Construction Adjudication Cases: Part 7 of 2020

Construction Adjudication Cases: Part 7 of 2020

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

1996: Part 7 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. Enforcement - serious error of law - post-award agreement leading to estoppel.. Flexidig v MVM Contractors (Europe) Ltd [2019] NIQB 117 judgment 2 December 2019

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3. Jurisdiction – contractual basis of adjudicator’s appointment....................................... OD Developments v Oak Dry Lining Ltd [2020] EWHC 2854 (TCC)

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4. Payment application - validity.... ...................................................................................................... RGB Plastering Ltd v TAWE Drylining and Plastering Ltd [2020] EWHC 3028 (TCC)

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5. Stay of execution - manifest injustice....................................................................................... JRT Developments Ltd v TW Dixon (Developments) Ltd HT-2020-BMH-000010

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6. Stay of execution - error of fact or law..................................................................................... QMAC Construction Limited v Northern Ireland Housing Executive [2020] NIQB 25

Introduction The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 7 of 2020. Kenneth T. Salmon, Consultant Solicitor, Slater Heelis LLP. In this part we consider an unusual case from Northern Ireland where enforcement was refused in light of a serious error of law that could, exceptionally, be dealt with upon enforcement, and because there was a post-award agreement giving rise to estoppel. Then we have an English decision, in which the award could not be enforced due to a lack of jurisdiction. We have a case concerning the validity of a payment application. Although not an enforcement case, it followed a series of adjudications and is instructive. In another English case, judgment was granted with a stay of execution to prevent a manifest injustice. That case had pre-echoes in an earlier case from Northern Ireland where a partial stay was granted also to avoid injustice.

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. Northern Ireland has its own scheme: the Scheme for Construction Contracts in Northern Ireland 1999 as amended by the Scheme for Construction Contracts in Northern Ireland (Amendment) Regulations (Northern Ireland) 2012. The Northern Ireland Scheme is broadly similar to that in force in England and Wales. 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, or Northern Ireland, as the context 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) Enforcement - serious error of law - post-award agreement leading to estoppel: Flexidig v MVM Contractors (Europe) Ltd [2019] NIQB 117 judgment 2 December 2019 In this unusual case, Horner J had to consider an application for summary judgment by the defendant, M&M, to enforce the award of an adjudicator in its favour against Flexidig the plaintiff for the sum of £462,456.20 plus fees and VAT. The dispute referred to adjudication arose from a sub-contract between Flexidig as sub- contractor and M&M as main contractor for excavation and reinstatement works for the installation of ducts in footpaths, verges and carriageways for Virgin Media in Louth and for which Virgin Media had employed M&M as main contractor. M&M complained that the works were defective and claimed the estimated costs of future reinstatement and the adjudicator accepted that M&Wwas entitled to claim those costs. Post adjudication award, the parties entered into a standstill in order to negotiate a commercial settlement. It was agreed that Flexidig would repair the defects in their original works and they did in fact carry out extensive repairs to a substantial proportion of the defects and there was evidence that this was accepted by Virgin Media and Lincolnshire County Council as the highway authority. In answer to the claim for summary judgment Flexidig relied on the standstill as giving rise to an estoppel by convention.

It also contended that the adjudicator had made an egregious error in awarding the costs of repair not incurred when the subcontract provided that either Flexidig should make good the defective works themselves or if they failed to do then M&M could employ and pay others and recover the cost incurred. It did not provide for the recovery of estimated costs not incurred. Relying on Caledonian Modular Ltd v City Developments Ltd[6] the judge, Horner J, held this was a short self-contained point which could be decided without the need for evidence. In Caledonian Modular Ltd Coulson J had recognised the importance of enforcing awards and that the court should not be asked to deal with the very issue ruled upon by the adjudicator, but went to say: “That is, of course, the general rule and it will apply in 99 cases out of 100. But there is an exception. If the case is a short and self-contained point, which requires no oral evidence or any other elaboration than that which is capable of being provided during a relatively short interlocutory hearing, then the defendant may be entitled to have the point decided by way of a claim for a declaration.” The short answer in this case was that the adjudicator had obviously erred. He was not entitled to award costs not incurred. If the court was wrong in this conclusion there was the estoppel. M&M had an award which it did not seek to enforce. Rather it attempted to negotiate a settlement under a standstill agreement which then broke down. Having done so M&M was estopped from relying on the award. There was residual sum due to M&M of some £12,679 which the judge ordered Flexidig to pay into court. It would have been unconscionable for M&M to have more.

[6] [2015] EWHC 1855 (TCC) at paragraph [12]

2) Jurisdiction – contractual basis of adjudicator’s appointment: OD Developments v Oak Dry Lining Ltd [2020] EWHC 2854 (TCC) HHJ Waksman was faced with an application for a part 8 declaration by OD that it was entitled to payment of £625,000 being the notified sum in its Final Payment Notice, which it said had become conclusive pursuant to the terms of the subcontract between the parties. The defendant Oak who had been successful in an adjudication, sought enforcement of the decision in its favour for £430,000 and OD opposed that application on the basis that the adjudicator lacked jurisdiction to make the award. OD had engaged Oak to carry out dry lining works under a letter of intent (LOI) which stated that the parties intended to enter into a JCT D&B subcontract 2011 (‘the JCT terms’). The LOI provided for adjudication and that any adjudicator should be appointed by the RICS. The works were completed but no JCT terms were ever signed. There were issues over payment with both OD and Oak serving payment notices and a series of counter notices being either payless or payment notices purportedly in accordance with the JCT terms culminating in a Final Payment Notice from OD for £625,000. If the JCT terms applied OD contended that the notice would be conclusive of the sum due to it.

Having reached a settlement that required Flexidig to carry out what were agreed works, it would have been both unfair and unjust to allow M&M once those works had been completed to turn the clock back to enforce the earlier adjudication award. In these circumstances, if judgment has been entered, for the sum found by the adjudicator, the court would have stayed the judgment because fairness and justice demanded it[7]. There was cogent evidence that M&M was in a parlous financial state and unlikely to be able to afford to repay the sum of £12,679 if later required to do so; thus the order for payment into court and not to M&M.

[7] See Equitix ESC CHP (Wrexham) Limited v Bester Generacion UK Limited [2018] EWHC 177 (TCC) at paragraph [77]:

Oak pursued its claim for payment of £430,000 at adjudication. OD raised two jurisdictional challenges. First, OD said the adjudicator’s appointment was invalid because it was not made in accordance with the adjudication provision of the JCT terms which were incorporated in the LOI albeit the method of appointment (by RICS) was correct. Second OD said its Final Payment Notice was itself conclusive at the outset and, therefore, there was no true dispute. The adjudicator dismissed the objections. He went onto find that even though no subcontract had been executed, the parties had contracted on the basis of the JCT terms and those terms were applicable to the claim for payment. Applying the JCT terms of payment he awarded Oak £430,000.

Jurisdiction

The court was asked by OD to look at the same two challenges it has raised before the adjudicator. The court looked at the notice of adjudication, and the way the adjudicator had been appointed. Whilst the notice of adjudication did not refer to the LOI, Oak had served its notice and appointed the adjudicator in accordance with the procedures in the LOI. This was not a case like Twintec[8] where the adjudicator was appointed under a contractual provision that did not exist. Here the appointment was consistent with and gave effect to the provision in the LOI. OD’s position crossed into a formalisation that did not sit well with the adjudication regime and thus their first objection failed. On OD’s second objection, the fact that its Final Payment Notice might have had conclusive effect had the JCT terms applied, did not deprive the adjudicator of jurisdiction. The contention as to conclusive effect raised an evidential not a jurisdictional bar – Oak would not be able to adduce any contrary evidence in relation to relevant matters. In any event Oak’s position had been that the Notice was invalid and that the JCT terms did not actually apply. It would be absurd if OD’s mere claim it was entitled to rely on the Final Payment Notice was sufficient to deprive the adjudicator of jurisdiction.

OD came to court for a declaration under Part 8 CPR that:

the LOI had incorporated the JCT terms from the start, its Final Payment Notice was valid per the JCT terms because Oak had failed to challenge the Final Payment Notice within 10 days as provided for by the JCT terms it had become conclusive as to the sum due. Oak then issued an application for summary judgment saying the adjudicator had jurisdiction on the basis of the adjudication provisions of the LOI. They argued that the JCT terms were not incorporated, so that the OD’s Final Payment Notice was of no effect and it was Oak’s payment notice which governed the right to payment. OD countered that if Oak was right and the JCT terms did not apply, the result was that the adjudicator had no jurisdiction because he had evaluated Oak’s claim on the premise that those terms did apply.

[8] Twintec v Volkerfitzpatrick Lyd [2014] EWHC10 (TCC)

The part 8 claims

He had therefore reached his decision on an incorrect contractual basis. Oak tried to argue that this made no difference: the adjudicator had evaluated the works in the same way he would have done if the JCT terms had not applied and he had adopted a fair and reasonable approach to evaluation. That it was wrong that the whole valuation process should have to be gone through again in another adjudication that would arrive at the same evaluation. The court had some sympathy with this argument but the court could not rework the decision to fit with a fair and reasonable basis, nor sever those findings that did not fit such an analysis. The adjudicator had proceeded on a contractual basis that did not apply, he had no jurisdiction and his decision could not be enforced.

OD claimed the LOI incorporated the JCT terms at the outset. Oak argued the contrary was the case; and that even if the JCT terms had been incorporated, OD’s Final Payment Notice was invalid as the conclusivity provisions in clause 1.8 of the JCT terms conflicted with clause 4.12 of the JCT terms and s.111 of the Act which left Oak’s own default payment notice to take effect. The court decided that the LOI had not incorporated the JCT terms at the outset. Either the JCT terms were adopted from the start or the LOI terms applied on their own. There was no third way – i.e. that the JCT terms had been adopted pending the execution of the contemplated JCT subcontract. This might have been the case if there was an estoppel by convention but OD did not put its case on that basis. The terms of the LOI applied and the JCT terms were not incorporated. The court declined to make any alternative findings on the hypothesis that the JCT terms had applied. The question whether the conclusive effect of clause 1.8 was inconsistent with clause 4.12 and s. 111 of the Act was a point of some importance that should be decided in a case that turned upon it.

Comment

This was an unfortunate outcome in several respects. It prompted the judge to exhort the parties to look at some form of ADR rather than continue further legal proceedings. There are lessons here for the future. The dangers of proceedings on a LOI without putting the intended contract in place. Ensuring the notice of adjudication and appointment follow the correct contractual basis for the claim. Making sure that a payment notice that might become conclusive is challenged in time.

Where did that leave the adjudication decision?

The adjudicator made his decision on the basis that the JCT terms were incorporated in the LOI, whereas the effect of the court’s ruling on the Part 8 claim was that the LOI did not incorporate the JCT terms.

to be made by certain dates and if late were to be administered as part of the following month’s payment; These proceedings were brought to finally determine the issue of the validity of that payment application. The subcontract provided (amongst other things) that payment applications by RGB were: Tawe served another notice of adjudication alleging that the application was valid. RGB asserted that that was substantially the same dispute as was dealt with in the first adjudication. In the event the third adjudicator did not decline jurisdiction and in his award dated 4 July 2020 decided that RGB should pay the amount set out in the application less sums received. 3) Payment application - validity: RGB Plastering Ltd v TAWE Drylining and Plastering Ltd [2020] EWHC 3028 (TCC) This was a part 8 application by TAWE for a declaration that an interim payment application by RGB was not in accordance with the subcontract and was therefore invalid. There had been three adjudication between the parties. In the first of these the validity of the application under the subcontract was in issue and in the award dated 23 December 2019 the adjudicator found that in accordance with the terms of the subcontract RGB was not required to consider the application. Neither party challenged that finding. Then, in June 2020,

The application in question was not only late, which if otherwise valid would simply have delayed payment by a month, but it did not value the works to either the current valuation date (3 May) or the following valuation date (2 June 2019). It was not sent to the email address set out in the payment schedule. In these respects, the application did not comply with the requirements of the subcontract. It was not clear or unambiguous so that the parties could know what to do about it or when[9].

In the judgment of the court it was invalid.

Previous payment applications which suffered from similar defects had been valued by TAWE and paid. This did not assist RGB as they were refused permission to rely on evidence filed 4 weeks late, and therefore to be able to raise a plea of waiver or estoppel. In any event, even if the evidence had been admitted, such a plea was so weak as to be unlikely to succeed.

to value works as at particular stated dates

to be sent by email to a stated address

[9] Following Caledonian Modular Ltd v Mar City Developments Ltd [2015] EWHC 1855; Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC); and Jawaby Property Investments Ltd v Interiors Group Ltd and Black [2016] EWHC 557 (TCC)

4) Stay of execution - manifest injustice: JRT Developments Ltd v TW Dixon (Developments) Ltd HT-2020-BMH-000010 The defendant, TW Dixon (TWD), engaged the claimant JRT Developments (JRT), to design and build a residential development in Shropshire. Following a break down in relations, JRT purported to terminate the contract in June 2019. The parties corresponded over financial matters, and in November 2019 JRT issued what it claimed was a payment notice in default of any payment notice from TWD. The notice claimed JRT was entitled to a sum just shy of £1m. TWD did not serve a pay less notice nor make payment. JRT referred the dispute over payment to adjudication. The adjudicator found TWD was liable for the whole of the sum claimed by JRT who now issued proceedings to enforce the decision and TWD issued separate proceedings under Part 7 CPR to determine the true value of the sum (if any) due to JRT. Before the court TWD accepted that JRT was entitled to summary judgment, but sought a stay of execution pursuant to CPR 83.7(4) on the basis of the following ‘special circumstances’. First, in accordance with the criteria laid down in Wimbeldon Construction Company 2000 v Derek Vago[10] that a stay should be granted on the grounds of JRT’s probable inability to repay the judgment sum if called upon to do so after a trial of the true value issue.

Second that there would be “manifest injustice” to TWD based not just on probable inability to repay, but having regard to all the circumstances of the case, citing Galliford Try Building Ltd v Estura Ltd[11]. In reply, JRT said that the test Wimbledon was not met, and that, for the court to find that there would be manifest injustice, the circumstances would have to be exceptional and the court would have to consider what sum TWD was able to pay. The court considered detailed evidence of JRT’s financial position, its accounts, balance sheets and bank statements and had regard to its other liabilities. Although JRT could not be said to be insolvent the court concluded it was unlikely to be able to repay the judgment sum if later ordered to do so after a trial of the part 7 claim. Applying the other part of the Wimbledon test, the financial position of JRT was substantially different than it had been when the contract was entered into and posed a higher risk; and the present financial position was not due wholly or in significant part to failure to pay the sum awarded in the adjudication.

On the question of manifest injustice, the court found the facts of the case to be very unusual.

It took into account the following facts and matters as relevant circumstances, listed overleaf.

[10] [2005] EWHC 1086 (TCC); and Broseley London Ltd v Prime Asset Management Ltd [2020] EWHC 944 (TCC) [11] [2015] EWHC 412 (TCC)

The unusual financial arrangements for the project. The judge said it appeared to be more in the nature of a joint venture than an arms’ length employer – contractor relationship. Directors of the two companies were uncle and nephew with another nephew acting as building manager. In addition the parties did not follow the payment terms of the building contract; their dealings were described as “informal and co-operative”. No contract administrator was appointed. The payment notice relied was the third of three notices and was thought by the recipient to be part of a continuing dialogue to resolve the differences of opinion as to value by agreement. Even if TWD had brought the problem on itself by failing to give a pay less notice, that did not mean the court must refuse a stay. TWD was a special purpose vehicle formed for the purpose of the development and unsurprisingly could not satisfy any part of the judgment without becoming insolvent which would deprive it of the opportunity of seeking redress through its claim The manner in which the award had been sought with the strategic objective of going to adjudication That only after termination had JRT demanded payment at the level then sought and which exceeded the value of the development Looking at the payment notice the court felt that substantial elements were overstated or not due at the date of the notice

Judgment was entered but with a stay of execution pending the outcome of the part 7 proceedings.

Comment

The facts of this case were most unusual. The court can and will look at all the surrounding circumstances where there is a question of manifest injustice. It will also consider, the financial effect on the paying party as well as that of the payer. It is clearly possible to invite the court to take a hard look at the facts behind a ‘smash and grab’ adjudication, especially one that looks to have been ‘engineered’. In this case it was also legitimate to look at the nature and strength of the items in the payment notice which may have not been capable of full review in the adjudication.

5) Stay of execution - error of fact or law: QMAC Construction Limited v Northern Ireland Housing Executive [2020] NIQB 25 The plaintiff QMAC entered into a series of contracts with the defendant pursuant to a framework agreement for improvements to its older housing stock. In respect of two such contracts called the Springfield Contract and the Ardoyne Contract, the plaintiff made applications for interim payment for work done, and contractual interest at an extremely high rate, both of which were disputed and not paid. In neither case did the defendant serve a Pay Less Notice and the sums claimed on the applications became in each the notified sum. The plaintiff commenced adjudication proceedings under both contracts for the notified sums and interest at the rate of 0.5% per week of delay. On the Springfield Contract the adjudicator awarded the plaintiff the sum of £143,454.71 plus VAT together with £121,501.95 interest as claimed and the Adjudicator’s fees of £4,176.90 plus VAT. On the Ardoyne contract the same adjudicator awarded the plaintiff the sum of £65,995.94 plus VAT together with £54,116.67 interest as claimed and the Adjudicator’s fees in the sum of £3,685.50 plus VAT. Each contract provided for interest to be paid at the rate of 0.16% per week (not 0.5% per week) for delayed payment. The plaintiff’s application for summary judgment to enforce the adjudicator’s two awards. defendant resisted the

adjudication was not a final determination of rights decisions were to be enforced even if they resulted from error of procedure, fact or law decisions were only not to be enforced if they involved an excess of jurisdiction or serious breach of the rules of natural justice mistakes by an adjudicator were to be viewed with a degree of scepticism consistent with the purposes of the Act. The defendant concentrated its fire on alleging that the interest award was manifestly incorrect and argued that if the judgment sums were paid over, then it would be difficult for the plaintiff to repay the defendant should the defendant ultimately succeed in the forthcoming true value adjudications. The court applied the well-known principles summarised by Jackson J (as he then was) in Carillion Construction v Devonport Royal Dock Yard Limited [12] that is: In the adjudication and before the court, the defendant denied any liability to pay the sums under either Contract. It pointed out it was “finalising two ‘true value’ adjudications” which would determine that the defendant was owed money by the plaintiff. The defendant further described the plaintiff’s adjudications as ‘smash and grab’ and complained that the adjudicator had made an obvious error in his calculation of interest and/or that the award of interest at such a high rate constituted a penalty. It was however significant that in neither case did the defendant dispute jurisdiction or argue that there was a breach of the rules of natural justice. More importantly, the defendant had not served a Pay Less Notice in respect of either contract.

[12] [2005] PLR 310, at paragraph [80]

In respect of a stay of execution, the principles to be applied were those set down inWimbledon[13]. The court found that the adjudicator had made a serious error in respect of the awards of interest. He had applied a rate of 0.5% per week instead of the rate of 0.16% per week provide for by the contract. The rate was not a penal rate however since it was what the parties had agreed. The awards had to be enforced despite this error. The Judge said: “The justice of this case demands that in these particular circumstances the court takes a broad brush approach.” He ordered that judgment be entered for the full amount of each award including interest. On the balance of the expert evidence although the plaintiff was not insolvent, its financial position was such that it was unlikely to be able to repay the full amount of the judgment together with the very substantial interest awards, if required to do so. The court ordered a stay of execution of the judgment sums for 14 days, after which there was to be a general stay as to the sum of £120,000, split £80,000 to the Springfield Contract and £40,000 to the Ardoyne Contract, until further order.

Comment

It was perhaps inevitable that judgment would be entered for the full amount but the court was able to ameliorate the injustice that would otherwise have resulted from such a massive over payment of interest by granting a partial stay. This case was decided in April 2020 well before JRT, yet we see pre-echoes of the manifest injustice question considered in JRT. It is also instructive to note that English case law was followed and fully applied.

[13] Wimbledon Construction Co 2000 Limited v Derek Vago (see footnote 8 above)

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