Adjudication Matters: April 2023

A recent natural justice challenge in Scotland Atalian Servest AMK Limited v B W (Electrical Contractors) Limited [1]

What were the facts?

This Scottish case related to a £2 million final account dispute between a subcontractor (“AMK“) and its sub-sub-contractor (“BW“).

The adjudicator decided that AMK were to pay BW approximately £1.4 million. In reaching his decision, the adjudicator determined that a new contract had been formed between the parties during the course of BW’s works, which was distinct to the lump sum, fixed price subcontract recorded in writing.

AMK failed to make payment in accordance with the decision, and subsequently defended itself at enforcement proceedings brought by BW.  In particular, AMK argued that by finding that there was a new contract between the parties, the adjudicator had contravened the rules of natural justice by deciding the dispute on the basis of factual and legal findings which had not been put forward by the parties during the course of the adjudication.

AMK also argued that the adjudicator had failed to answer the question referred to adjudication; had failed to address all of the arguments raised by AMK during the adjudication; and had reached conclusions regarding the validity of AMK’s final account valuation which the parties had not been given the opportunity to respond to during the course of the adjudication.

What did the court decide?

The court enforced the decision. The court noted that the question referred to the adjudicator for determination was what sum (if any) was due to BW by AMK under the sub-sub-contract. The court commented that the terms of the referral “could scarcely have been wider in scope” and that the adjudicator had made a genuine attempt to resolve the question referred to adjudication.

The court found that the adjudicator had allowed the parties sufficient opportunities to make submissions during the course of the adjudication, and had fairly considered the respective arguments in reaching the decision. Whilst sections of the decision could have been worded differently in order to set out the adjudicator’s reasoning in a more explicit way, this did not in itself amount to a breach of natural justice sufficient to merit a stay of execution.

This case serves as a reminder of the high evidential bar which is required to make out a successful natural justice challenge in adjudication enforcement proceedings.

Does a payment application need to be received within site working hours to be valid? Elements (Europe) Limited v FK Building Limited [2]

What were the facts?

Elements sought to enforce an adjudicator’s decision against FK relating to a payment application served outside of usual working hours.

The Sub-Contract confirmed:

• that site working hours would be between 07:30 and 18:00 from Monday to Friday; and
• payment applications were required to be issued no later than 4 days prior to the Interim Valuation Date for the relevant payment.

Elements issued payment application 16 on 21 October 2022 to FK by way of an email sent at 22:08. The applicable Interim Valuation Date was 25 October 2022. FK failed to issue a Pay Less Notice within the applicable deadline, and Elements subsequently commenced adjudication proceedings to seek payment. The adjudicator decided that the sum of £3,950,190.52 was due to Elements in relation to application 16, in addition to interest.

At enforcement, FK argued that the payment application was submitted late and was therefore contractually invalid. In particular, FK argued that for the payment application to be issued within time, it must have been received within working hours as defined within the Sub-Contract. As application 16 was submitted at 22:08 on 21 October 2022, FK argued that it should not be deemed as having been received until the next day (22 October 2022). The effect of this would be that application 16 would be deemed to have been submitted only 3 days prior to the Interim Valuation Date (rather than the required 4 days).

What did the court decide?

The court enforced the adjudicator’s decision and confirmed that, absent any clear wording to the contrary, a requirement to issue a notice by a certain day means that a party has until 23:59 of the relevant day to issue. On this basis, application 16 had been issued 4 days prior to the Interim Valuation Date, notwithstanding that the application was received outside of working hours. As such, FK was required to serve a Pay Less Notice in circumstances where it sought to challenge the sums applied for, and was required to comply with the adjudicator’s decision.

When does limitation begin to run where there is no written contract? Hirst and another v Dunbar and others [3]

What were the facts?

This claim doesn’t relate to adjudication but it is relevant to adjudication practitioners because it considers the payment provisions of the Construction Act.

In 2012, Hirst carried out works at a residential development. Hirst claimed that the works were carried out pursuant to a contract with Dunbar, under which Hirst was entitled to be paid a reasonable sum upon completion of the works.

Dunbar denied that there was such a contract and claimed that Hirst carried out the works at its own risk to improve the value of the site. At the time Hirst had sought to buy the site for itself, however the purchase ultimately fell through.

The works were complete in December 2012, and proceedings were commenced in 2019 for alleged monies due from Dunbar to Hirst.

What did the court decide?

The court considered three core questions:

1. Was there a contract between Hirst and Dunbar?
2. Was the claim for payment statute barred under the Limitation Act 1980?
3. If Hirst was entitled to payment, what was the sum due?

The claim was dismissed on the basis that no contract had been entered into between Hirst and Dunbar. Instead Hirst had undertaken the works at its own risk.

Additionally, notwithstanding the above, Hirst’s claim would have been time barred as more than six years had passed since the cause of action had accrued. Hirst had contended that, under the Scheme for Construction Contracts (England and Wales) Regulations 1998/649 (“the Scheme“), the right to payment did not arise on completion of the works but instead upon the issue of the relevant payment notice. The court rejected this argument and said that the Scheme was a procedural mechanism for determining when payment was due. Even if there had been a contract in place, the right to payment would still have existed whether or not a payment notice had been issued to crystallise that right. The right to payment would therefore have accrued at the latest at completion of the works (04 December 2012) and so Hirst was now out of time.

The court distinguished between terms which determine when an entitlement to payment arose, and terms “concerning only the process of billing and payment“. The Scheme concerned the latter, and so does not change when a cause of action accrued.

The court also considered the quantum of Hirst’s claim and recognised that the burden of proof is on Hirst. The court recognised that substantial works had been undertaken by Hirst, but also that their lack of evidence made them “authors of their own misfortune“. As such, even if payment would have been awarded to Hirst, the level of quantum would have been substantially reduced.

This case serves as a useful reminder to check limitation periods, and ensure that thorough records are made at the time, and are maintained for at least the duration of the limitation period.

Fraud in Adjudication

This article is adapted from an article originally written by Carly Thorpe and published by the Adjudication Society in November 2022.

Allegations of fraud can be raised during adjudication in a party’s submissions to the adjudicator and/or in subsequent enforcement proceedings, either to resist enforcement of the adjudicator’s decision or in support of an application for a stay of execution of the judgment. The general approach is that the court should not enforce an adjudicator’s decision if it is reasonably satisfied that to do so would assist in the perpetration of fraud. However, the court will require clear and unambiguous evidence of fraud to persuade it not to enforce.

What amounts to fraud?

Fraud is very difficult to establish in adjudication proceedings. The court requires that fraud allegations are spelt out and at least on their face supportable by credible evidence. The court has said that this applies equally if not more so in adjudication enforcement proceedings when it would be very easy to “bandy about” fraud allegations to seek to avoid enforcement [4].

Some examples of where the court has rejected allegations of fraud include:

• An allegation that the lack of independence of the quantity surveyor had led to an overvaluation of the final account [5];
• An allegation of theft raised directly before the adjudicator and taken into account in the course of his decision. [6]
• An allegation of collusion to inflate the true value of invoices sent for payment due to no clear and unambiguous evidence to suffice fraud. [7]

When should fraud be raised?

It is important to raise allegations of fraud during the adjudication itself. It is an established principle that allegations of fraud raised for the first time in the enforcement proceedings will not be sufficient to resist enforcement if the allegations could have been raised earlier.

Key Principles to remember about fraud are:

1. If you think a document or witness evidence is fraudulent this should be raised during the adjudication itself. Failure to do this will likely lead to your allegation being rejected.
2. If fraud is only suspected after the adjudicator’s decision has been issued, and therefore there is no opportunity to raise this during the adjudication, make sure you explain in your submissions in the adjudication enforcement proceedings why the fraud could not have been raised previously.
3. Fraud is a serious allegation so parties should exercise caution before raising it. Clear evidence is required.

Going forwards we anticipate that the courts will continue to be reluctant to allow allegations of fraud to prevent the enforcement of adjudicators’ decisions.

Adjudication is a swift interim remedy and there is not the time for forensic investigation and/or cross examination like there is in litigation.  A party faced with an unfavourable adjudicator’s decision as a result of a fraud could seek for the dispute to re-considered in future litigation/arbitration to allow the fraud to be corrected.

If you have any queries about any of the points covered or would like to know more about adjudication please contact Carly Thorpe.

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[1] Atalian Servest AMK Ltd v BW (Electrical Contractors) Ltd [2023] CSOH 14

[2] Elements (Europe) Limited –and- FK Building Limited [2023] EWHC 726 (TCC)

[3] Hirst and another v Dunbar and others [2022] EWHC 41 (TCC)

[4] G South Ltd v King’s Head Cirencester LLP [2009] EWHC 2645 (TCC)

[5] BM Services Inc Ltd v Greyline Builders Ltd [2018] EWHC 3884 (TCC)

[6] Speymill Contracts Ltd v Baskind [2010] EWCA Civ 120

[7] Grandlane Developments Ltd v Skymist Holdings Ltd [2019] EWHC 747 (TCC)