Construction Adjudication Cases: Part 5 of 2020

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

1996: Part 5 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. Jurisdiction - Failure to Exhaust............................................................................................ Field Systems Designs Ltd v M W High Tech Projects UK Ltd [2020] CSOH 17

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3. Jurisdiction – order for payment of sum due to responding party.......................... WRW Construction Limited vDatblygau Davies Developments Limited [2020] EWHC 1965 (TCC) HHJ Andrew Singer QC 23 July 2020 4. Payment Terms - Clarity of....................................................................................................... Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC) Cockerill J

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5. Stay of Action Pending Payment of Award....................................................................... Donald Insall Associates Ltd v Kew Holdings Ltd [2020] EWHC 1862(TCC)

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Introduction The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 5 of 2020. Kenneth T. Salmon, Consultant Solicitor, Slater Heelis LLP. This part features two decisions on jurisdiction. The first is an example of the Scottish tendency to give the adjudicator the benefit of having considered the materials before him. The second has wider implications, and whilst the facts were singular they are by no means unique, and mean that a referring party faced with a negative award may find itself having to pay money to a responding party. Our third case underlines the need for clarity of payment terms. Our fourth and final case, is an example of the courts’ insistence that adjudicators’ decisions be honoured, even where a cross claim has been properly issued.

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) Jurisdiction - Failure to Exhaust: Field Systems Designs Ltd v M W High Tech Projects UK Ltd [2020] CSOH 17 The pursuer, Field, sought to enforce an adjudicator’s award in its favour. The defender, MWH, opposed enforcement on the grounds that (a) the adjudicator had failed to consider a material line of defence and had thus failed to exhaust his jurisdiction and (b) having failed to consider the material line of defence had thus failed to give adequate reasons for his decision. Field was engaged by MWH for the design and installation of controls and instrumentation at a waste plant. The sum in dispute in the adjudication had been over £1.05m, a small part of which (some £26,000) concerned Field’s application for payment for work carried out by two companies, claimed on an hourly rates basis. In the adjudication, MWH argued that the two companies had been Field’s sub-contractors, which under the terms of the contract meant their work should have been valued on a cost plus basis which produced a lower figure than that claimed by Field. In response, Field said the two companies were joint venture partners and, accordingly, the hourly rates basis was correct. There was a hearing before the adjudicator at which MWH went further and said that if the two companies were indeed joint venture partners as Field claimed, then neither of the rates in the contract applied and their works should be valued at nil resulting in a total deduction of £890,000. There were some 25 valuation issues dealt with by the adjudicator, 2 of which concerned the claim for payment for the work of the two companies.

In respect to those 2 valuation issues, the adjudicator decided the works of the two companies were to be valued on the hourly rates basis. He found that certain deductions should be made from the sums claimed for the two companies, of some £15,000 in round figures. In his award he did not expressly address the issue whether the two companies were subcontractors or joint venture partners and therefore the contention that their works should have been valued at nil. He did, however, say that he had considered all the arguments and submission put forward. The court looked at two authorities concerning the circumstances in which a failure by an adjudicator to consider an issue in an adjudication would prevent enforcement[6]. It was clear from Pilon and later cases that a distinction was drawn between a deliberate and an inadvertent failure. The latter would not ‘ordinarily’ render a decision unenforceable. Whilst the decision in Whyte and Mackay was to refuse enforcement as a result of an inadvertent mistake, Coulson on Construction Adjudication’ (4th edition) suggested that that decision should be confined to its own facts. The adjudicator’s decision did not contain a clear or discrete reference to the sub-contract/joint venture point. Though the matter was very finely balanced, a review of the adjudicator’s decision lead to the conclusion that consideration of the point must be implicit in his findings. The court would hold there was a failure to exhaust jurisdiction only ‘in the plainest of cases’[7]. Ultimately, MWH had not established that the adjudicator had failed to address the point. [6] Pilon Ltd v Breyer Group plc [2010] EWHC 837 (TCC); Whyte and Mackay Ltd v Blyth & Blyth Consulting Engineers Ltd [2013] CSOH 54 [7] DC Community Partnerships Ltd v Renfrewshire Council [2017] CSOH 143

2) Jurisdiction - order for payment of sum due to responding party: WRW Construction Limited v Datblygau[9]: Davies Developments Limited [2020] EWHC 1965 (TCC) HHJ Andrew Singer QC 23 July 2020 The claimant WRW applied for summary judgment to give effect to an adjudicator’s award in its favour. The case was unusual in that WRW had been the responding party in the adjudication in which the defendant DDD had been seeking payment of £3.3m pursuant to clause 8.7 of a JCT 2011 Design and Build Contract for WRW to design and build nine dwellings on a site in Twickenham. This was the third adjudication between the parties in the second of which it had been decided that the contract was validly terminated by the DDD in mid-2018. In the third adjudication, the adjudicator had to decide what was due on DDD’s claim pursuant to clause 8.7 for the post termination final account. He arrived at a negative value in the sum of –£568,597.32. WRW now contended that it was due this sum either as awarded by the Adjudicator or as a necessary consequence of the award. DDD opposed the application on two grounds: first that the adjudicator had made no such award nor was he empowered to do so; or that the doctrine of ‘merger’ applied. If judgment was granted, DDD asked for a stay of execution. The court reminded itself that it was for WRW to demonstrate there was no reasonably arguable defence to the claim.

The court did accept that the adjudicator had not given any, or any adequate, reasons, for his decision on the point, but they did not consider such failure to be material. On an objective and reasonable understanding of the sub-contract/joint venture point, it could only have affected the valuations on two issues (worth under £15k, the total amount in dispute being over £1m). Further, MWH’s argument that the companies were sub-contractors was so lacking in substance or evidence that it could have had no material impact. If contrary to that finding, the failure had been material, the court would have severed the affected part of the decision and enforced the remainder endorsing the flexible and pragmatic approach adopted in another recent Scottish case.[8]

Comment

It is usually implicit in deciding where the money goes and how much, that the adjudicator must have considered every defence. Still, adjudicators are well advised to deal explicitly, however briefly, with every defence put before them. [8] Dickie & Moore Ltd v McLeish and others (No 2) [2019] CSOH 87; upheld on appeal on severance [2020] CSIH 38 [9] Datblygau (pronounced dad’blug’uy) means ‘developers’

The Notice of Adjudication under the heading "Claim and Relief" at Paragraphs 19 and 20 stated: " 19. DDD [the Defendant] is entitled to and claims payment from WRW [the Claimant] of the sum of £3,345,790.40 (or such other sum as the Adjudicator shall determine is owed by WRW to DDD) pursuant to Clause 8.7 and/or as damages for breach of contract. 20. DDD invites the Adjudicator to determine the sums due and payable by WRW to DDD and to order payment of such sum by WRW to DDD within 7 days of his/her decision (or such other period as he/she shall determine)." Clause 8.7 of the Contract involved the carrying out of a valuation exercise pursuant to Clauses 8.7.4 and 8.7.5.

In the (revised) Award under the heading "Final Assessment of the Claim" the adjudicator had said: "I DECIDE AND FIND that my assessment of the total value of the account due to [sic] Clause 4.7.4.1 is an amount due as a debt from DDD to WRW as is permitted by Clause 8.7.5 in the sum of £568,597.32." That finding was in accord with the Contract's clear effect i.e. that whatever sum was found due under clause 4.7.4.1 to either the Contractor or Employer was due to that party as a debt.

WRW’s Particulars of Claim included the following relief:

"An order that DDD pay to WRW £568,597.32 (plus the applicable VAT) in accordance with the Decision or the revised Decision or as a debt; alternatively judgment for damages in the same sum." It was agreed that the Adjudicator had jurisdiction to value the post-termination final account, but no jurisdiction to award a payment to WRW. The parties agreed that the sole issue which the Court had to decide was whether in the light of a binding valuation exercise by the Adjudicator, WRW was entitled to be paid the sum claimed in accordance with that valuation. DDD submitted that the Court could not order payment on the basis of the Award because, without a valid order for payment from an Adjudicator, payment now would involve the Court making a final determination on the merits of the post- termination valuation account which would bar any attempt to reclaim overpayments in subsequent litigation.

In its Response at Paragraph 33 WRW said:

"The post- determination final account in accordance with Clause 8.7.4 of the Contract leads to a position in which DDD is indebted to WRW. Whilst WRW accept that the Adjudicator has no jurisdiction to order payment to be made to WRW, the Adjudicator has been asked by DDD to value the post-termination final account. It is respectfully submitted that the Adjudicator should find that the proper value of the post- termination final account is as set out above. Put another way, the Adjudicator should conclude that the sum due and payable by WRW to DDD is – [minus] £695,035.63." proper valuation of the It was accepted by WRW both in the adjudication and in court, that the Adjudicator did not have jurisdiction to order a payment of money from DDD to WRW. What was being said by WRW was that the sum claimed was due as a result of the adjudicator’s valuation and finding.

The court found there was no bar on the basis of the authorities cited to the Court enforcing a temporarily binding valuation in an adjudication award by making an order for payment of the monies due as a result of that valuation. Indeed, it would be contrary to principle and established authority for the Court to effectively force a party who had the benefit of an award in its favour to have to commence a further adjudication (to which there was no defence) for the purpose of obtaining an order for payment before returning to the Court if necessary, for further enforcement proceedings. DDD’s second line of defence was based on the doctrine of merger: that if the court gave judgment on a cause of action, it was extinguished such that DDD was prevented from bringing a second set of proceedings for a final determination of the post termination account. The flaw with that contention was that an adjudicator's award was not a ‘judicial decision’ and therefore the doctrine did not apply. In any case it only had temporary effect until the matter was finally determined. Summary judgment on the award was not such final determination. The right to seek such a final determination did not merge with summary judgment on the award. It was not lost. Any sums paid on foot of that valuation were only paid on a temporarily binding basis so as to preserve cash flow. It followed that there was no reasonably arguable defence to the claim for payment of the sum of £568,597.32 and summary judgment was granted.

The court looked the judgment of Lord Mance in Aspect [10] where it was said:

"By providing that the decision of an adjudicator is binding and that the parties shall 'comply with it', Paragraph 23(2) of the Scheme makes the decision enforceable for the time being. It is enforceable by action founded on the contractual obligation to comply with the decision combined, in a normal case, with an application for summary judgment. The limitation period for enforcement will be 6 years from the adjudicator's decision. But the decision is only binding and the obligation to comply with it only lasts 'until the dispute is finally determined' in one of the ways identified.” DDD submitted that before a Court could order payment of a money sum due to WRW, there needed to be a fourth adjudication to give effect to the valuation of the post- termination final account reached in the third adjudication.

They relied on Harrington [11] at Paragraphs 40 and 41 and Bresco [12] at Paragraph 44.

The court accepted based on these authorities that the Adjudicator did not have jurisdiction to award a monetary sum to WRW as responding party to the adjudication. But that was not the relevant issue, nor one that arose in those cases. The issue before the court was whether on the basis of a valid, binding valuation of the post-termination account, a court's enforcement of that valid award could include an order for payment of the sum due as a consequence, or not.

[10] Aspect Contracts v. Higgins Construction [2015] UKSC 38 [11] P C Harrington Contractors v. Multiplex Construction (UK) [2007] EWHC 2833 (TCC) [12] Bresco Electrical Services v. Michael J Lonsdale (Electrical) [2020] UKSC 25

As to stay, DDD contended that there was a real risk of future inability to repay if and when proceedings were commenced by them to finally determine what sum was due on the final account. The relevant guidelines were to be found in Wimbledon Construction Co (2000) v. Vago [13]. After considering the evidence the court concluded there was no evidence to demonstrate that WRW was in other than a relatively healthy financial position and, more importantly, there was no evidence to demonstrate any real risk that monies would not be repaid if and when a Court so ordered.

3) Payment Terms - Clarity of: Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC) Cockerill J Rochford brought a part 8 claim against Kilhan, in respect of Interim Payment Application 9, “IPA9”, which Rochford disputed was ever properly due and owing to Kilhan. The claim arose out of a bespoke subcontract under which Kilhan was engaged to construct a reinforced concrete frame for Richmond upon Thames College. Kilhan brought adjudication proceedings for payment of IPA9 for just shy of £1.4m covering the period ending 30 April 2019. Rochford responded with a payment notice for £1.2m. The following issues also arose: - Whether the payment provisions in the subcontract complied with the Act? - Was the application for IPA9, a valid application for payment, and / or a valid default payment notice? - Was Rochford's payment notice valid: i.e. was it issued in time and did it specify how the sum sought was calculated? The adjudicator concluded that the due date for payment of IPA9 was 20 May 2019, being the date on which the notice was served, and that the final date for payment was thirty days from that due date, being 19 June 2019. He concluded that Rochford had neither served a Payment Notice within five days of the due date nor a Pay Less Notice no less than seven days prior to the final date for payment. On that basis, the adjudicator found that the sum claimed was owing in default.

Comment

This is an important case. The consequences for the referring party were no doubt unexpected in terms of the valuation and the order for payment on enforcement. Would it be possible to prevent a similar result by careful drafting of the referral to limit the issues to be decided and/or the relief sought? Not in light of Bresco. A responding party can run any defence that is available to it including setting off a cross claim.

[13] [2005] EWHC 1086 at Paragraph 26; and see Broseley London v. Prime Asset Management [2020] EWHC 944 (TCC) at Paragraphs 23

In its absence they did not intend an impractical and unworkable solution and the result was to leave the date for submission of the claim (for payment) at large. The words "end of the month" were best seen in context as pertaining to the period for the application rather than as a condition precedent to the entitlement to make a claim for the period. This was not a “throwing‐out” of the parties' agreement, but an interpretation of it, which balanced respect for their words with contractual certainty and fairness. What then was missing? It was common ground that the parties had not stated a date when payment became due. Therefore it was impossible to know the final date for payment. Under paragraph 4 of the Scheme payment became due on the later of (1) The expiry of seven days from the “relevant period”, or (2) The making of a claim by the other paying party. On the basis, as found, that Kilhan was not pegged to the final day of the month for making the application, it followed that this regime came into effect, and that the due date in this case was, as the adjudicator found, 20 May 2019, the date on which the claim was issued. The final date for payment. On the facts of the case, pegging the final date to service of an invoice, which was itself pegged to a payment certificate, was simply impractical. The best way of mending the misfire caused by the parties' incomplete drafting of the contractual documents, was to have regard to the Scheme. Had the court had to decide the point on the law, it would “with some diffidence” have accepted that section 110 required a final date

Rochford initially refused to pay and Kilhan brought part 7 proceedings to enforce the award. Rochford paid before that application was heard and then issued a part 8 application to determine the above issues. The court confirmed as Rochford contended, both from the wording of the Act, and from the authorities, that a piecemeal incorporation of the Scheme's provisions was possible to the extent necessary to achieve compliance with the Act[14]. The Act contains certain minimum provisions as to payment which every contract must contain. Rochford’s complaint about the adjudication, was that adjudicator did not, but the court should, give effect to the express terms of the subcontract requiring Kilhan to issue its Interim Payment Applications on the last day of each month; and that the final date for payment was to be fixed by reference to Kilhan's service of its invoice.

The subcontract said:

“S/C payment cert must be issued with invoice” . But there was no separate provision for issuing an invoice.

It also said:

“payment terms thirty days from invoice as per attached payment schedule” and “valuation monthly as per attached payment schedule end of month” .But no payment schedule was produced. The court concluded that parties intended claims, invoices and payment certificates to be submitted as per the payment schedule.

[14] Coulson LJ in Bennett (Construction) Ltd v CMC MBS Limited [2019] EWCA Civ 1515

the contractual payment period and payless or payment notices given on the basis of a longer contract period might prove to be out of time. As always, clarity of payment terms is essential. It is surprising how often terms that are meant to require the submission of an invoice, misfire. The Act refers to a payment application and where the due date is fixed by an event, such as the requirement for an invoice, this must be clearly spelt out and made a condition precedent to payment if that is what is intended. More obviously, where payment applications are to be made by reference to a payment schedule, such a schedule must be included, with provision as to what is to happen if the contract overruns the last scheduled date. 4) Stay of Action Pending Payment of Award: Donald Insall Associates Ltd v Kew Holdings Ltd [2020] EWHC 1862 (TCC) judgment 15 July 2020 Kew was a SPV registered in the Cayman Islands. Its only asset in the UK was a property that it intended to convert and refurbish. It retained DIA to provide architectural services in connection with the project. In 2018 DIA obtained an adjudicator’s award for unpaid fees of just over £200,000. Kew failed to pay. In February 2019 DIA obtained summary judgment for the amount awarded together with interest, the adjudicator’s fees and costs. The judgment remained unsatisfied despite DIA obtaining a charging order over the property, made final in May 2019. By March 2020, proceedings for an order for sale were ongoing when Kew commenced the current proceedings against DIA, claiming damages of £2m for professional negligence in respect of the services provided by DIA.

for payment provision to fix a time period, albeit that that might itself depend on an event to fix the due date, noting the distinction between subparagraph (1A), which allows an adequate mechanism for the determining of the due date, and subparagraph (1B), which refers to "how long a period is to be between the date on which a sum becomes due and a final date for payment". That suggested that while a due date could be fixed by reference to, say, an invoice or a notice, the final date had to be pegged to the due date, and be a set period of time, and not an event or a mechanism. That also made sense given that it would be important for the payer to be exactly certain how much time it had in which to serve a payless notice. The Part 8 application failed.

Comment

This case may have significant implications. Even where the due date for payment can be triggered by an event, such as the time of the making of a payment application, the court decided that the final date for payment must be calculated from the due date and not the happening of an event. This interpretation of s 110 of the Act would mean that the final date for payment may not be linked to an event that is moveable, such as the submission of an invoice. The outcome was determined by the finding that the payment notice was out of time, so that the conclusion about the final date for payment was obiter and “reached with some diffidence”. It may be that another court would come to a different conclusion. In the meantime, there is a risk for payers whose contracts fix the final date for payment by reference to the timing of the submission of an invoice or similar moveable event since the 17 day period for payment under the Scheme will often be shorter than

"..The commencement of these proceedings without honouring the adjudication award and the judgment, in flagrant disregard of the "pay now, argue later" regime of the HGCRA, amounts to unreasonable and oppressive behaviour.” However, the court accepted Kew’s submission that a strike out would be too draconian a sanction and that a stay of proceedings, unless and until the outstanding sum was paid, was the appropriate remedy and it so ordered. Kew was also ordered to £600,000 into court as security for DIA’s costs in the proceedings pursuant to CPR 25.12.

DIA made an application to strike out the proceedings unless Kew made payment within 7 days, or in the alternative for an order that the proceedings be stayed until payment was made. They also applied for security for costs. Kew did not oppose the application for a stay, but they opposed the strike out and security for costs applications. S&T v Grove Developments[15] and M Davenport v Greer[16] on the basis of which it was clear that Kew would not have been entitled to start a further adjudication in respect of its claim for damages for negligence, without paying the award, nor could it rely on any subsequent ‘true value’ adjudication as a defence to the enforcement of the award. But here was a different situation, as the award had already been enforced by way of summary judgment. The court referred to There was nothing in the Act or the authorities that would render the current proceedings unlawful or an abuse of process. The Act expressly contemplated the commencement of legal proceedings to establish the parties’ rights and obligations by way of a final binding determination. That right was ‘more fundamental’ than the obligation to meet the award. There was nothing to suggest that the complaints over the services were disingenuous.

Comment

This decision is in line with S&T v Grove and M Davenport v Greer but it highlights a distinction between (a) the right to commence court (or arbitration) proceedings for a final determination of an issue determined by an adjudicator before satisfying the award; and (b) the right to bring a new adjudication by way of cross claim or for a true value. But the outcome is the same; until the award is paid the right to proceed to final determination, or, by the same token a cross claim, is almost certain to be prevented by a stay if not a strike out.

The ‘pay now argue later’ philosophy is preserved.

The court was satisfied that:

“….the claimant is in deliberate and persistent breach of the Order dated 5 February 2019. The Claimant's repeated promises to pay the outstanding sum indicate that it could satisfy the judgment but has chosen not to do so. ..

[15] [2018] EWCA Civ 2448 [16] [2019] EWHC 318 (TCC)

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