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Adjudication Matters – July 2016

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22/07/2016

Welcome to the July edition of Adjudication Matters, your comprehensive review of recent adjudication enforcement decisions.

  1. Does a contractor have a right to further interim payments after the last date in a payment schedule has passed?
  2. Can an Adjudicator decide an issue which the parties don’t ask him to?
  3. Can a dispute regarding whether a settlement agreement has been entered into, be referred to adjudication?
  4. Will the Court assist in interpreting ambiguous payment terms?
  5. Can an Adjudicator consider events which happen after the adjudication has commenced?

Does a contractor have a right to further interim payments after the last date in a payment schedule has passed?

Grove Developments Limited v Balfour Beatty Regional Construction Limited [2016] EWHC 168 (TCC)

Background

Grove Developments Limited (Grove) engaged Balfour Beatty Regional Construction Limited (Balfour Beatty) under a JCT Design and Build 2011 Contract (with a schedule of bespoke amendments) for the construction of a hotel and serviced apartments.

The Contract incorporated an interim payment schedule which set out dates for 23 interim payments, from September 2013 to July 2015, ending on the planned contractual completion date of 22 July 2015.

The contract works overran and Balfour Beatty did not reach completion by the contractual completion date. Balfour Beatty issued an interim application for payment no.24 in August 2015 which was after the final date in the agreed payment schedule.

Grove argued that Balfour Beatty was not permitted under the contract, to issue any further applications for payment beyond the final date in the agreed payment schedule (i.e. interim application 23). No further payment dates had been agreed between the parties.

The TCC

This case is an example of the recent trend of parties requesting that the Technology and Construction Court (TCC) issue a declaration as to the interpretation of contractual terms, in order to avoid the cost of further adjudications.

Grove commenced Part 8 proceedings in the TCC and requested that the TCC decide whether Balfour Beatty had a contractual right to submit a 24th interim application, and if so whether Grove had served a valid pay less notice and the final date for payment in respect of such application.

Decision

Under Section 109 of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) a party to the contract is entitled to payments in the form of instalments, stages or periods, unless the contract is for works of a duration of less than 45 days. If the contract does not specify the agreed instalments, stages or periods in which payment becomes due, and the final date for payment for each instalment, stage or period, then the provisions of the Scheme for Construction Contracts 1998 (the Scheme) are implied to provide for such payments.

The TCC confirmed that the Scheme will only be implied into a contract to replace those terms which do not comply with the requirements of the Construction Act. The provisions of the Scheme will not automatically be imported in their entirety. Balfour Beatty attempted to argue that s.109(1) of the Construction Act should be construed as requiring that all work under a construction contract gives rise to an entitlement for interim payments, but the court disagreed, stating that this “would be a draconian restriction on the freedom of commercial parties to contract on terms of their choosing.”

Therefore, a contract that only provides for a sole interim payment, or as in this case for 23 interim payments, will comply with the Act despite the potential for there being periods in which the contractor is carrying out construction works and not receiving interim payments.

The TCC also rejected Balfour Beatty’s argument that it would make commercial sense for the payments to continue up until the completion of the works, stating that it would have been reasonably foreseeable that work could have been delayed and so that the payment dates could expire. Balfour Beatty should have negotiated additional payment terms when the payment schedule was agreed at the outset or when it became apparent that the works were in delay.

Balfour Beatty was therefore not entitled to further payment in respect of the works until the final account (which meant a wait of several months).

Comment

This case emphasises the importance of ensuring that all eventualities, including delay, are considered and captured fully when agreeing a fixed payment schedule.

Failure to do so may well result in the contractor having no entitlement to further payments and in terms of cash-flow this could potentially prove disastrous. The most prudent way to overcome such a risk would be to provide for and agree a schedule of dates which continue far beyond any expected completion date for the proposed works; or the parties could instead include a ‘catch all’ provision at the end of the payment schedule that subsequent interim payments be submitted on the x date of each month.

Clear and precise wording should also be added to the payment schedule to detail how further interim payments are to be calculated if the expressly stated payment dates were to expire.

This judgment is likely to have widespread impact on the construction industry. A contractor who does not ensure that the payment schedule covers any likely periods of delay could find himself with severe cash flow difficulties in the event of project overrun.

Can an Adjudicator decide an issue which the parties don’t ask him to?

Stellite Construction Ltd v Vascroft Contractors Ltd [2016] EWHC (TCC)

Background

Stellite Construction Limited (Stellite), the employer, referred to adjudication a claim for liquidated damages under a JCT contract (the Contract) with Vascroft Contractors Limited (Vascroft), the contractor, following the late completion of Vascroft’s works.

During the course of the contract works, the Contract Administrator had issued a letter of intent to Vascroft for an additional package of works (the Phase 2 works).

The Adjudicator’s Decision

The Adjudicator decided that time for completion of the works under the Contract had been set at large because he considered that the issue of the letter of intent had caused critical delay to the project. The Contract Administrator was unable to grant an extension of time under the Contract for delay to the works caused by the issue of the letter of intent because the issue of a letter of intent was not one of the Relevant Events set out in the Contract. This meant that no liquidated damages were due to Stellite.

Having found that time for completion was at large the Adjudicator then decided that a reasonable date for completion of the works under the Contract was 5 March 2016.

Court Proceedings

Stellite commenced Part 8 proceedings in the Technology & Construction Court (TCC) seeking a declaration that the Adjudicator’s decision was not enforceable on the following grounds:

  • The Adjudicator had breached the rules of natural justice because (so Stellite contended) Vascroft had not argued in the adjudication that time was at large and the Adjudicator had not given the parties a fair opportunity to comment on such a proposition; and/or
  • Neither party had asked the Adjudicator to make a decision as to a reasonable date for completion, nor had the parties addressed this issue in their submissions to the Adjudicator. As such, the decision as to a reasonable date for completion was outside of the Adjudicator’s jurisdiction and was unenforceable.

Stellite’s objective in the Part 8 proceedings was to restore the parties to their pre-adjudication positions. A second adjudication would then follow.

Time at Large

Building Contracts typically require that the works are completed by a certain date, together with a mechanism for an extension of time to be granted to the completion date in certain circumstances. If the delay event occurs which is the employer’s fault, and the contract does not allow an extension of time to be granted as a result of that delay, then the original completion date will fall away and time will be ‘at large’, which means that the contractor must complete the works within a reasonable time, rather than by a set date.

Stellite argued that neither party had suggested that the letter of intent had caused critical delay to the works and as such the Adjudicator did not have jurisdiction to find that time was at large.

The TCC considered that the key question here was whether the Adjudicator had “fairly canvassed” his proposed finding that the Contract did not permit an extension of time to be granted for the letter of intent. Both parties had commented in their submissions during the adjudication on the delay caused by the letter of intent and Vascroft had argued generally that Stellite’s acts of prevention had caused delay (although Vascroft did not specifically say that the letter of intent was an act of prevention).

The TCC found that this was not a case where the Adjudicator had applied external information to the dispute. The Adjudicator had simply applied the law to the material before him in the parties’ submissions.

The Adjudicator had clearly understood the materials before him and he had fairly and properly used these materials to arrive at his decision that time was at large. In order to decide whether liquidated damages were due to Stellite, the Adjudicator needed to consider whether or not the liquidated damages mechanism in the Contract had broken down. This naturally involved consideration as to whether or not time was at large.

As such, there was no breach of natural justice and this element of the Adjudicator’s decision was binding upon the parties.

Reasonable date for completion

The TCC decided that the decision as to a reasonable date for completion could only be relevant to a claim for un-liquidated damages, and only arose because of the Adjudicator’s finding that time was at large.

The scope of the Adjudicator’s jurisdiction in adjudication is governed by the Notice of Intention to Refer a dispute to adjudication (the Notice). Here, the Notice only related to claims for liquidated damages and did not confer jurisdiction upon the Adjudicator to consider alternative claims.

An adjudicator’s jurisdiction can be extended by the submissions of the Responding Party, because a Responding Party is entitled to raise any defence to the claim being made against them. Here nothing in Vascroft’s defence to the adjudication covered the question of what was a reasonable time for completion if time was at large. Further, the question of what was a reasonable completion date if time was at large would not have been a defence to Stellite’s claim in any event. As such, neither party had requested that the Adjudicator decide what was a reasonable date for completion and by deciding a reasonable date for completion, the Adjudicator had exceeded his jurisdiction.

Severed Decision

The parties agreed that the Adjudicator’s findings on the above two issues could be severed.

As such the TCC declared that the Adjudicator’s finding that time was at large was valid, enforceable and binding however, the Adjudicator’s findings regarding a reasonable date for completion were not binding upon the parties because the Adjudicator had exceeded his jurisdiction.

Comment

This judgment demonstrates the importance that a Referring Party make clear in the Notice of Adjudication precisely what matters the Adjudicator is being conferred the jurisdiction to decide and what matters are outside the scope of the adjudication.

It is rare for the court to sever an adjudicator’s decision. The court was able to sever the decision here because the issues in dispute were easy to separate. In order to increase the likelihood that an adjudicator’s decision will be capable of being severed, the parties could consider requesting that the adjudicator deal with each issue under separate headings so that each of the adjudicator’s findings can be separately identified. This could mean that part of the decision remains enforceable even if the remainder falls away.

Can a dispute regarding whether a settlement agreement has been entered into, be referred to adjudication?

J Murphy & Sons Ltd v W Maher and Sons Ltd [2016] EWHC 1148 (TCC)

J Murphy & Sons Ltd (Murphy) was a sub-contractor to Balfour Beatty Civil Engineering Ltd. Murphy engaged W.Maher & Sons Ltd (Maher) as its earth shifting sub-sub-contractor.

Maher served a notice of adjudication claiming that the parties had agreed Maher’s final account in the sum of £720,000, and that payment of this sum had not yet been made by Murphy. Maher referred to emails between the parties which discussed settling the final account. No formal settlement agreement had been entered into.

Murphy argued that Maher had commenced adjudication by applying to an incorrect nominating body, so Murphy served a new notice of adjudication.

Murphy then issued proceedings in the Technology and Construction Court (TCC) seeking a declaration that the Adjudicator did not have jurisdiction to hear the dispute in relation to the alleged settlement agreement because the dispute did not arise under the original subcontract.

The subcontract between Murphy and Maher provided that the Adjudicator would only have jurisdiction to determine disputes arising under or in connection with the subcontract.

The question to be decided by the TCC in this case was: Did a dispute as to whether there had been a full and final settlement agreement between the contractual parties arise “under” the sub-contract or under the alleged settlement agreement or both?

If the dispute arose under the settlement agreement, then the Adjudicator would not have jurisdiction and his decision would not be binding on the parties. The TCC started by reviewing the case law on this point and concluded that the question rested on whether the settlement agreement was a variation of the original subcontract or instead a stand alone agreement that settled matters under the subcontract (so that those disputes ceased to exist under the subcontract).

The TCC said that the alleged settlement agreement could be interpreted in a number of ways. The alleged settlement agreement could be:

  1. a final and binding agreement in relation to the value of work carried out by Maher to date, with the net balance payable; or
  2. a temporarily binding agreement as to the value of the work carried out, with a final account settlement to be agreed at a later stage; or
  3. a non-binding agreement that £720,000 represented a suitable final account sum.

Alternatively there might not have been any discussion about the £720,000 and this sum might not have been agreed (whether on a binding basis or otherwise).

The TCC concluded following a review of the correspondence between the parties that it was clear that there had been discussions regarding seeking to agree a final account. As such it appeared that (if an agreement had been reached) the parties would have intended this agreement to be binding and option 1) above therefore applied.

However, it was still uncertain whether this alleged settlement agreement would fall under the original subcontract, or be a separate agreement to it.   The TCC decided that in light of this uncertainty as to whether or not the settlement agreement was separate to the subcontract, it was not appropriate to deprive the parties of the right to adjudicate and the settlement agreement should be regarded as ‘arising under the original contract’ so that the dispute could be referred to adjudication.

The TCC said “A dispute as to whether all or some of the alleged entitlement which one contractual party has against the other has been settled in a binding way arises “under” the original contract.

This means that agreements of interim or final accounts can be adjudicated upon if one party seeks to challenge the settlement on one basis or another.

Murphy’s challenge therefore failed, and the Adjudicator had jurisdiction to determine the dispute relating to the alleged settlement agreement.

Comment

The Judge remarked that he would welcome an appeal on this point, because it would be helpful for there to be a Court of Appeal decision on the issue as to whether or not a settlement agreement arises under the contract.

In the meantime, it appears that a dispute arising under a signed settlement agreement cannot be adjudicated upon because the settlement agreement is a separate agreement to the construction contract.

However, where there is no signed settlement agreement, a dispute as to whether or not a settlement has been entered into, arises under the contract.

This distinction may be difficult to identify in practice, so we would recommend that if in any doubt a party seeks legal advice on this point before incurring the costs of what could be an abortive adjudication.

Will the Court assist in interpreting ambiguous payment terms?

Bouyges (UK) Limited v Febrey Structures Limited [2016] EWHC 1333 (TCC)

If a party does not agree with an adjudicator’s decision, one method of resisting enforcement of that decision may be to request that the court issue a declaration with regards to the correct interpretation of the contract terms. This declaration would be legally binding and in most instances, will allow the parties to settle their dispute without further formal proceedings being required. This route is particularly useful if the parties disagree as to the interpretation of the contractual payment provisions for example the deadline for a pay less notice to be served.

In this case, Bouyges (UK) Limited (Bouyges) asked the Technology & Construction Court (TCC) to issue a declaration confirming the deadline for service of a Pay Less Notice under its Subcontract with Febrey Structures Limited (Febrey). The dispute had previously been referred to adjudication, but Bouyges disagreed with the Adjudicator’s findings.

The dispute between the parties related to the payment terms of the Subcontract with respect to Febrey’s October 2015 payment application and in particular Bouyges’ Pay Less Notice dated 23 November 2015. Febrey argued that the Pay Less Notice should have been served by 20 November 2015. Bouyges argued that the deadline was 23 November 2015 and as such the Pay Less Notice was valid.

The following Subcontract clause was relevant to this dispute:

“Clause 21.1

 The Subcontractor shall submit to the Contractor applications for interim payment on those dates stated in any schedule of dates for application for interim payment that may be contained in Appendix 8″

The TCC concluded that the reference to Appendix 8 was an error and that this clause should have referred to Appendix 10, which was entitled “Subcontract Payment Schedule”. All of Febrey’s previous interim applications had been submitted in accordance with Appendix 10 and there were no material disputes until the October 2015 interim payment. The relevant entry for October 2015 stated the following:

Application Date Assessment Date Due date for payment Payment notice date Pay less notice date Final date for payment
23 Oct 2015 2 Nov 2015 16 Nov 2015 23 Nov 2015 20 Nov 2015 23 Nov 2015
40% balance of payment 4 Dec 2015 7 Dec 2015

Febrey submitted its payment application on 23 October 2015. Febrey argued that the date stated in Appendix 10 for the Payment Notice (being 23 November 2015) was an error and the date should be read as 20 November 2015.

Bouyges did not serve any notice in respect of this application until 23 November 2015 which valued the sum due to Febrey at minus £2,041.27. Febrey argued that this notice was late and was therefore invalid.

The TCC found that Appendix 10 did not comply with the provisions of the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) because:

  • The Payment Notice date was more than 5 days after the due date; and
  • The Pay Less Notice deadline was before the Payment Notice deadline.

If payment provisions do not comply with the Construction Act then the relevant provisions are replaced by the equivalent provisions of the Scheme for Construction Contracts 1998 (the Scheme). This is not a wholesale replacement. It occurs to the extent only that the contract does not comply with the Construction Act.

Here, the TCC held that moving the Payment Notice date to 5 days after the due date in line with the Scheme would not resolve the problem because the Subcontract would still not be compliant with the Scheme as the deadline for a Pay Less Notice would still be prior to the deadline for a Payment Notice.

Bouyges argued that the Pay Less Notice deadline and the Final Date for Payment should also be changed in line with the Scheme or that the correct solution was to leave the Final Date for Payment as it was, but find that a Pay Less Notice could be served at any time up to the Final Date for Payment. Both of these options would comply with the Construction Act.

The TCC rejected Bouyges’ arguments and said that Appendix 10 must be interpreted in the context of the dates agreed by the parties, in respect of previous interim applications. In all of the other monthly applications listed in Appendix 10, the Payment Notice Date was the same as the Pay Less Notice Date and within 5 days of the Due Date. As such, the TCC considered it possible to identify a clear and obvious error in Appendix 10 in that the reference to 23 November 2015 for the Pay Less Notice, should have been 20 November 2015 (i.e. the same date as the Payment Notice Date).

The Notice served by Bouyges on 23 November 2015 was therefore served late and was invalid. Febrey was therefore entitled to payment of the full sum claimed in its October 2015 interim application for payment.

Comment

This case is a reminder of the importance of clear drafting of payment provisions in order to avoid expensive disputes. When preparing a payment schedule for inclusion in a construction contract, not only do the parties need to ensure that they have provided for contract overruns in that schedule, but that they have also included the correct dates for each and every monthly payment cycle.

In the event of uncertainty in respect of the correct interpretation of payment provisions, the parties could avoid successive adjudications by seeking a binding declaration from the court via Part 8 proceedings. However, such court proceedings can be expensive, and there is a risk that the court will not agree with a party’s proposed interpretation.

Can an Adjudicator consider events which happen after the adjudication has commenced?

Goldsworthy & Others v Harrison & Another [2016] EWHC 1589 (TCC)

Background

The statutory right to adjudicate under the Housing Grants Construction & Regeneration Act 1996 (the Construction Act) does not apply to residential occupiers. Mr & Mrs Harrison (the Harrisons) were homeowners who engaged Goldsworthy & Others (Goldsworthy), who were builders, to carry out some works to their home. As the Harrisons were residential occupiers, there was no statutory right to adjudicate under the Construction Act.

Following a dispute regarding interim payment, Goldsworthy commenced adjudication against the Harrisons. The Adjudicator found that the Harrisons should pay Goldsworthy just over £72,000. The Harrisons did not pay and Goldsworthy commenced proceedings in the Technology & Construction Court (TCC) requesting summary judgment that the Adjudicator’s decision be enforced.

The primary issue between the parties was whether they had agreed contract terms which included a contractual right to adjudication. If not, then as there was no statutory right to adjudicate, the Adjudicator would not have jurisdiction, the Adjudicator’s decision would not be valid, and the claim for enforcement would fail.

Goldsworthy argued that the parties had agreed to contract on the basis of the standard form JCT Minor Works 2011 (JCTMW). The JCTMW contains a provision for adjudication. The Harrisons said that although the parties expressed an intention to enter into the JCTMW, no final agreement was reached as to the terms of the contract.

As a secondary issue, the Harrisons argued that the Adjudicator had no jurisdiction to decide the dispute over interim payments because the dispute was overtaken during the adjudication by the issue of a final certificate and by a statement of account issued by Goldsworthy.

The TCC’s Decision

The TCC said the difficulty with this case was that the works had proceeded without a final contract being in place. The court considered that the parties’ conduct during the works was not consistent with the JCTMW. For example, the parties had not complied with the payment mechanism in the JCTMW.

The TCC said that the fact that the parties’ correspondence suggested that the use of the JCTMW form was envisaged for the works did not amount to a finding that there was a contractual agreement by the parties to use the JCTMW form and bind themselves to the JCTMW terms.

Goldsworthy’s case was that they made an offer in their quotation for the works, which the Harrisons accepted by an email dated 28 March 2013 which instructed Goldsworthy to commence works.

However, it appeared that Goldsworthy’s quotation had been made in response to an email from the Harrisons of 4 January 2013, which expressly referred to the need to enter into a JCTMW contract. The court found that without knowing what had been said between the parties between January and March 2013, it could not make a definitive finding as to the terms of the contract between the parties. The court required fuller evidence from both parties regarding the discussions around the emails, and found it impossible to say whether the parties did or did not reach a binding agreement incorporating the terms of the JCTMW.

As the TCC could not reach a decision without the full evidence, summary judgment for enforcement of the adjudicator’s decision could not be granted.

The TCC said that in theory the next step would be to proceed to a full trial of the issue of whether the parties’ contract included the adjudication clause. Such a trial would determine only the enforceability of the adjudicator’s decision. It would not finally determine how much money was owing from the Harrisons to Goldsworthy in respect of the works. The TCC said that the parties may take the view that a better course, to avoid the risk of legal costs escalating on both sides, would be to sit down and arrive at a fair figure for payment to resolve all of their differences.

With regards to the secondary issue, the TCC found that the Adjudicator’s decision must be made on the basis of the facts as they are at the time of the decision. If a final certificate is issued during the adjudication, depending upon what the Adjudicator has been charged to decide, it may have to be taken into account as impacting on the parties’ dispute. Here as the final certificate was immediately disputed by a formal notice, the Adjudicator was entitled to disregard this for the purpose of his decision.

Comment

This case is a reminder of the need for certainty as to the terms under which work is being carried out. When contracting with a residential occupier, a main contractor should ensure that there is a clear agreement as to whether the parties have a right to adjudicate. Here both parties could have avoided the costs of an unenforceable adjudication and unsuccessful court enforcement proceedings, if they had known that there was no contractual right to adjudicate.

This case also confirms that an adjudicator can take into account events (such as subsequent payments or certificates) which take place after the adjudication has commenced. However the adjudicator can also choose to disregard such payments or certificates if for example the sums in question are disputed.

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