Construction Adjudication Cases: Part 2 of 2020

Construction Adjudication Cases: Part 2 of 2020

The Enforcement of Adjudicators’ Awards under the HousingGrants, Construction and Regeneration Act Adjudication Cases

1996: Part 2 of 2020 Kenneth T. Salmon Consultant Solicitor at Slater Heelis LLP

Construction&Engineering

Contents

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1.. . .Introduction .........................................................................................................................................

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2. COVID-19 – Injunction to prevent proceedings................................................................ MillChris Developments Ltd v Waters

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3. Insolvency - Whether adjudications would determine final net position.............. Balfour Beatty Civil Engineering Ltd v Astec Projects Ltd (In Liquidation)

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4. Payment – Effect of subsequent correction – Manifest injustice.............................. J&B Hopkins Ltd v Trant Engineering Ltd

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5. Natural Justice – Waiver – Payment of adjudicator’s fee under reservation........ Platform Interior Solutions Ltd v ISG Construction Ltd

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6. Stay of Execution......................................................................................................................... Broseley London Ltd v Prime Asset Management Ltd (Trustee of the Mashel Family Trust)

Introduction The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 2 of 2020. Kenneth T. Salmon, Consultant Solicitor, Slater Heelis LLP. The law is stated at June 1, 2020. This part examines an important case on adjudication following insolvency, a failed attempt to injunct an on-going adjudication, the effect of a subsequent ‘correction’ to a notified sum and whether there was manifest injustice, and case on natural justice and stay of execution.

Legislation The Act means the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 Pt 8.

The ‘new’ provisions apply to contracts entered into on or after 1 October 2011.

The main regulations are contained in the Scheme for Construction Contracts (England & Wales) Regulations 1998 (the ‘Principal Regulations’).[1] They have been amended by the Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011[2] (the ‘new Regulations’). The new Regulations apply only to contracts for construction operations in England entered into on or after 1 October 2011. For earlier contracts the Principal Regulations apply. There are separate regulations for contracts for work in Scotland applicable to contracts made on or after 1 November 2011.[3] The new Regulations apply only to contracts for work in Scotland entered into on or after this date. For earlier contracts the Scheme for Construction Contracts (Scotland) Regulations 1998[4] applies. There are new separate regulations for Wales, applicable to contracts for construction operations in Wales entered into on or after 1 October 2011.[5] A reference to “the Scheme” is to the Principal Regulations for England and Wales, or the Scheme for Scotland, as the context so requires.

[1] Scheme for Construction Contracts (England & Wales) Regulations 1998 (SI 1998/649). [2] Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011 (SI 2011/2333). [3] Scheme for Construction Contracts (Scotland) Amendment Regulations 2011 (SI 2011/371). [4] Scheme for Construction Contracts (Scotland) Regulations 1998 (SI 1998/687) (S.34). [5] Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (Wales) Regulations 2011 (SI2011/1715) (W.194).

1) COVID-19 – Injunction to Prevent Proceedings: MillChris Developments Ltd v Waters [6] The Act allows parties to refer a dispute to adjudication "at any time" and it is only in exceptional circumstances that an injunction might be granted to restrain that right. In this case, the contractor applied for an injunction to restrain an on-going adjudication commenced against them by their house-owner employer on the grounds that because of the COVID-19 lockdown, there would be a breach of the rules of natural justice if the adjudication was allowed to continue. Jefford J. confirmed that the court had jurisdiction to grant such an injunction in an on-going adjudication, where for example one party was no longer trading[7], or where an adjudicator had indicated they would only hear from one party, but would do so rarely and only in very clear-cut cases. She rejected the argument that the COVID-19 lockdown would lead to a breach of the rules of natural justice in this case if the adjudication continued. This was not a case where the threshold had been met. It was said that the contractor's solicitor was self-isolating, but no explanation was offered as to why papers could not have been transported or scanned over to the solicitor (or anyone else instructed). The contractor also complained of lack of time to obtain evidence by way of witness statements from former employees, namely the contractor's former managing director and former project manager. The court held that had nothing to do with the lockdown but resulted from a failure to contact the witnesses concerned.

The defendant home-owner had offered an extension of time to the adjudication process which could have ameliorated any issues with witnesses and evidence. The contractor further complained that there was no opportunity to accompany the adjudicator upon a site visit because of the restrictions imposed by the COVID-19 crisis. The court stated that the parties had no right to attend a site visit and that if a site visit was necessary, the adjudicator could attend on his own armed with a list of specific matters provided by the parties beforehand for his attention.

[6] MillChris Developments Ltd v Waters [2020] 4 WLUK 45 (2 April 2020) (Jefford J). [7] Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Civ 27

2) Insolvency - Whether adjudications would determine final net position: Balfour Beatty Civil Engineering Ltd v Astec Projects Ltd (In Liquidation)[8] The court of appeal had established in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd[9] that, it would be "an exercise in futility" to allow an adjudication to continue when a referring company was in insolvent liquidation, unless there were certain exceptional circumstances. In Meadowside Building Developments Ltd (In Liquidation) v 12-18 Hill Street Management Co Ltd [10] Adam Constable QC set down the factors that required to be satisfied in order to allow an adjudication to proceed. In this case Astec, was a company in insolvent liquidation and commenced an adjudication against Balfour in respect of one of three contracts between them. They intended, if allowed, to commence adjudication proceedings under the other two contracts. Balfour sought an injunction to restrain the adjudication from proceedings on the basis that the ‘Meadowside’ requirements were not fulfilled. The court considered whether a "final net position" could be reached where there were three adjudications under three separate contracts. Waksman J. concluded there was nothing in Bresco or Meadowside that prevented this. The three adjudications would deal with the entirety of the parties' mutual dealings and thus mirror the requirements of rule 14.25 of the Insolvency (England and Wales) Rules 2016 (SI 2016/1024).

Astec had been in liquidation since October 2014 and was legally funded. It also had legal expenses and after the event insurances. The question then was whether the security that Astec was offering was sufficient.

The adjudication was allowed to continue on the following conditions.

1. That Astec provide security for costs in the sum of £750,000 (three times more than the sum initially offered). 2. Astec were to commence the remaining two adjudications within 21 days and the same adjudicator was to be appointed to deal with all three sets of proceedings. 3. The adjudications were to be dealt with together over an 84-day period (thus allowing 28 days for each one), unless the parties agreed to confer jurisdiction on an adjudicator to deal with all three contracts in one adjudication. 4. Balfour was to have 6 months from the adjudicator's decision(s) to issue court proceedings to seek a different result and Astec could not seek enforcement of any decision(s) in its favour during that period or while any subsequent litigation to determine the final position was ongoing.

[8] [2020] EWHC 796 (TCC) (27 February 2020) (Waksman J). [9] [2019] EWCA Civ 27 Coulson LJ [10] [2019] EWHC 2651 (TCC)

3) Payment - Effect of Subsequent correction –

Trant argued before the Adjudicator that it had issued a payment and or payless notices and that though validly issues, PA 26 was not substantiated properly. The Adjudicator decided that the emails relied upon by Trant were not valid payment or payless notices respectively and that Trant must pay notified sum immediately, in full and without deduction, with interest and his fees. Before the court, Trant relied on effectively the same grounds to oppose enforcement as to justify an alternative application for a stay of execution if summary judgment was granted. The court noted the applicable principles were well known and been applied for some 20 years. The starting point was that if the adjudicator had decided the issues referred to him or her, whether he or she was right or wrong in fact or in law, as long as they had acted broadly in accordance with the rules of natural justice, that decision would be enforced by summary judgment[12]. For a modern statement of the principle the court referred to the dicta of Coulson J (as he then was), in Hutton [13] at [14]: “If the decision was within the Adjudicator's jurisdiction and the Adjudicator broadly acted in accordance with the rules of natural justice, such defendants must pay now and argue later.” Neither of these two bases on which a decision might be challenged were present or relied on by Trant. The court also looked at the two narrow exceptions identified in Hutton at [4] namely ‘admitted error’; and the presence of a self-contained legal point concerning timing, categorisation or description of payment notices or payless notices, in respect of which the potential paying party had issued Part 8 proceedings seeking a final determination of that or those substantive points. Again, neither exception applied here.

Manifest injustice: J&B Hopkins Ltd v Trant Engineering Ltd [11] IBy a sub-contract, Trant engaged Hopkins to carry out M&E works at a recycling plant in the Isle of Wight. There was a dispute over the payment of interim Payment Application 26 (‘PA26’) which Hopkins referred to adjudication. On 2 March 2020, the Adjudicator, Mr Silver decided Hopkins was entitled to approximately £974,000 including VAT being the sum that had been claimed by them and was found to be the notified sum, against which Trant was found not to have issued a valid payment or payless notice as required by s.110B(4) of the Act.

Trant declined to pay.

Hopkins issued proceedings in the TCC on 10 March 2020. The usual expedited directions were given. Then in April because of the Covid- 19 crisis further directions were given for a remote hearing which was conducted remotely by Skype for Business.

At paragraph 3.9 of the Notice of Adjudication Hopkins had stated:

“For the avoidance of doubt, the Adjudicator is not asked, nor does the Adjudicator have jurisdiction to, investigate or consider the merits of any actual valuations of JBH's sub- contract works as part of this adjudication. In this adjudication the Adjudicator's jurisdiction is strictly limited to considering whether the sum applied for by JBH in Application 26 became due and payable by virtue of Trant's failure to serve any valid and/or effective payment or payless notice in response to the same.”

Trant resisted enforcement on the basis that by the time that the adjudication was commenced in January 2020, Hopkins was no longer entitled to be paid the sum stated in Application 26. This was because any entitlement had been superseded by subsequent interim payment cycles, in which Hopkins made further applications for payment which were the subject of valid payment payless notices, and which ‘superseded and corrected’ the sum payable under the Sub-contract as at August 2019. And they had “gone along with” these subsequent payment cycles on a cumulative basis. Thus, Trant said: “The current entitlement as at the date of these proceedings is against the Claimant's application PA33 dated 28 February 2020 in respect of which the Defendant served a payment notice/payless notice which constitutes the notified sum of the amount due under the Sub-contract.”

The first question was whether the so called “correction principle” existed and then second whether enforcing the decision would be inconsistent with it. Alternatively, if the decision were enforced the Court should give effect to the current payment entitlement with the result that payment would be met with an immediate obligation to repay” “…it would be manifestly unjust to permit the Claimant to enforce a decision in respect of PA26, when that sum had ceased to be due, following later payment cycles which the Claimant went long with, before the adjudication started, and no longer represents the current payment entitlement under the Sub-contract. To enforce the decision would be inconsistent with, and undermine, the 'correction' principle set out in the case law, namely, that interim payments can be corrected in the next interim payment cycle. Here that correction occurred long before the adjudication was commenced and so the earlier payment entitlement ceased to exist and is replaced by the current sumdue pursuant to s111.

The court held on authority that such a principle did exist[14].

The “correction principle” referred to meant that if an interim application was not met by the required notices, leading to the result that the sum applied for became the sum due, any correction to reflect the true value of the work (and the application) was permissible on later applications. However, the quid pro quo was that the amount due on the original application was precisely that: the amount due. It fell due as in this case, because the relevant notices were not issued. But the correction principle could not be applied to lead to a result that the amount was not due at all. The fact that it was an interim application, and the amount could be corrected later, did not assist Trant.

Counsel for Trant accepted that this was a novel point.

He identified, correctly, that there was another adjudication currently on foot between the parties on the same project, to determine the extent to which Hopkins was entitled to payment of any further sums under the sub-contract which would take some weeks or more to decide.

It was therefore contended that:

[ 11] [2020] EWHC 1305 (TCC) [12] See Macob Civil Engineering Limited v Morrison Construction Limited [1999] EWHC Tech 254, and [1999] BLR 93, [13] Hutton Construction Limited v Wilson Properties (London) Limited [2017] BLR 344 at [3]. [14] ICI Limited v Merit Merrell Technology Limited [2017] EWHC 1763 (TCC); S&T (UK) Limited v Grove Developments Limited 2018 EWCA Civ 2488

Turning to the second question, the court could not agree that enforcement would undermine the correction principle. On the contrary it would be inconsistent with the right to adjudicate “at any time”. Secondly, Trant’s analysis implicitly precluded the possibility of any disputes on earlier payment applications remaining after a further payment application was made. Such possible disputes (on earlier applications) could be substantive ones, and they did not disappear and cease to exist because a subsequent application was made on an interim basis. Nor was there some sort of estoppel. What, in law, was the notified sum under PA26 did not become incapable of adjudication simply because the payment cycle moved on to Application 27 and beyond. Where for example there was a monthly payment cycle, the submission of a subsequent payment application would have to take place before the previous application had become due or before any adjudication on that previous application could be commenced. Upholding the approach urged by Trant would not only have created a wholly novel approach by the courts, but would be procedurally unjustified and would also undermine the policy of enforcement developed by the courts. The alternative application for a stay on the same facts also failed. Any contention relating to inability to repay having been abandoned, there was in fact or law no other basis on which it could be said that a stay was necessary to prevent manifest injustice. Going along with or participating in the subsequent payment cycle did not mean the right to adjudicate on the pre-existing dispute was lost or that Trant was somehow prejudiced.

Neither were any unusual features to support such a course.

4) Natural Justice: Waiver – Payment of adjudicator’s fee under reservation: Platform Interior Solutions Ltd v ISG Construction Ltd [15] ISG engaged Platform upon ISG’s subcontract terms to perform works in an hotel to the value of some £52,300. Platform's works were then extended by a variation instruction to cover substantial additional works and the subcontract price increased to £2,274,395.24 plus VAT. ISG purported to determine the subcontract for material or persistent breach pursuant to an express term. Platform said the termination was unlawful and claimed to rescind the subcontract. After the purported termination Platform submitted its payment application no 12 and also claimed the release of the retention in total a net payment of £621,268.43 plus VAT. There was no payment or pay less notice from ISG. The dispute over termination and what was due was referred by ISG to adjudication. The adjudicator decided that ISG had lawfully determined the subcontract, but that Platform was nevertheless due payment from ISG of £417,541.33 plus VAT. She arrived at this figure by applying the terms of clause 27(5) of the subcontract which had provided that: "(5) ISG shall be entitled to recover from the Sub-Contractor all losses, expenses, costs and damages suffered or which may be suffered by ISG by reason of such termination."

Her valuation exercise took the figure that ISG said it would have cost Platform to complete the works, and deducted that figure from what ISG said it would cost it to complete the works. That showed a saving of £417,541 and the adjudicator awarded that sum to Platform thus: "13.1 Firstly. In respect of payment, as above and my spreadsheets at Appendix B and C, I find that the Respondent is liable to make payment to the Referring Party in the sum of £417,541.33, as follows: "Assumed Platform costs to complete £2,506,096.38 "Actual ISG costs to complete £2,088,555.05 £417,541.33" When Platform demanded payment, ISG responded to say that it thought the adjudicator's decision was invalid and unenforceable. When enforcement proceedings were issued, ISG raised several arguments to challenge enforcement. It also started separate Part 8 declaratory relief proceedings. The two sets of proceedings were not heard at the same time. The application for summary judgment was heard first and separately. There were three grounds of challenge:

It said that ISG having paid the adjudicator’s fee, had waived the right to challenge the validity of the decision. The court, noting that the reservation was not a general reservation made during the course of adjudication proceedings, but an express one made after the decision was made, asked itself whether there was any evidence of affirmation of the decision. It said: 54. “It also seems to me that a waiver by payment of an Adjudicator's fees is a different type of alleged affirmation from the other situations considered in the authorities. As a matter of policy, it seems to me that this court should not do anything to discourage payment to an adjudicator of fees for the adjudicator's work. Thus, where the alleged election is payment of an adjudicator's fees, the court should perhaps be particularly careful to see whether the inference should properly be drawn that the payer intended to treat the decision as valid.” 55. In this case, as set out at paragraph 36 above, ISG's email of 16 December had made it clear that ISG regarded the Decision as invalid and unenforceable. Was there anything in the payment of the fees from which the inference can be drawn that ISG had changed its mind? In my view, the answer to that question is clearly "No", not least from the terms of the email of 23 December.” ISG’s email of 23 December to the adjudicator when making payment, made clear that it was paying the fee notwithstanding that it felt the decision was invalid and unenforceable and whilst specifically reserving all its rights.

“ (1) That the Adjudicator failed to exhaust her jurisdiction in respect of the dispute referred;

(2) That the Adjudicator breached natural justice in reaching her award on a method of valuation advanced by neither party; (3) That the Adjudicator failed to give adequate and cogent reasons for her decision on valuation.” Ground 1 was subsumed in ground 2. Before the natural justice issue was heard, Platform raised an objection.

[15] [2020] EWHC 945 (TCC) Roger ter Haar QC

5) Stay of Execution - Broseley London Ltd v Prime Asset Management Ltd (Trustee of the Marshel Family Trust) [16] There had been three adjudications between the parties arising out of a contract under which the defendant (PAML) engaged the Claimant (BLL) to carry out the refurbishment of a high value dwelling. The first adjudication was brought by BLL upon its interim application for payment no 19 in respect of which PAML had failed to give a pay less notice or a payment notice in time. The adjudicator Mr Paul Jensen awarded BLL the full amount of its application (‘Decision 1’). In a second adjudication, Mr Jensen issued declarations in respect of payment certificate no 20 (‘Decision 2’). In the third adjudication Mr Jensen declared that BLL had lawfully terminated the contract at the end of September 2019 for non-payment of application no 19 (Decision 3). PAML did not pay the sum due under Decision 1 arguing that when the value of the final account was determined, BLL would be indebted to PAML. When BLL applied for summary judgment, PAML applied for a stay of execution of two months pending the outcome of a ‘true value’ adjudication on not the interim application no 19 but on the final account. That adjudication had been commenced by BLL, but after PML’s application for a stay, BLL withdrew its referral. That knocked the ground from beneath PAML’s feet and meant that it must pay Decision 1 or seek its stay pending the outcome of proceedings to determine the value of the final account.

Natural Justice ISG said the adjudicator had ignored clause 27(4) and turned clause 27(5) “on its head” to arrive at an illogical and inexplicable decision that ISG had saved money in completing themselves. Although the adjudicator had applied clause 27 in a way which neither party might have anticipated, it had been open to ISG to spell out its case on the various figures put forward and to make any reservations it thought fit as to how the figures could be applied. The adjudicator had been entitled to arrive at a valuation which was between that contended for by ISG and that claimed by Platform. Further her explanation was clear and whether she was right or wrong in law was not the question. The challenge to the validity and enforceability of the decision was dismissed.

The basis of the claim for a stay was that BLL’s financial position rendered it probable that it would be unable to repay the amount awarded in Decision 1 if required (per Wimbledon v Vago and Gosvenor v Aygun[17]). PAML was obliged to accept following S&T v Grove[18], that it was not entitled to commence a true value adjudication in respect of interim application 19 as it had not paid the amount awarded in Decision 1. However, the issue that arose here was slightly different: could PAML start what would be a ‘true value’ adjudication in respect of the final account? The court noted the fact that Decision 3, deciding that BLL had been entitled to terminate, was based on PAML’s failure to pay sums due to BLL, and in particular the amount awarded in Decision 1. The possible subject of the (as yet un-started) adjudication would be the determination of a notional final account, where the amount of that final account would be dependent on the validity of Decision 1. To allow that adjudication to proceed without first requiring payment of the sum decided would be “a remarkable intrusion into the principle established by S&T” and one which would “permit the adjudication system to trump the prompt payment regime...” Accordingly, it was not open to PAML to commence a final account adjudication without first having paid the amount awarded in Decision 1. Therefore, there was no justification for granting a stay.

The court went on to consider whether there was any basis for a stay to permit court proceedings to determine the true value of the account. It would not be right to grant a stay to allow PAML to bring litigation proceedings to determine the final account, because Prime had failed to pursue such claim with diligence, noting that any stay should only be for the shortest possible period to permit the proceedings to be concluded. Such delay could of itself be a bar to a stay[19]. The court also briefly considered arguments put forward by PAML as to BLL’s financial position and ability to repay any sums later found not to have been due. The evidence did not satisfy the court there was such inability. The court observed that the difficulties imposed on by the effects of the COVID-19 epidemic meant it was not easy to know at what date any repayment might occur and therefore at what date to look at the ability or otherwise to repay. There had been what the court described as a ‘serious’ allegation that the directors of BLL had so ordered the company’s affairs as to reduce its ability to repay but that allegation was not proved.

Summary judgment granted and stay refused.

[17] Wimbledon Construction Company 2000 Ltd v Vago [2005] EWHC 1086 (TCC), 101 ConLR 99Gosvenor London Ltd v Aygun Aluminium UK Ltd [2018] EWCA Civ 2695, 182 ConLR 38ct [18] S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448, 181 ConLR 66 [19] See paragraph 17.28 of the 4th edition of Coulson on Construction Adjudication; and HHJ Toulmin CMG QC in ALE Heavylift v MSD (Darlington) Ltd [2006] EWHC 2080(TCC) at paragraph [100].

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