Adjudication Case Law Update 2023: Part 4

Henry Construction Projects Limited v Alu-Fix (UK) Limited [2023] EWHC 2010 (TCC) District Judge Baldwin judgment 23 May 2023

Henry applied for summary judgment to enforce the "true value" adjudication decision of Mr M.T. Molloy dated 6 March 2023 ("TVA") awarding them £191,753.88 plus interest. Alu-Fix resisted on the basis that Mr Molloy lacked jurisdiction because the TVA had been commenced prior to Henry having paid them the notified sum due to them under the JCT Contract between the parties.
IAlu-Fix had made a payment application. Henry failed to make payment or to issue a payment notice or (as it was later found) serve an effective pay less notice (“PLN”). Alu-Fix commenced a smash and grab adjudication before Mr Rayner (“SGA”). At that point, without making payment of the application, Henry commenced the TVA. Alu-Fix asked Mr Molloy to resign because Henry had commenced the TVA before making payment of the notified sum. Mr Molloy found he had jurisdiction because at that time Mr Rayner had not yet made any decision and it remained to be seen whether the sum claimed in the SGA (and disputed by Henry) was or was not due. Mr Molloy stayed the TVA pending the outcome and payment of any sum found due by Mr Rayner.

Mr Rayner decided there was no PLN and found Henry liable to pay the sum claimed. They made payment to Alu-Fix, whereupon Mr Molloy proceeded with the TVA, finding in favour of Henry.

The issue before the court was one on which there was no direct authority: could a paying party commence a TVA where the question of its liability to make the payment claimed due was genuinely disputed and had yet to be determined in an existing SGA?

The court referred to the decisions of • O'Farrell J in the recent case of Bexheat v Essex Services Group , • Jackson LJ in Grove Developments Ltd v S&T (UK) Ltd , and • Stuart-Smith J (as he then was) in M Davenport Builders Ltd v Greer from which it derived the following principles: - Where a valid payment application was made, and no payment application or PLN was given, the payer was obliged to pay the notified sum by the final date for payment (s111 of the Act). - If payment was not made, the payee was entitled to seek an adjudication award in its favour. - Where a party was required to pay the notified sum by reason of its failure to serve a payment notice or PLN, it was entitled to embark upon a 'true value' adjudication in respect of that sum but only after it had complied with its immediate payment obligation under s111 of the Act. - It was clear that the payer became free to commence a true value adjudication when (and only when) he had paid the sum ordered to be paid by the earlier adjudication.

Henry’s case
Henry argued that this case differed from those previously decided, in that at the time of commencement of the TVA there was an ongoing "genuine dispute" as to the validity of the PLN. Thus, unless and until there was an adjudication decision that there was no valid PLN, no "immediate payment obligation" arose or subsisted. The embargo upon launching a TVA prior to the payment of any immediate payment obligation was not engaged and no question of jurisdiction could arise. The payment obligation only became immediate upon Mr Rayner finding the PLN invalid and was discharged within the timeframe set down by him. They also drew the Court's attention to Stuart Smith J's analysis of Harding (t/a MJ Harding Contractors) v Paice in the case of Davenport in which it was said the Court of Appeal implied that it was not an essential prerequisite to relying upon a later true value adjudication decision that the earlier immediate obligation should be discharged before launching the later true value adjudication. Paice did not pay its immediate obligation under the third adjudication before launching the fourth, and they were not precluded from proceeding with or relying upon the fourth adjudication for that reason. This suggested that the critical time would be when the court was deciding whether to enforce the immediate obligation. Alu-Fix submitted that the authorities were clear: you could not commence a TVA until the existing liability had been discharged.

What is the date of the immediate payment obligation in this case?
The court held that the resolution of the issue lay in determining the commencement date of the immediate payment obligation: was it the final date for payment under s111 of the Act? Or in the case of a genuine dispute as to entitlement, the date of the decision of the adjudicator? Section 111(1) of the Act provided that the notified sum must be paid by the final date for payment. This created the immediate payment obligation (Bexheat para. 76(ii)). And that is what Mr Rayner decided in the SGA. The existence of a genuine dispute as to the existence of an immediate payment obligation did not alter the position. For it to be allowed to do so would be to undermine the right to payment and to tip the balance in favour of the disputing party. And it might also require the court to decide whether a dispute was genuine or not. The payer could protect itself by serving a PLN.

In what circumstances might a genuine dispute as to the existence of a PLN entitle the payer to commence a TVA before payment?
Recognising there could be a tension between an apparently premature TVA being a nullity or surviving for the purposes of reliance, the court suggested the following solution. If an adjudicator in Mr Rayner’s position upheld a "zero" PLN, or the validity of a payment application was successfully challenged, there would have been no ‘notified sum’ within the meaning of the Act and therefore no immediate payment obligation. As such a TVA may well not, on the facts, be found to be premature and reliance upon it might well be permitted. In dismissing the summary judgment application the learned Judge concluded thus: “Overall, in my view, the outcome in this case, whilst not closing the door on commencing a TVA prior to the outcome of an SGA and later relying upon the outcome, ought to discourage such a course in areas of spurious SGA dispute, but not deter those who have a sufficient level of confidence that any dispute raised should result in a finding of no immediate payment obligation having been established.”

Comment
As before (see Paice), the door is not completely closed on commencing a TVA whilst a SGA is anticipated or in progress and before making payment. The question of jurisdiction in the TVA may yet turn upon the outcome of the SGA. If it is later established that the payment application in question is invalid, or an effective payment or pay less notice has been given, there will have been no notified sum due and payable under s111 of the Act and therefore nothing to prevent the TVA from having been properly commenced and continued. The circumstances in which such a course proves worthwhile, may be limited. If the SGA decides no notified sum, there will be no payment obligation and no need for a TVA. On the other hand, if those questions arise and can be dealt with on enforcement (under part 7 or part 8), then the TVA may well have utility.

Home Group Limited v MPS Housing Limited [2023] EWHC 1946 (TCC) Mr Justice Constable judgment 25 July 2023
Home Group applied to enforce the decision of Mr Derek Pye awarding them some £6.5m in what was the second of two adjudications between the parties. In the first adjudication it was held that MPS had wrongfully determined a contract under which they had engaged Home Group to perform property maintenance and repair work. The second adjudication concerned assessment of the termination losses. MPS opposed enforcement on the grounds of breach of the rules of natural justice, submitting that: (i) the sheer volume of material comprising the referral, coupled with (ii) Home Group’s unreasonable refusal to provide MPS with data or access to the underlying documents until the last moment, and (iii) a lack of sufficient time for MPS and its experts to interrogate and fairly respond to the referral.

Volume of materials
MPS said that if the electronic data comprising and supporting the referral was reduced to paper it filled 127 double-sided lever arch files, equivalent to 32 standard boxes. Home Group pointed out that the hard copy documents delivered to the adjudicator filled 7 boxes. The court held that irrespective of whether the correct number was 7 boxes or 32 boxes, the quantity of information of itself did not present a valid basis for challenging enforcement.

Access to data
Home Group’s offer of access to its data before the adjudication was conditional upon agreement to a sampling exercise. The court said that had MPS reserved its position as to the nature and extent of sampling but requested access it would have been difficult for Home Group to have refused. Or had it refused, the complaint would then have had substance.

Time to respond
MPS and its experts would have had sufficient time to respond if they had acted immediately instead of complaining at the lack of time and losing three weeks in tactical manoeuvring. The court noted that the adjudicator was able to address the issues (including particularly the allegations of quantum duplication) by undertaking a sampling exercise and that MPS did in fact make considerable inroads into the quantum of the claim which was originally in excess of £8m. In reviewing the considerable body of case law on the subject, the court concluded: (1) Adjudication decisions must be enforced even if they contained errors of procedure, fact or law. (2) A decision would not be enforced if it was reached in breach of natural justice and the breach was material, i.e. led to a material difference in the outcome. (3) Complexity and constraint of time to respond were inherent in the process and no bar in themselves to enforcement. (4) In cases involving significant amounts of data, an adjudicator was entitled to proceed by way of spot checks and/or sampling. How this should be carried out was a matter of substantive determination by the adjudicator and an error in approach, in the absence of some particular and material related transgression of natural justice, would not give rise to a valid challenge. The decision was enforced.

FK Construction Limited v ISG Retail Ltd [2023] EWHC 1042 (TCC) Justice Joanna Smith DBE judgment 5 May 2023

When the instant proceedings came before the court, there had been 7 adjudications between the parties arising from disputes under two projects (known as ‘Project Barberry’ and ‘Project Triathlon’, respectively) in which ISG had engaged FKC on similar bespoke sub-contracts. On Project Barberry there was the ‘Wood decision’, of February 2023, in which ISG was found liable to pay FKC just under £1.7m (ISG having failed to serve a valid pay less notice in response to FKC’s payment application). That was followed by the ‘Molloy decision’, of April 2023, in which the adjudicator found that the gross value of the sub-contract works was £3.7m (of which it was noted ISG had already paid around £2.8m leaving a balance of some £900,000 ostensible due to FKC). On Project Triathlon, there were three decisions dealing with various claims (the ‘Triathlon decisions’), the net effect of which was that FKC owed ISG some £67,000. These proceedings were brought to enforce the Wood decision. Crucially no proceedings had been commenced to enforce any of the other decisions. ISG did not challenge the validity of the Wood decision but they argued that the court should use its discretion to set off the sums due under the Wood decision against the net sum due to ISG under the Triathlon decisions, and/or against the gross value of the works determined in the Molloy decision. ISG said the net effect was that FKC was entitled to no more than £900,000 for Project Barberry, less £67,000 due to ISG for Project Triathlon.

The Law
It was well-established that a party ordered to make payment under an adjudicator’s decision must usually pay in full, without deduction or set-off as this would be contrary to the ‘pay now argue later’ policy of the Act. However, there were three limited exceptions: (1) Where there was a contractual right set off provision that did not offend the statutory requirement for immediate enforcement of an adjudicator’s decision (Thameside Construction v Stevens ; BexHeat v Essex ). (2) Where it followed logically from the decision itself that a set off was permitted, for instance where it was found that an overall amount was due but there was no order for payment. (3) In ‘an appropriate case and at the discretion of the court’, where there were two valid adjudication decisions involving the same parties, the effects of which was that monies were owed by each party to the other (HS Works v Enterprise Managed Services ). ISG argued that this case fell within the third limited exception. The court therefore looked at the decision in HS Works, where the judge formulated four steps to be considered in determining whether to set off two adjudicators’ decisions: • Step1, was to determine whether both decisions were valid. • Step 2, if both decisions were valid, they were capable of being enforced. • Step 3, if both decisions were valid and enforceable, the court should enforce or give effect to them both, provided that separate proceedings had been brought by each party to enforce each decision. • Step 4, the court should decide how each decision should be enforced. It might, for example, be inappropriate to set off a second decision against the first, if the first decision was made on the basis that there could be no set off.

The decision
The court found the facts of HS Works to be far removed from the present case. The court had not been asked to determine the validity or enforceability of either the Molloy decision or the Triathlon decisions and there were no separate proceedings to enforce those decisions. The result was that the court had no discretion to permit set off in respect of any of those decisions. Even if the court was wrong in that conclusion, there were other reasons why it would not have exercised its discretion in favour of allowing a set off. These included the fact that the Wood decision did not indicate that there could be set off or withholding against the sum found due to FKC. And no actual payment had been found due under the Molloy decision which was concerned with the gross value of the work. On the wider question of whether an adjudicator’s decision relating to one project could be set off against a decision relating to another project, the court commented that this was ‘a point of some interest’, which it was unnecessary to determine in the present case. Accordingly, FKC was entitled to summary judgment for the full sum due under the Wood decision.

ISG Retail Limited v FK Construction Limited [2023] EWHC 2012 (TCC) Adrian Williamson KC judgment 2 August 2023
This case is a sequel to the enforcement of the ‘Wood decision’ referred to above. Following the enforcement of the Wood decision, ISG commenced a further adjudication before Mr Molloy seeking a determination of the gross value of FKC’s works. On 14 April 2023, Mr Molloy issued a Decision (the ‘Molloy decision’) in which he held, so far as relevant, that the gross valuation of FKC's Works at 28 February 2023 was £3,736,679.72. On the same day, ISG issued the present proceedings for a declaration that FKC was entitled to no more than the sum found due by the Molloy decision and repayment of any sums paid in excess of that sum and, by subsequent amendment, repayment of the sum of £1,751,063.70 paid to FKC by ISG on 16 May 2023 (the ‘Wood Overpayment’). ISG relied upon the decision of the Supreme Court in Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc in which Lord Mance observed: "23. In my view, it is a necessary legal consequence of the Scheme implied by the 1996 Act into the parties' contractual relationship that Aspect must have a directly enforceable right to recover any overpayment to which the adjudicator's decision can be shown to have led, once there has been a final determination of the dispute… It seemed to the learned judge that, where the dispute referred to an adjudicator had then been referred to the Court or arbitration, and a different, final, outcome arrived at, it must follow that any sums paid over pursuant to the decision of the adjudicator should be repaid. The temporarily binding effect of the (incorrect) decision must yield to the final effect of the (ex hypothesi) correct judgment. The effect of the earlier judgment on 14 June (in these proceedings) was to undermine the basis on which Mr Wood proceeded and to reverse the Wood decision, which could now be seen to be wrong. In the result, ISG was entitled to the declarations sought in respect of, and summary judgment for the repayment of, the sum of £1,751,063.70.