Adjudication Matters – June 2018

15th June 2018

No novation is not ideal

M Hart Construction Ltd & Anor v Ideal Response Group Ltd [2018] EWHC 314 (TCC), [2018] All ER (D) 100 (Mar)

See full article here.

Summary

The court refused to enforce two adjudicators’ decisions on the basis that there was no contract between the parties. There had not been an effective novation from an original contracting party.  The adjudicators therefore did not have jurisdiction to determine the disputes.

Another adjudication, involving a different claimant, was enforced. An incorrect description of the contractual parties in the referral notice did not render the notice invalid nor did it limit the adjudicator’s jurisdiction.

Background

The first claimant in the litigation was M Hart Construction Limited (Hart Construction). Mr Hart controlled Hart Construction.  The second claimant was PK Maintenance Limited.

The case concerned multiple contracts for works relating to the conversion of the Olympic Village to residential accommodation. The defendant, Ideal Response Group Ltd (Ideal), was engaged by Lend Lease to carry out remedial works relating to water damage at the Olympic Village.

In June 2012, Ideal entered into an oral contract (Contract I) with Mr Hart to carry out the works required.  It was agreed Mr Hart and Ideal would deduct their costs from sums paid to Ideal by Lend Lease. Any remaining profits would be shared equally.

The scope of works was later expanded to include certain remedial works Lend Lease was required to carry out, and which Lend Lease contracted with Ideal to do. Mr Hart suggested that PK Maintenance Limited (PKM) be asked to assist.  Subsequently, a tripartite contract was agreed on the same terms as Contract I for Mr Hart and PKM to carry out the additional works (Contract II).

Mr Hart started to trade via a limited company some time in 2014. This company was Hart Construction.

Mr Hart’s contention was that:

• he notified Ideal in January 2015 that he would from then on be trading via Hart Construction
• that there was an implied novation of Contract I and Contract II to the extent that Contract I and Contract II were dissolved and each replaced by a new contract between Ideal and Hart Construction.

Disputes arose in relation to payments claimed by Hart Construction and PKM from Ideal. Over two adjudications Hart Construction established an entitlement to substantial sums. PKM also established an entitlement to payment from Ideal in a third adjudication.

The ‘Hart Construction Adjudications’

Hart Construction (the company) was named as the referring party in the two adjudications it brought (rather than Mr Hart as an individual). Hart Construction purported to rely on a contract formed between itself and Ideal in June 2012.  Notably, June 2012 was prior to Hart Construction’s date of incorporation.

The ‘PKM Adjudication’

In the adjudication brought by PKM, PKM relied on a contract between it, Ideal and Hart Construction. This contract was said to have been agreed in September 2013.  It was common ground that Mr Hart, and not Hart Construction, was party to that tripartite contract at the time of its formation.

Ideal’s refusal to comply

Ideal did not comply with any of the adjudicators’ decisions.

In relation to the two Hart Construction Adjudications, Ideal resisted enforcement of the decisions on the basis that there was no contract between Ideal and Hart Construction; there was no effective novation, and for this reason, the adjudicator lacked jurisdiction.

In the PKM adjudication, Ideal argued PKM had relied on a contract entered into between PKM, Ideal and Hart Construction. Therefore, the adjudication was based on a contract that did not exist and the adjudicator lacked jurisdiction.

The decision

All three claims adopted the usual procedure for enforcing adjudication decisions by way of summary judgment.

For Hart Construction to succeed, it had to demonstrate that Ideal’s jurisdiction argument had no real prospect of success. Ideal had to demonstrate that it had a real prospect of successfully demonstrating that there had been no novation.

Ideal had little difficulty mounting this ‘no novation’ hurdle. There was no formal novation document in place.  The court found it was not possible to infer a novation from the circumstances presented, namely that Ideal had been advised during a telephone conversation that Mr Hart would be trading through Hart Construction. This was also disputed by Ideal.  Hart Construction had a very difficult factual case to make out, which would be dependent on the giving of oral evidence.  The court could not conclude on a summary judgment basis that a novation had taken place.

There was therefore no contract between Hart Construction and Ideal pursuant to which a dispute could arise and be referred to an adjudicator. The adjudicators in the Hart Construction adjudications lacked jurisdiction. As such, the adjudicators’ decisions could not be enforced.

Had the contracts been properly novated, the error in the way that Hart Construction had described its contracts with Ideal (i.e. the fact it had described itself as having been a party from the outset) would not have been sufficient to deprive the adjudicators of jurisdiction. The issue then would have been that Hart Construction would have incorrectly identified and described that contract. The reasoning of Stuart Smith J in Purton v Kilker Projects Limited at [23] was adopted by Jefford J:

‘The jurisdiction to refer is dependent on the existence of a construction contract and a dispute arising under it. It is not dependent upon identifying each and every term with complete accuracy so that the process of referral becomes a formalistic obstacle course akin to 18th century forms of action where one slip may put a party literally out of court.’

This reasoning saved PKM. Although PKM had incorrectly described its contract with Ideal, there was no question that there was a contract between the parties, or that a dispute had arisen pursuant to that contract. In circumstances where there was an admitted contract between Ideal, PKM and Mr Hart, PKM’s error in the adjudication documents had no relevance to the substantive dispute.

Practical implications of the case

To enforce an adjudicator’s decision, the enforcing party must be able to demonstrate (or be able to demonstrate) on a summary judgment basis that:

• there was a construction contract between the parties
• that the dispute to which the decision relates arose under that contract.

As decisions are typically enforced by way of summary judgment, the responding party need only show that they have a real prospect of successfully demonstrating that there was no contract in place to defeat the claimant’s application.

Even significant errors as to the form and content of a contract will not be sufficient to deprive an adjudicator of jurisdiction.

Where there is a dispute about whether the parties have entered into a contract at all, the enforcing party is likely to find it difficult to establish that there was a contract for summary judgment purposes. Parties should take care to properly consider the contractual basis upon which they are entitled to adjudicate before referring a dispute to adjudication.