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Adjudication Matters: May 2024

Welcome to the May 2024 edition of Adjudication Matters, where we discuss the key developments in adjudication and adjudication enforcement. Please contact Construction & Engineering Partner Carly Thorpe if you need any advice or assistance.

This month we discuss 4 recent cases which relate to the following topics:

  1. When will Part 8 Proceedings be appropriate? (Part 1);
  2. When will Part 8 Proceedings be appropriate? (Part 2);
  3. Success in a Part 8 Claim doesn’t always mean success in Part 7 enforcement proceedings; and
  4. The importance of termination provisions in contracts and challenging an adjudicator’s decision.

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1. When will Part 8 Proceedings be appropriate? (Part 1)

Factual Background

In TClarke Contracting Limited v Bell Build Limited [1] the Court refused to make a Part 8 declaration, and instead directed that the Claimant pursue a Part 7 claim to properly determine the matters in dispute.

TClarke Contracting Limited (“TClarke“) was engaged as main contractor in respect of the construction of a data centre at Greenwich Point, London (“the Property“). Bell Build Limited (“Bell“) were appointed as TClarke’s sub-contractor under a 2016 JCT Design & Build Subcontract (“the Sub-Contract“) in November 2021 to deliver the supply and installation of new sub and superstructures at the Property.

The parties fell into dispute as to whether TClarke had served a valid Pay Less Notice in response to Bell’s payment application nr. 18. This resulted in adjudication proceedings in which the adjudicator found in favour of Bell and determined that TClarke must pay Bell the value of the relevant application (£2,129,672.69 plus VAT). In reaching their decision, the adjudicator found that the Pay Less Notice submitted by TClarke was invalid.

TClarke refused to comply with the adjudicator’s decision, and initiated Part 8 proceedings in which it sought a binding declaration that the Pay Less Notice was valid. If successful, TClarke would have only been liable to make payment of the sums assessed as due to Bell in the Pay Less Notice, rather than the full sum applied for by Bell.

TClarke additionally argued that the adjudicator’s decision contained errors of law, and of fact – including whether the parties had agreed to vary the terms of the Sub-Contract in March 2023.

The Court’s Decision

The Court rejected TClarke’s claim on the basis that the dispute was “plainly inappropriate” for Part 8 proceedings. In particular, TClarke’s submissions required the Court to consider a relatively complex factual matrix, including the meaning of the relevant terms of the Sub-Contract, and whether those terms were in fact varied by the parties in March 2023. The Court pointed out that disputes involving disputed contract variations will ordinarily require witness evidence to resolve, and that TClarke’s claim should therefore proceed as a Part 7 claim.

Takeaway Points

This case serves as a reminder that Part 8 proceedings will only be appropriate for a narrow range of disputes which are unlikely to involve any substantial disputes of fact.

The Court emphasised that the Part 8 process will only be suitable where a party has “identified one or more precise legal questions that can be properly tried upon clearly identified agreed facts and which will be determinative of the current dispute between the parties.”

In this case, the Court took the view that the parties’ wider dispute – which included a number of complex issues requiring further evidence – could not be properly determined by means of the Part 8 declaration sought by TClarke.

Lastly, the Court reminded the parties that Part 8 proceedings are not an appropriate forum in which to appeal an adjudicator’s decision. Parties that disagree with an adjudicator’s decision should therefore usually comply with the relevant decision, and commence Part 7 proceedings or arbitration to finally determine the matters in dispute.

2. When will Part 8 Proceedings be appropriate? (Part 2)

In ISG Retail Limited v FK Construction Limited [2] the Court considered, and ultimately rejected a Claimant’s Part 8 claim, on the basis that the proceedings were likely to involve substantial disputes of fact. The Court determined that the dispute was therefore better suited to the Part 7 process.

Factual Background

ISG Retail Limited (“ISG“) was appointed main contractor in respect of the construction of six new industrial units (“the Works“) at Avonmouth, Bristol (“the Site“). FK Construction Limited (“FK“) was engaged as ISG’s roofing and cladding sub-contractor.

The Court described the parties as “serial litigants“, on the basis that as at the date of the hearing, the parties had already contested 12 prior adjudications, 8 sets of High Court proceedings, and 2 appeals to the Court of Appeal. The present hearing concerned FK’s Payment Application Nr 12 (“the Application“). FK had previously obtained an adjudicator’s decision valuing the Application at £3,736,679.72. The adjudicator also decided that FK were entitled to an extension of time (“EoT“) of 188 days and were additionally awarded prolongation costs of £198,000.

ISG commenced Part 8 proceedings in respect of the adjudicator’s award of EoT and prolongation costs to FK. In particular, ISG sought a declaration that FK were required to deliver particulars of delay to ISG as a condition precedent to any EoT entitlement. ISG sought additional declarations to the effect that FK had failed to comply with the alleged condition precedent, and therefore that the adjudicator’s EoT and prolongation costs awards were wrong and should not be enforced. FK raised the following counter-arguments:

  1. The contractual requirement to deliver particulars of delay to ISG was not in fact a condition precedent to EoT entitlement
  2. Regardless of the answer to point 1, FK had in fact complied with the contractual requirement to deliver particulars of delay to ISG.
  3. ISG should be estopped from relying on the strict contractual position regarding the conditions of FK’s right to claim EoT, as ISG had waived its entitlement to do so.

The Court’s Decision

In considering whether the relevant contractual provisions of the Sub-Contract constituted conditions precedent to EoT entitlement, the Court referred to the judgment of Mr Alexander Nissen KC (sitting as a Deputy Judge of the High Court) in Sleaford Building Services v Isoplus Piping Systems Ltd [2023] EWHC 969. In Sleaford, the Court expressed doubt as to whether allegations of breaches of conditions precedent could be decided without the determination of substantial disputes of fact. In this case, the Court accepted that there was regular communication between ISG and FK’s respective representatives at the Site, and that it was therefore possible that FK had delivered particulars of delay to ISG during an informal site meeting. This was a matter which would need to be determined by reference to factual evidence, including details of how the parties had previously dealt with delay substantiation and EoT entitlement.

Similarly, the Court noted a number of previous authorities which confirm that disputes involving arguments around waiver and estoppel will generally be unsuitable for Part 8 determination. This is because parties will usually need to adduce significant factual evidence in order to support any claim of waiver/estoppel, including details of how parties operated the relevant contractual provisions in practice. This type of factual evidence is highly likely to be contested by the party said to have waived its strict contractual rights, which will ordinarily make such claims unsuitable for Part 8.

Having regard to the above principles, the Court decided that the proceedings brought by ISG were highly likely to involve significant disputes of fact and were therefore unsuitable for Part 8. The Court invited the parties to consider whether the claim should continue under Part 7.

Takeaway Points

Similarly to the TClarke v Bell case described above, this judgment emphasises that Part 8 applications will generally be unsuccessful where the Court finds that substantial factual evidence is required to properly determine the relevant dispute.

In order for a Part 8 claim to succeed, the Claimant must show that the relevant issues are “relatively straightforward and the evidence self-contained”. In this case, despite the Claimant’s attempt to frame the dispute as a straightforward matter of contractual interpretation – i.e. whether the requirement for FK to deliver particulars of delay was a condition precedent to EoT entitlement – the Court found that it could not determine this question without reference to the relevant factual matrix regarding the operation of the contract by the parties in practice. This in turn led to further factual questions as to whether FK might have complied with the requirement to deliver particulars of delay to ISG, and/or whether ISG had waived the requirement for FK to provide such particulars.

The Court confirmed that such questions are unsuitable for determination under Part 8 and are best dealt with in Part 7 proceedings.

Parties should therefore be wary of assuming that disputes are suitable for Part 8 determination. Both TClarke v Bell and ISG v FK demonstrate that even disputes which appear relatively straightforward – including matters of contractual interpretation – can in fact require the Court to consider substantial factual evidence regarding the parties’ conduct and operation of the relevant contract. Where this is the case, a claim will be more suitable for determination under the Part 7 procedure.

3. Success in an initial Part 8 Claim doesn’t always mean success in subsequent enforcement proceedings

Morganstone Ltd v Birkemp Ltd [2024] EWHC 933 (TCC)

Morganstone v Birkemp [3] arose in respect of two linked claims relating to adjudication decision dated 23 February 2024 (“the Decision“).

The Adjudicator had decided that a total of £207,076 was due from Morganstone Limited (Morganstone) to Birkemp Limited (Birkemp) in respect of Birkemp’s interim payment application dated 31 August 2023 (“the August Application“).

Morganstone issued Part 8 proceedings claiming declarations (1) that Birkemp had no contractual right to make the August Application or any interim payment application after March 2023 and was therefore not entitled to be paid in respect of the August Application and (2) that, in the alternative the Decision was wrong in law and unenforceable.

Birkemp defended the Part 8 claim on the basis that, on the true construction of the parties’ contract, it had the right to make the August Application and had the right to make subsequent interim payment applications.

By a Part 7 claim issued shortly thereafter, Birkemp sought enforcement of the award in the Decision.

The Part 8 Claim

Morganstone was the main contractor for a housing development at a site in Swansea. In December 2021 it subcontracted various works to Birkemp for a contract sum of £4,466,544.30 under a formal sub-contract (“the Sub-Contract“).

Morganstone issued a number of documents to Birkemp by Dropbox, which included a post-tender review document, a monthly payment schedule and a draft sub-contract.

The draft sub-contract document was a three-page document comprising 19 clauses. Clause 18 provided:

“The Contractor and the Sub-Contractor respectively acknowledge that this Agreement forms the entire contract between the Contractor and the Sub-Contractor to the exclusion of any antecedent statement or representation, including but not limited to the Sub-Contractor’s quotation.”

Clause 10 of the draft sub-contract provided for payments under the Sub-Contract.

It was also apparent that the column headings in the monthly payment schedule corresponded to the stages in the payment cycle provided for in clause 10 of the draft sub-contract. However, although the headings corresponded to the payment stages, the timetable provided for in clause 10 was significantly different.

In November 2021, Birkemp raised a number of issues in relation to the payment date schedule. Morganstone later responded and confirmed that a new payment schedule would be issued and that they should work from the original payment schedule.

Work under the Sub-Contract commenced, and interim payments proceeded smoothly in accordance with the monthly payment schedule.

A further payment schedule was issued in March 2023 by Morganstone to account for the following year, to which there was a slight structural difference from the previous schedules (“the 2023 Payment Schedule“).

Birkemp later complained to Morganstone that the 2023 Payment Schedule was incorrect, to which Morganstone replied, maintaining that the dates were correct. Birkemp maintained its contention that the dates were consistently one week late.

On 31 August 2023 Birkemp issued the August Application, which was its 22nd interim payment application.

On 8 September, Morganstone issued a pay less notice against the August Application, making a number of deductions in respect of the amount claimed. However, it did so expressly without prejudice to its primary contention that Birkemp had no entitlement to apply for any interim payments.

Birkemp contested many of the deductions made by Morganstone as being “Inappropriate Deductions”. Their argument centred on Morganstone being estopped from denying Birkemp’s entitlement to continuing interim payments. This was because the initial email exchange contained express affirmation that a further schedule would be issued and where, after expiry of the 2022 payment schedule, Morganstone continued to make interim payments and did not before the parties’ relationship broke down contend that Birkemp’s right to continued interim payments was dependent on agreement to the new schedule.

The Court’s Decision

The Judge rejected both of Birkemp’s submissions and confirmed that the adjudicator took an erroneously restrictive view of his jurisdiction.

The adjudicator’s failure was deliberate rather than inadvertent, as he had specifically addressed the question as to whether the cross-claims could be raised in the adjudication and decided that these fell outside the scope of the adjudication.

The error was material, in that the cross-claims would, if upheld, have had a very significant effect on the overall result of the adjudication. Moreover, the error was brought about by Birkemp’s deliberate attempt to achieve a tactical advantage by confining the scope of the adjudication in such a manner as to exclude potentially relevant defences to the claim for payment.

It was therefore held that the Decision was unenforceable as the adjudicator had taken an unjustifiably narrow view of his jurisdiction, in breach of the principles of natural justice.

Takeaway Points

These proceedings highlight that an adjudicator is required to consider all relevant issues within the scope of the dispute referred to adjudication. A Responding Party has a right to raise any legitimate defence to the claim made against it.

4. The importance of termination provisions in contracts, and challenging an adjudicator’s decision

Shaylor Group Limited (in administration) v Valescure Property Limited (in liquidation) [2024] EWHC 750 (TCC)

Factual Background

Shaylor Group v Valescure [4] concerned a High Court claim for declarations that an adjudicator erred in calculating the amount due from the Defendant, Valescure to the Claimant, Shaylor Group upon the termination of a construction contract.

The Claim sought a declaration that the adjudicator ought to have found the amount due was £20,277,563.57 rather than £9,369,927; a difference of £10,907,636.57.

Shaylor Group argued that the adjudicator had miscalculated the amount due because he misinterpreted certain provisions dealing with sums payable on termination in circumstances where the works were incomplete.

Shaylor Group argued that it was entitled to the additional sums even though Valescure had entered into insolvency proceedings.

The factual background involved a building contract between Shaylor Group and Valescure for the construction of 157 apartments in Birmingham.

The contract was terminated before completion due to the Shaylor Group’s insolvency, which triggered a dispute over the final amount due. The adjudicator’s decision favoured Valescure, prompting Shaylor Group to initiate court proceedings to obtain declarations to correct the adjudicator’s decision.

The Court’s Decision

The Court found that the adjudicator had misinterpreted the relevant contract provisions relating to the calculation of sums payable upon termination.

The fact that Valescure had become insolvent was not relevant to establishing the sums due to the Shaylor Group upon termination.

The Judge considered the distinction between value and price within the contract’s termination regime. It was held that the Valescure was not liable for the £20.3 million claimed by the Shaylor Group (primarily due to the Valescure’s property liquidation, leaving it lacking the necessary funds for a defence).

In light of these circumstances, the Judge dismissed Valescure’s claim for declaratory relief, citing concerns that granting such declarations could “bestow an unlawful windfall on the claimant“.

Takeaway Points

This case underscores the complexities of construction contract terminations, and the importance of accurate contractual interpretation (especially surrounding termination sums).

The judgment also highlights the potential benefits of raising challenges to an adjudication decision where the adjudicator has erred in their interpretation of the applicable contract.

How we can help

If you have any queries in respect of this bulletin or would like to know more about adjudication please contact Carly Thorpe, Seumas Cram, and Jonathan Coser.

Explore our Adjudication Basics video series here.

[1] TClarke Contracting Limited -and- Bell Build Limited [2024] EWHC 992 (TCC)

[2] ISG Retail Limited -and- FK Construction Limited [2024] EWHC 878 (TCC)

[3] Morganstone Ltd v Birkemp Ltd [2024] EWHC 933 (TCC)

[4] Shaylor Group Limited (in administration) v Valescure Property Limited (in liquidation) [2024] EWHC 750 (TCC)

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