Adjudication Matters: February 2024

Will the TCC enforce an adjudicator’s decision where no payment has been awarded by the adjudicator?

In Level 1 Raised Flooring v JM Construction (SW) [1] the TCC declined to enforce an adjudicator’s decision on the basis that no payment had in fact been awarded in the adjudicator’s decision. This case is a reminder of the importance of drafting the notice of adjudication so it is clear what issues the adjudicator is in fact being requested to determine.

The dispute

Level 1 had engaged JM to carry out construction works to a property in London. The relationship between the parties broke down and Level 1 terminated the contract. Level 1 considered that JM had been substantially overpaid prior to termination. Level 1 initiated adjudication proceedings for the determination of the value of JM’s works and whether there had been an overpayment to JM.

The adjudicator found that, in principle, there had been an overpayment to JM however he did not order payment in favour of Level 1. Payment was contingent upon Level 1 having validly terminated the contract (a point which was contested by JM) and on Level 1 having complied with the contract’s provisions which dealt with the termination account.

If the termination was valid, Level 1 would have been permitted to follow clause 6.7 of the contract. This removed any requirement for further payments to be made to JM and required the preparation of an account to determine the amount due in either direction. At the point of referring the dispute to adjudication Level 1 had not followed the final accounting process for payment under clause 6.7 and as such, the adjudicator found that no repayment was in fact due to Level 1.

Following the adjudicator’s decision Level 1 completed the procedure under clause 6.7 in respect of the final account. Level 1 then sought to enforce the adjudicator’s decision in respect of the overpayment on the basis that payment was now due following completion of the final account process.

Level 1 said that it had followed the contract’s procedure in having produced an account that the adjudicator’s determination as to overpayment at termination had subsequently crystallised into an enforceable decision.

JM submitted that the adjudicator had made a conscious decision not to award payment and had conducted a valuation only of JM’s work at a specific point in time. JM said there was therefore no enforceable decision for payment.

Decision and take home points

The TCC held that complying with clause 6.7 following the adjudicator’s decision was not sufficient to create a right to payment in circumstances where the adjudicator had not awarded payment in their decision. The courts can enforce an adjudicator’s valuation decision even where an adjudicator has not awarded payment but relying on the principles set out in Workspace Management v YJL London Ltd [2], payment must be the “logical consequence of a decision actually made“, and “necessary and indispensable result of the…overall decision” or an “inevitable and logical consequence.”

This case serves to highlight the importance of careful drafting of the notice of adjudication so it is clear what the adjudicator is being asked to decide. In this case, the adjudicator’s decision was contingent on the legality of the defendant’s termination, which the adjudicator had not been asked to address and consequently the adjudicator had not addressed this point in his decision.

Whilst Level 1 could not enforce the adjudicator’s decision in respect of the valuation of JM’s works, the issues in dispute had been narrowed nonetheless. Level 1 could have referred a second adjudication requesting a declaration as to payment, rather than these court enforcement proceedings.

Can a true valuation adjudication be commenced after a “smash and grab”?

In Lidl Great Britain v Closed Circuit Cooling (t/a 3CL) [3] the TCC considered whether an adjudicator’s “smash and grab” decision needed to be complied with before an adjudication on the costs of rectifying defects could take place.

The Grove “pay now argue later” principle

In S&T (UK) v Grove Developments [4] the Court of Appeal held that section 111 of the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act“) creates an immediate obligation to pay the notified sum and that any right to adjudicate (under section 108 of the Construction Act) for the purpose of obtaining a true valuation of the sum due is subject to that payment obligation first being complied with.

In other words, the immediate obligation of the losing party to pay the previously notified “smash and grab” sum takes precedence over the losing party being able to initiate its own true value adjudication. The paying party must “pay first and argue later”. If not, the adjudicator in the subsequent true value adjudication will lack jurisdiction.

Background

3CL had agreed to carry out design, installation and maintenance works for supermarket chain Lidl.

On 29 September 2022 3CL made interim payment application under the contract (“AFP19“). Lidl served a payment notice which stated that no payment was due to 3CL on the basis that 3CL’s work was incomplete and defective, and liquidated damages ought to be deducted.

Adjudication 1

3CL commenced adjudication requesting a declaration that the notified sum was the sum stated in AFP19 and that Lidl’s payment notice was not a valid payment notice and was in fact an invalid pay less notice. The adjudicator found in 3CL’s favour. Lidl did not pay. 3CL applied for enforcement and the court ordered that Lidl make payment [5] (we discussed this earlier enforcement judgment in our October 2023 edition of Adjudication Matters. Lidl still did not pay 3CL until September 2023.

Adjudication 2 and 3

Lidl commenced two adjudications before paying the notified sum in Adjudication 1:

• Adjudication 2 – In July 2023 Lidl claimed costs it had incurred in appointing a third party to rectify alleged defects in the works. The adjudicator found in Lidl’s favour and decided that Lidl could deduct £758,000 from any monies due to 3CL.
• Adjudication 3 – In August 2023 Lidl referred a dispute as to 3CL’s entitlement to an extension of time. The adjudicator decided that 3CL had no entitlement.

Did the adjudicators in Adjudication 2 and Adjudication 3 have jurisdiction?

Lidl commenced court enforcement proceedings seeking payment of the sums awarded in Adjudication 2. 3CL relied on Grove [4] to argue that the adjudicators in both Adjudication 2 and Adjudication 3 lacked jurisdiction due to Lidl not first having paid the notified sum in Adjudication 1, in accordance with the immediate payment obligation under section 111 of the Construction Act.

Lidl’s argued that the Grove [4] principle only prohibited commencing a “true value” adjudication within the same interim payment cycle as the “smash and grab” sum adjudication. Neither Adjudication 2 nor Adjudication 3 had been a true value adjudication on the same interim payment cycle.

Conclusion and take home points

The court held that Grove [4] extends only to a true valuation of the same interim payment cycle and that there was no logic for prohibiting any adjudication whatsoever under a contract whilst a notified sum remained unpaid.

However, importantly where there are cross claims for defects or other deductions, which could have been advanced in a pay less notice in the same interim payment cycle as the “smash and grab” adjudication, a dispute on such cross claims cannot be referred to adjudication until the “smash and grab” notified sum for that interim payment cycle has been paid.

As such, there is not a blanket ban on all adjudications being commenced before payment of the notified sum but matters relating to valuation which could have been covered in a pay less notice in that same interim payment cycle cannot be adjudicated by the paying party without first having paid the notified sum.

If the paying party does not serve a pay less notice making deductions, then it cannot rely on those deductions in defence to the notified sum and cannot bring a true value adjudication covering those deductions that should have been the subject of a pay less notice.

The key question is whether the deduction could have been made at the time. If those matters did not exist when the pay less notice should have been given (e.g. defects materialising after the deadline for serving a pay less notice), then Grove [4] does not apply to those deductions and the paying party could refer such deductions to adjudication even if the notified sum has not yet been paid.

As such, Adjudication 2 had been, in part, initiated without jurisdiction due to it being a true value of items in respect of which deductions had been made in the payment notice served in response to AFP19.

Adjudication 3 related to liquidated damages which Lidl had sought to deduct in the payment notice served in response to AFP19 so this adjudicator also did not have jurisdiction.

The court:

• Enforced part of Adjudication 2 in respect of the costs Lidl had incurred several months after a pay less notice could have been given.
• Granted a declaration in respect of Adjudication 3 that the adjudicator lacked jurisdiction to determine extension of time entitlement for the period that could have been dealt with in a pay less notice for AFP19.

In conclusion, the deadline for a pay less notice represents a dividing line so that anything which arises after that date falls outside of the Grove principle and can be referred to adjudication despite a “smash and grab” decision not being paid.

If there is any doubt as to what items within Grove [4] the referring party should ask the adjudicator to set out their decision on an item by item basis so that any items for which the adjudicator lacks jurisdiction may be served by the court at enforcement stage.

Can a single notice of adjudication refer a claim for payment on both a “smash and grab” basis and a “true value” basis?

Background

In Bellway Homes v Surgo Construction [6], the dispute arose over the validity of an application for payment. The subcontractor, Roundel made a payment application to Surgo Construction Limited (“Surgo“) on 22 December 2022 (“the AFP“). No payment notice or pay less notice was issued and no payment was made.

Roundel served a notice of adjudication in March 2022 which:

• Sought payment of the sum applied for in the AFP on a “smash and grab” basis.
• In the alternative, requested a true valuation of the works set out in the AFP.

The adjudicator found that the payment application did not meet the requirements for a “smash and grab” adjudication, and that instead he should consider a “true value” claim.

The adjudication concluded with Roundel being awarded £146,118.82 on a true valuation basis.

Surgo did not pay. Roundel assigned its claim to Bellway, who then commenced enforcement proceedings.

Surgo argued:

1. Multiple disputes were referred without consent and subsequently determined by the adjudicator when no jurisdiction to do so existed.
2. Alternatively, if the adjudicator did have jurisdiction, he had then exceeded it by going on to determine a “true value” payment after having decided that the payment application was invalid in relation to a “smash and grab”.

Decision

The court found that there had not been multiple disputes. The dispute referred to adjudication was simply a dispute over what sum ought to be paid to Roundel.

The court held that the adjudicator had not exceeded their jurisdiction, and that Roundel had simply asked the adjudicator to evaluate the sums due to them either in a “smash and grab” or, in the alternative, calculated on a substantive basis.  In essence, the adjudicator had used the routes available to him to determine that whilst the application did not meet the strict requirements for succeeding in a “smash and grab”, this did not mean that the application was redundant in all scenarios. It was still capable of being an application for payment in other circumstances, which enabled him to use an alternative route to his decision and settling on a “true value” adjudication.

The attempt by Surgo to separate the “smash and grab” from the “true value” was overly legalistic and did not recognise the natural meaning of the word “dispute”, with Surgo failing to recognise the alternative routes offered to the adjudicator to reach his decision.

Takeaways

This judgment serves as a reminder to all parties involved in construction contracts of the importance of serving valid payment and pay less notices. This is particularly relevant to the responding party in adjudication proceedings, who may now find themselves defending adjudications which, when worded correctly, can advance a technical and “true value” case simultaneously.

The judgment also provides some clarity to the referring party in any adjudication proceedings, that where their technical argument may be weaker, they can bring a “true value” claim simultaneously in the alternative to protect their position. This could enable cost savings in the adjudication process, allowing for one single set of proceedings as opposed to multiple simultaneous adjudications.

Will a contract clause requiring adjudication before court proceedings prevent court proceedings from being issued?

Background

In Lancashire Schools SPC Phase 2 v Lendlease Construction (Europe) & Ors [7], the court considered whether the presence of a mandatory adjudication clause in a construction contract would prevent commencement of litigation.

The dispute arose out of a Private Finance Initiative (“PFI“) project under the Building Schools for the Future Programme. Lancashire Schools applied to the court to have the claim set aside or alternatively, struck out. Their argument was that the claim had been brought in breach of clause 68 of the project agreement which said that disputes must be referred to adjudication before commencement of any litigation.

Decision

The court concluded that whilst adjudication was a mandatory step in the dispute resolution clause under the contract, the presence of such clause did not prevent parties from issuing a court claim form prior to any adjudication proceedings.

The court refused to set aside the claim form or stay the proceedings. Recognition was given to the mandatory adjudication clause, however the court reasoned that this did not give rise to an automatic decision to strike out any claim brought in breach of it. Instead, the court considered it had discretion over whether or not to stay the proceedings to allow an adjudication to take place.

Here the court considered that it would be disproportionate to strike out the claim, due in part to the multi-party nature of the dispute. As Lancashire Schools was one of four defendants involved in various aspects of the dispute, sending the fourth defendant down a different path of resolution to the others could frustrate matters and prevent successful mediation. This was coupled with the fact that the claims against the other three defendants could continue whilst the claim against Lancashire Schools was stayed. The court considered that any adjudication was unlikely to provide a satisfactory outcome, and that the dispute would likely end up back in front of the court at a later date.

Takeaways

This case demonstrates that the insertion of a mandatory alternative dispute resolution clause will not automatically prevent the commencement of litigation. This contrasts with previous cases where the courts have upheld mandatory dispute resolution clauses. The court took a holistic view of the matter, considering the overall impact of a stay on any other parties involved in the claim. The court focused on the impact on the procedural timetable of all of the interlinked claims and emphasised that practical challenges and the likelihood of success of any adjudication will be taken into account when deciding whether or not a stay of proceedings is appropriate.

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[1] Level 1 Raised Flooring Ltd v JM Construction (SW) Ltd [2023] EWHC 2841 (TCC)

[2] Workspace Management Ltd v YJL London Ltd [2009] EWHC 2017 (TCC)

[3] Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 3051 (TCC)

[4] S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448

[5] Lidl Great Britain Ltd -v- Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 2243 (TCC) (11 September 2023)

[6] Bellway Homes Limited v Surgo Construction Limited [2024] EWCA 10 (TCC)

[7] Lancashire Schools SPC Phase 2 Limited (formerly Catalyst Education (Lancashire) Phase 2 Ltd) v Lendlease Construction (Europe) Limited (formerly Bovis Lend Lease Limited) & Ors [2024] EWHC 37 (TCC)