Were the sums sought in an adjudication set off by way of the referring party’s recent entry into a CVA

Henry Construction Projects Ltd v ProMEP Ltd [1]

Factual Background

Henry engaged ProMEP as an MEP sub-contractor on several projects over several years including a Project at Standbrige Earls. This project at Standbridge ran into difficulties and each party alleged that the other was in repudiatory breach.

In October 2021 ProMEP entered into a CVA. As part of the CVA process Henry proved three debts totalling £3.457 million which were accepted by the CVA supervisor. Henry received £242 thousand pounds from the CVA in respect of these debts.

In November 2022 ProMEP commenced adjudication proceedings against Henry for £887,208 relating to the Standbridge development. Henry responded that the claim was set off by the provisions of CVA and therefore ought to be valued at £nil. Henty also counter claimed for £825,000.

The adjudicator found that ProMEP’s claim was not part of the set off in the CVA. The CVA had been specific as to what claims were included and this claim was not. He awarded ProMEP a payment of £90,000.

Henry subsequently issued a Part 8 application seeking a declaration that all claims ProMEP had against Henry predating the CVA were settled by the CVA. In response ProMEP commenced Part 7 proceedings seeking enforcement of the adjudicator’s decision.

The court followed the Court of Appeal in A&V Building Solutions Ltd [2] in deciding that the Part 7 proceedings should be heard first, and the Part 8 Proceedings was not of the type that should be heard together with the Part 7 proceedings requiring as they would, complex arguments and limited disclosure. In any event the same arguments for the Part 8 proceedings were put forward by Henry in its defence of the Part 7 proceedings.

Did the CVA settle all present and future claims?

The court decided that the CVA did not settle all current and future claims and debts in the way that an insolvency would. A CVA allows for the retention of some assets to enable the company to continue trading going forward. Unless future claims, even claims unknown at the time, are specifically included in the CVA then they remain as asset of the company. In this regard the CVA is a contract between the debtor and its creditors and will be construed as such using the normal rules of construction.

Does failing to raise a defence of an allegedly fraudulent act at adjudication prevent its later use in Part 8 hearing to prevent enforcement of the adjudicator’s decision?

Henry in resisting the enforcement of the decision also raised the point that the decision may have been reached by the adjudicator as a result of a “fraudulent act” by ProMEP

The fraudulent act of which it complained was that ProMEP submitted a summary of the counsel’s advice that it had received on the matter to the adjudicator. Henry claimed that this summary was selective, including parts which were favourable to ProMEP’s case and omitting parts which were harmful to its case.

The court noted that counsel’s advice is not evidence: it is more akin to a representation of the law submitted by parties hoping to persuade the adjudicator of the merits of arguments. But it is the adjudicator who makes the decision on matters of law. Such a flawed statement submitted by one of the parties would not affect the enforceability of the adjudicator’s decision. In any case, the court did not agree that the summary was a fraudulent misrepresentation of the full advice

Further, the court decided that Henry could have made these representations to the adjudicator at the time of the adjudication. It did not do so and as a result could not seek to rely on it now to avoid enforcement of the decision.

The Court’s Decision

The court enforced the adjudicator’s decision. Henry entered Administration shortly after the hearing so it appears doubtful that in practice ProMEP will be paid the monies directed.

Takeaway Points

A CVA, whilst similar to an insolvency, is materially different in that the company concerned retains some assets to enable continued trading. Insolvency Rules are not always mandatory to CVAs. Not all existing and future debts and claims are included in the set off of a CVA. Only those that are described in the terms of the CVA. Creditors of companies that have dealings or potential liabilities to a company entering a CVA should take care to examine the terms. Accordingly a company in a CVA can continue to raise claims against its creditors and debts settled under the CVA cannot be set off against other claims.

Using counsel advice in adjudication proceedings is a not uncommon practice. Such submissions are not evidence. Submitting a summary of the advice to the adjudicator is acceptable, there is no requirement to submit the full advice. There is no requirement to ensure that such submissions are balanced but they must not be fraudulently misleading.

Can part of an adjudicator’s decision be severed in the event the decision is unenforceable?

Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd [3]

Factual Background

Downs employed Laxmanbhai to build 79 residential units in connection with the development of land at Downs Road, London under a JCT Design and Build Contract (2011 edition) with amendments.

On 26 February 2021 Laxmanbhai sent Interim Application 34 which stated the sum due as £1,888,660.70. On 3 March 2021 Downs served a ‘holding notice’ which it relied on as a valid Payment Notice (Payment Notice 34) for £0.97. On 9 March 2021 Downs served a detailed Payment Notice (Payment Notice 34a) for a net sum of £657,218.50, which was duly paid by Downs on 26 March 2021. Downs had adopted the approach of sending two payment notices, the first being a ‘holding notice’ on payment applications 31 to 33 to acquire time to make an assessment of the sum it considered due.

Laxmanbhai brought an adjudication over the true value of Interim Application 34. In its Response, Downs advanced a cross-claim in respect of a defective capping beam in the sum of £149,692.

The adjudicator valued Interim Application 34 at £103,826.98. The adjudicator declined to address the issue of the capping beam stating his task was exclusively to determine the proper valuation of the payment application referred to him. Subsequently, Downs issued a Part 8 Claim seeking a declaration that the adjudicator’s decision was invalid due to his failure to address Downs’ cross-claim of the defective capping beam.

Issues

The TCC proceedings focused on three main issues:

1. The validity of Payment Notice 34
2. Whether the adjudicator’s failure to address Downs’ capping beam cross-claim was a breach of natural justice
3. Was any part of the adjudicator’s decision severable in the event the decision was unenforceable

Issue 1: Validity of Payment Notice 34

The judge found that Payment Notice 34 did not constitute a valid payment notice because it did not set out the sum which Downs genuinely considered to be due or set out the basis of the calculation demonstrating how Downs arrived at the gross valuation. Rather, it was a holding exercise for Downs to gain time to make a fuller assessment in response to Interim Application 34.

Issue 2: Was there a breach of natural justice?

The judge found that the adjudicator had deliberately declined to address the cross-claim which he had jurisdiction to determine and which he should have addressed. The failure on the adjudicator’s part was material and as a consequence the adjudicator’s decision was unenforceable.

Issue 3: Was part of the Decision severable?

Downs argued that even though the adjudicator’s decision was not enforceable the decision was nonetheless binding on the parties as the sum due in payment cycle 34 absent the cross-claim. Downs contended that the adjudication addressed two separate issues: first, the sum due in respect of Interim Application 34 and, second, the amount of any set-off Downs could rely upon against that sum.

The judge rejected Downs’ approach and concluded that it would be “artificial and inappropriate” to sever the decision as the adjudicator was not asked to make a series of separate decisions. He had in fact reached a single decision. The judge concluded no part of the decision could be served and therefore no part of it was binding on the parties.

Takeaway Points

The case highlights that a payment notice must comply with the requirements of Section 110A (2)(a), namely that it specifies the sum considered to be due at the payment due date and the basis on which that sum is calculated. A payment notice setting out an artificial value as a ‘holding tactic’ by an employer to gain more time to make a fuller assessment will not be deemed valid. A payment notice must set out the sum the employer genuinely considers due.

To enable an adjudicator’s decision to be severed if possible the adjudicator should be asked to set out each of their findings separately.

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[1] Henry Construction Projects Ltd v ProMEP Ltd [1] [2024] EWHC 1825 (TCC) (16 July 2024).

[2] A&V Building Solutions Limited v J&B Hopkins Limited [2023] EWCA Civ 54

[3] Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd [2021] EWHC 2441 (TCC)