served its own Notice of Adjudication claiming entitlement to a project manager's instruction changing the works information to reflect the increase in the quantity of the pipe protection actually installed including the assumptions required to provide a reasonable assessment.

It was clear from WWU's response that it believed the adjudicator in the second adjudication had exceeded his jurisdiction by considering the pipe protection dispute. The same adjudicator was appointed and issued his decision addressing the further jurisdictional challenge. He resolved that he had jurisdiction and accepted PPS' argument that until such time as the decision in the second adjudication was challenged and found to be ineffective by the courts, the decision remained temporarily binding. WWU should have assessed the compensation event as if a project manager's instruction had been given.

Legal proceedings

WWU issued proceedings seeking declarations that certain paragraphs of the second adjudication decision were unenforceable because the adjudicator had no jurisdiction and that, as a consequence, the decision in the third adjudication was also unenforceable. It argued that the dispute which it referred to under the second adjudication was limited simply to whether or not there could, in principle, be a compensation event in respect of the suggested increase in quantities of the rock encountered. This dispute did not, it argued, encompass any issues relating to whether or not any suggested additional quantities of pipe protection were recoverable.

PPS argued that the assertions of principle it put forward in its first letter of October 2012 encompassed the claim to entitlement for additional pipe protection, and that the whole claim to entitlement to a compensation event was rejected in WWU's response. Therefore, the dispute being referred to adjudication by WWU encompassed intrinsically the pipe protection issue.

Decision

The court ruled that both adjudication decisions should be enforced for the following reasons:

  • Although the courts have sought to discourage losing parties in adjudications from seeking declarations of unenforceability due to some tenuous argument, the courts must still objectively consider and analyse all arguments about jurisdiction to see if they fall into that category;
  • Where there is a jurisdictional challenge due to issues surrounding the scope or ambit of the dispute referred to adjudication:
    • the court shall determine whether the adjudicator acted without jurisdiction by analysing the relevant exchanges between the parties;
    • a referring party may refer only part of the crystallised dispute. Primarily, one must construe the Notice of Adjudication to determine the extent to which all or part of the crystallised dispute is being referred to adjudication;
    • a responding party may run any factual or legal defence to the disputed claim which is being referred;
    • however, none of the post-Notice of Adjudication documentation generated in an adjudication will alter the scope or ambit of the dispute referred, save by agreement or by operation of waiver or estoppel.
  • Where it is thought that the adjudicator in an earlier decision has exceeded his jurisdiction or acted materially in breach of the rules of natural justice, the decision is and remains binding unless and until it is declared by the court to be unenforceable;
  • On the facts, Akenhead J found that WWU's Notice of Adjudication did not cut down the scope or ambit of the dispute which had earlier crystallised and that the express exclusion of "consequential issues" did not in reality limit what was referred because the dispute which had crystallised related to the basis of entitlement. Consequently, he found that the adjudicator was acting within his jurisdiction;
  • As the judge concluded that the second adjudication decision was enforceable, it followed that the third adjudication decision was also enforceable. Nevertheless, Akenhead J stated that he would have concluded that the third adjudication decision was enforceable in any event (following Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] EWHC 30 (TCC) and Shimizu Europe Ltd v Automajor Ltd [2002] EWHC 1571 (TCC)).

Commentary

Although the courts are clear that adjudication decisions should be enforced in all but the most limited of circumstances, any jurisdictional challenges alleged by losing parties must be carefully analysed. This judgment provides a useful guide as to the methodology employed by the courts to evaluate such jurisdictional challenges including considering the scope of the dispute referred to adjudication and a party's attempt to limit that scope.

Roe Brickwork Ltd v Wates Construction Ltd

In this case, Edwards-Stuart J held that, despite using a method of calculation for overhead and profit which was not utilised by the referring party, the adjudicator had not exceeded his jurisdiction or breached the rules of natural justice and consequently the decision was enforced.

Background

The claimant, Roe Brickworks Ltd ("Roe"), was a brickwork subcontractor for the construction of three blocks of flats on the Ocean Estate in Tower Hamlets, East London. The defendant, Wates Construction Ltd ("Wates") was the main contractor. Roe's claim in the adjudication was that its work had been delayed by about six months and that, as a result, it had suffered significant loss and expense.

The adjudication

The claim included, among others, the following three heads of claim:

  1. Additional preliminaries and loss of overheads and profit ("OHP");
  2. Loss of productivity, broken down by various causes; and
  3. Additional supervision and management.

The adjudicator did not decide that a particular sum was due to Roe. Instead, he assessed the value of the claims referred to him, which he valued at £381,459.75 plus interest. His actual decision was in these terms: "The sum of £381,459.75 + interest is awarded above. The actual net due shall reflect the amounts already paid under each head of award above. It is payable within 10 days of today. The parties will know what is already paid under each head."

Legal proceedings

Wates resisted the application on two grounds. The second ground was resolved before the summary judgment application. The remaining ground was that the adjudicator did not have jurisdiction to assess the OHP in the way that he did (which was by increasing the amounts awarded in respect of the other heads of loss by 13%). Alternatively, to adopt the approach he did, without allowing the parties an opportunity to make submissions on it, was a breach of natural justice which had a significant or material impact on his finding as to the value of the claim.

Wates submitted that the adjudicator did not have the jurisdiction to identify the number of hours, apply the contractual all inclusive Daywork Rates and then add an allowance for overhead and profit. Roe argued that it had claimed OHP in addition to its losses calculated by reference to the Daywork Rates, and its entitlement to do so had been very much in issue.

All that happened was that the adjudicator decided that Roe was entitled to recover OHP in addition to the losses based on the Daywork Rates, but he just calculated it in a slightly different way and in an amount that was considerably less than the sum claimed by Roe. Instead of using the Hudson formula, the application of which Wates had in any event disputed, the adjudicator applied an uplift to the losses that he considered Roe had suffered.

Decision

Edwards-Stuart J commented that Wates' submissions had come close to persuading him but held that, although the adjudicator's method differed from that used by Roe, what the adjudicator did in this case ultimately fell within the scope of his jurisdiction and did not breach the rules of natural justice.

Commentary

This case goes some way to show the reluctance of the court to step in, except in the most limited of circumstances.

It also serves as a reminder to adjudicators to ensure that there is clarity in the reasoning given for their decisions. The parties must be able to understand with certainty an adjudicator's decision, and how the sums awarded have been calculated, as imprecision can easily lead to challenges.

Hillcrest Homes Ltd v Beresford and Curbishley Ltd [2014]

In this case, the court decided that claims that had been advanced in negligent misstatement and misrepresentation could not be adjudicated.


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