Construction Adjudication Cases: Part 5 of 2019

Cases The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 5 of 2019 Kenneth T. Salmon, Katy Ormston and Tiffany Low

Construction & Engineering

Contents 1. Introduction 

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.

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2. Enforcement when another decision  imminent MTD Contractors Ltd v Willow Corp SARL  3. Fraud  PBS Energo A.S. v Bester Generacion UK Ltd 4. Insolvency – effect of administration  on enforcement Indigo Projects London Ltd v Razin & Anor 5. Natural justice 

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RGB P&C Ltd v Victory House General Partner

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1. Introduction The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 5 of 2019. Kenneth T. Salmon, Consultant Solicitor, Katy Ormston, Trainee Solicitor and Tiffany Low, Paralegal at Slater Heelis LLP. The law is stated at 31 May 2019. 2. Enforcement when another decision imminent MTD Contractors Ltd v Willow Corp SARL 6 The Defendant employer, Willow, engaged the Claimant, MTD, to construct a hotel. Willow failed to pay MTD the balance of the final account and retention. In a first adjudication the adjudicator ordered Willow to pay part of the retention. Willow’s agent issued a pay less notice claiming an entitlement to withhold the costs of remedying defects. MTD brought a second adjudication to challenge the pay less notice and the second adjudicator decided that claim in MTD’s favour. Willow brought proceedings in Court to challenge the second adjudicator’s decision and judgment on that claim was awaited. In a third adjudication, MTD claimed a declaration as the certificate of making good should have been issued and payment of the balance of the retention. The third adjudicator found for them awarding them £699,695 and MTD now sought to enforce that decision. Willow issued a Part 8 claim challenging the third decision. The Court had previously ruled, contrary to the usual practice, that the enforcement proceedings and the Part 8 claim should not be heard together. Willow argued that there was an important connection between the final judgment expected on the retention due pursuant to the second adjudication and the question of the validity of the third adjudication decision, on the balance of the retention. Effectively, if the second decision were set aside or the findings as to the deductions for defects were set aside or determined to be unenforceable, then the third decision would be unenforceable. Pursuant to authority, the Court held that the third decision would be enforced whether it was right or wrong unless there was no jurisdiction to make it or there was a breach of the rules of natural justice. It was all about interim cash flow and decisions were routinely enforced on this basis. The fact that the decision was to be challenged in some other forum was, of itself, seldom, if ever, grounds for resisting enforcement, see PBS [below]. The fact that judgment in the Part 8 challenge on the second decision was imminent was no more reason than the Part 8 challenge to the third decision itself, not to enforce that decision. The Court practice was not to take into account arguments that the decision might be incorrect. Neither was it right to refuse enforcement because the decision might be vulnerable

to challenge on jurisdictional and / or natural justice grounds because of the imminent judgment on the second decision. It would be contrary to settled practice and authority on enforcement to await the outcome of a Part 8 challenge to the third decision There was no justification for a conditional order, and Willow had not sought to seek a stay and could not satisfy the grounds for a stay. Willow was not entitled to obtain equivalent relief by another route. Judgment for the Claimant (MTD). 3. Fraud PBS Energo A.S. v Bester Generacion UK Ltd 7 This was an application for summary judgment by PBS for the unpaid amount of an adjudication award in their favour by Mr Judkins in the sum of £1.7m plus interest. Background Bester entered into a contract to design and build a biomass- fired energy generating plant in Wrexham for Equitix CHP Wrexham Ltd. They subcontracted certain works to PBS. The subcontract price was £14.23m plus VAT. A dispute arose and PBS gave notice of intention to terminate its employment. Bester who denied PBS was entitled to terminate, at first sought to affirm the subcontract. Later by letter they purported to terminate the subcontract. A dispute as to termination was referred to adjudication before Mr Simon Tolson who found for PBS. He was not required to deal with quantum but was asked to and did order Bester to repay performance security of £2.7m that had been taken by Bester. Bester did not pay and PBS had to take enforcement proceedings which resulted in them obtaining summary judgment in January 2018 and thereafter the return of the security. In those proceedings the judge, Stuart-Smith J. criticised Bester for raising numerous spurious issues and failing to consent to judgment. PBS issued adjudication proceedings before Mr Judkins claiming the balance of the subcontract sum pursuant to the termination provisions. They were specifically required to give credit for the value of equipment that has not been delivered up under the subcontract and which PBS had retained. Based on valuation evidence before him Mr Judkins awarded PBS a net balance of £1.7m and further on the witness evidence of PBS found that they were not required to give any credit as the equipment in question was stored and available and would belong to Bester once they had paid the balance of the subcontract price. In response to PBS’s application for summary judgment Bester said claims made in the adjudication that the equipment was stored to Bester’s order and would be available to them on payment, were simply untrue: some of the items were not stored as claimed; orders placed by PBS for other items had been cancelled; the cancelled order values indicated that the values placed on other items of equipment had been overstated in the valuation claim. Thus Mr Judkins had been misled.

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In legal terms there were misrepresentations, which were false and which had induced Mr Judkins to reach his decision not to

7. The fraud point could not have been taken in the adjudication because it only emerged after detailed review of documents disclosed in court proceedings after 23 November 2018 and given the complexity of the task (57,000 unordered documents, 17,000 of which were in Czech or Slovak, without translation), and the weight of work upon the adjudication case. Therefore it was open to Bester to take the point upon enforcement. 8. The award could not be reengineered and severance was not available. 9. The mere assertion by PBS that it was entitled to payment of other sums (claims yet to be established) and the alleged poor financial position of Bester were not reason to refuse Bester permission to defend. This was one of those rare cases where summary judgment would be refused. 4.Insolvency – effect of administration on enforcement Indigo Projects London Ltd v Razin & Anor 8 The Claimant company applied for summary judgment to enforce an adjudicator’s decision in its favour. The Defendants opposed the application on the ground that the Claimant had subsequently entered into a company voluntary arrangement (CVA) and would not have the means to repay the sum in dispute if subsequently ordered to do so. The Defendants had engaged the Claimant to build a house and a dispute arose concerning alleged defects and delay. The Claimant issued an interim payment notice and because the Defendants failed to serve a pay less notice, the sum claimed in the payment notice became due for payment. The whole sum due was not paid and the Claimant commenced adjudication. The adjudicator decided that the Defendants should pay the amount due under the interim payment notice, less the sum previously paid. Payment was to be made within seven days but the Defendants again failed to pay. The Defendants had a claim for liquidated damages, and issued a pay less notice seeking to set off the difference between the gross valuation of the work done by the Claimant, and the amount previously certified, thus reducing the sum owed by the Defendants to nil. A month later, the Claimant entered into a CVA, clause 7 of which required that where there had been dealings between the Claimant and a creditor, an account was to be taken of what was due from each party to the other, and the sums due from one were to be set-off against the sums otherwise due.

grant any credit. The Court found:

1. A number of representations had been made by PBS: a. as to the existence and availability (upon payment) of certain items of equipment; b. that PBS had made efforts to sell the equipment to no avail; c. that PBS had sold a water cooled grate for which it said it had not been paid and that title would not pass until it was paid and thus it was held to Bester’s order; d. that upon achieving a sale it would give credit to Bester. 2. There were material falsities on these representations as to: a. what was available; b. as to the sale of the water cooled grate and that the failure to give credit even after sale was a matter of intention; c. PBS had neither paid for nor obtained title to certain gas-flue cleaning equipment and had never held to Bester’s order thus achieving a saving of £200,000; d. That the fabric filter being the only component actually required by PBS was suitable for other projects; e. It was properly arguable that another valuable piece of equipment (the SNCR) was no longer available to Bester, as claimed by PBS. 3. The admission by PBS that “there may be some slight variation in what equipment was available to hand over” was not good enough and it was incumbent on PBS to explain any discrepancy openly and fully. 4. Fraud was proved when a false representation had been made knowingly or without belief in its truth or recklessly in the sense of not caring whether it was true or false. 5. It was properly arguable that PBS made false representations to the adjudicator knowing them to be false, or without belief in their truth, or, at the very least, recklessly. 6. It was clear the adjudicator Mr Judkins had rejected Bester’s case on credit based on the evidence of PBS that it had been unable to sell or use the equipment on other projects. And he had understood that the parts were to be held to Bester’s order and available upon payment or credit would be given for any part resold or used. The false representations were intended to and did influence Mr Judkins to the material advantage of PBS.

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5.Natural justice RGB P&C Ltd v Victory House General Partner 10

On that basis the Defendants said it would not be just to enforce the adjudicator’s decision as this would undermine the proper operation of cl.7, noting that the adjudicator had not considered their cross-claims in the adjudication. Unlike previously decided cases, the Court noted that the CVA in the instant case was entered into after the adjudicator’s decision and the application to enforce it. The Court held it was also relevant that the adjudicator’s decision did not deal with the merits of the payment application and neither was it a valuation of the work carried out by the Claimant, or an assessment of the account between the parties. It was a decision based solely on the failure to serve a pay less notice. If that decision had been complied with, the effect in a subsequent resolution of the entire dispute by arbitration or litigation would have been that the payment would have been treated as an interim payment on account. Since the payment had not been made, and the adjudicator’s decision was not a determination of a sum due in respect of any particular work, it would have no effect on the result of the account taken by the CVA supervisors. The supervisors would simply note the existence of the decision and move on to an assessment of the parties’ claims and cross-claims. However, if the sum were paid after the commencement of the CVA, it would be a recovery that would go into the general fund available for distribution amongst the creditors when the time came, in accordance with the Insolvency (England and Wales) Rules 2016; it would not be taken into account in arriving at the balance due either way on consideration of the mutual dealings between the Claimant and the Defendants, as it would have been if paid prior to the CVA. An order to pay the sum found due by the adjudicator would therefore work harshly against the Defendants. It would distort the process of accounting required under the CVA because the money would not be applied for the sole benefit of the Defendants but instead for the benefit of the creditors generally. If the adjudicator had decided all the claims and cross-claims between the parties, it might have been different. It would be wrong in principle to enforce the adjudicator’s decision by ordering the Defendants to pay the Claimant the sum found due. The Court considered two previous decisions 9 . Even if that was incorrect, the effect of ordering payment of the sum found due by the adjudicator would amount to special circumstances within the meaning of CPR r.83.7(4) (a) such as to justify staying enforcement of the full amount (paras 27-36, 53-57 of the judgment).

Victory House (“VH”) employed RGB as contractor under a JCT DB 2011 to convert an office building in Leicester Square into an 8 floor hotel. Works were delayed from the completion date of 16 May 2016 until practical completion on 1 September 2017. This application arose from the 4th adjudication between the parties in which VH sought a declaration as to the proper assessment of the final statement. RGB’s final statement (including claims for loss and expense) gave an adjusted Contract Sum of over £11m and was supported by a report from Helen Turner of The Vinden Partnership, compared to VH’s assessment of less than £6m. The Turner report identified 4 relevant events leading RGB to seek an extension of time (“EOT”) of 67 weeks and 4 days. VH relied on a report of Nik Sekulic of Navigant and claimed to be entitled to deduct liquidated damages (“LDs”) for the period of delay. It was therefore necessary for the adjudicator to form a view on “the correct adjustment to the Completion Date”. During the course of the adjudication further experts’ reports were adduced and submissions made on them. The adjudicator decided the adjusted Contract Sum to be included in the Final Statement was £9,762,141.63 (including loss and expense) less LDs of £62,142.86 to be deducted and that VH was to pay RGB £1,161,123.57 plus VAT. That sum was not paid. VH’s defence was twofold: (1) to arrive at the LDs payable, the adjudicator had undertaken his own analysis of RGB’s extension of time claim without reference to the parties or affording them the opportunity of to advance their own cases as to the course he intended to take; and (2) he had failed to take account of key aspects of VH’s defence as to claims made by subcontractors and included in RGB’s claim; in each case in breach of the rules of natural justice. Jefford J referred to the principles to be applied 11 . On the first issue Jefford J. concluded that the adjudicator had been asked to determine the issue of EOT. Part of the issue concerned the validity of changes to logic links in the baseline programme made by Ms Turner, and criticised by Mr Sekulic. The adjudicator did not embark upon some unrelated delay analysis of his own, but had, in the judge’s view, properly reached his own views on the logic links, the programme and the critical path and then ascertained the impact of the relevant events (as he found them). He was entitled to do so. The second issue involved four subcontractors’ claims amounting to £827,320 and included in RGB’s claim. The adjudicator had decided that some money, but a significantly lesser sum, was due to in each case. VH argued that he failed in so doing to take into account their case that the claims were so suspiciously similar, that they had been manufactured and were not genuine. It was said he did not deal with the

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arguments at all or even refer to them in his decision. Before the Court it was VH’s case that the claims were fraudulent though that term was never used in the adjudication. If there was indeed a failure to deal with the defence that the claims were fraudulent or at least manufactured, it was accepted it must have been inadvertent, not deliberate. In its referral and its preamble to dealing with the subcontractors’ claims, RGB said it did not deal with the claims individually due to their similarity but made brief comments on their adequacy. VH in its reply made submissions in answer to RGB’s defence of the claims – essentially saying that the claims had been produced with the assistance and collusion of RGB, were not genuine and independent. The fact that the letters containing the claims were suspiciously similar was in fact referred to in the adjudicator’s decision as was VH’s complaint that there was an absence of supporting documents. In light of this it was not sustainable for VH to claim that the adjudicator had not read its submissions. Despite not dealing with each claim separately or referring expressly to the ‘suspicion’ raised by the similarity in the letters, the Court drew the inference that the adjudicator must have considered these arguments and either dismissed them or regarded them as immaterial. In other parts of his decision it was apparent the adjudicator had in mind the inadequacy of supporting evidence for at least one of the claims. The adjudicator was entitled to form his own view of the evidence about the claims. He was not obliged to set out every step of his reasoning. There was no inference that he had overlooked a key defence. In summary it was not at all clear that VH’s case was that the claims were fraudulent. Rather it seemed the subcontractors had been encouraged or assisted to make the claims. That and a lack of support went to the merits of the claims and the adjudicator clearly considered the merits of each claim. A failure to consider every sub-issue if there was such a failure did not render the decision one reached in breach of the rules of natural justice. Even if the adjudicator did inadvertently overlook some other element of the VH defences or of the evidence, that did not render the decision so unfair that it should not be enforced or mean he had failed to deal with the dispute referred to him. Decision enforced.

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References: 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 (SI 2011/1715) (W.194) 6. [2019] EWHC 1612 (TCC) Waksman J, judgment 13 May 2019 7. [2019] EWHC 996 (TCC) Pepperall J judgment 17 April, 2019 8. [2019] EWHC 1205 (TCC) Edwards-Stuart J judgment 17 May 2019 9. Westshield Ltd v Whitehouse [2013] EWHC 3576 (TCC); Bouygues UK Ltd v Dahl-Jensen UK Ltd [2001] 1 All E.R. (Comm) 1041 10. [2019] EWHC 1188 (TCC) Jefford J judgment 10 May 2019 11. Cantillon v Urvasco Ltd [2008] EWHC 282 (TCC); Carillion Construction Ltd v Davenport Dockyards Ltd [2005] EWCA Civ 1358; Balfour Beatty Construction Company Ltd v The London Borough of Lambeth [2002] EWHC 597

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Matthew Grellier Head of Construction & Engineering [email protected] Get in touch with our team for more info:

Katy Ormston Trainee Solicitor [email protected]

Kenneth Salmon Consultant Solicitor [email protected]

Tiffany Low Paralegal [email protected]

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