Adjudication Matters: June 2023

When will the court offset a payment across multiple adjudication decisions?

In FK Construction Ltd v ISG Retail Ltd [1] ISG appointed FKC as sub-contractor for two projects, Barberry and Triathlon. Disputes arose on both projects resulting in seven adjudications (four on Barberry, three on Triathlon).

FKC brought court proceedings to enforce an adjudication decision on project Barberry under which ISG were liable to pay FKC £1.7 million. ISG resisted enforcement arguing it had a valid set off against the net sum due to ISG under the Triathlon decisions, and/or against the gross value of the works determined in a decision by another adjudicator on project Barberry, which would reduce the payment due to £900,000.

The general position is that an adjudicator’s decision must be paid in full, without deduction or set off. There are three exceptions. The third exception, which ISG sought to rely upon, is that in an appropriate case and at the discretion of court, where two valid and enforceable adjudication decisions exist involving the same parties and the effect of which are that monies are owed by each party to the other, one decision can be set off of the other (HS Works Ltd v Enterprise Managed Services Ltd [2009] EWHC 729 (TCC) [2]).

In considering ISG’s defence the court confirmed the four tests that must be satisfied in order for set off to apply between two adjudication awards between the same two parties:

1. Validity – both decisions must be valid.
2. Enforceability – if valid, then both decisions must be capable of being enforced or given effect to.
3. Separate proceedings – if both decisions are valid and enforceable, the court should give effect to them both, provided that separate proceedings have been brought by each party to enforce each decision.
4. Discretion – where the three tests set out above are satisfied, the court has discretion to permit a set off.

The court found that the above four tests were not satisfied here because ISG fell at the first hurdle of validity. The court could not determine whether one of the decisions was valid and was not asked to do so.

The court determined the facts were “so far removed” from those in HS Works that exercise of the discretionary approach adopted by Akenhead J in HS Works wasn’t justified.

Accordingly the court refused to accept set off.

The case is a useful reminder that there are limited exceptions to the general rule that an adjudicator’s decision will be robustly enforced without set off or deduction.

Clarification of the court’s approach to adjudication enforcement proceedings and concurrent Part 8 claims.

In Sleaford v Isoplus [3] the court considered two consolidated sets of proceedings which both arose out of one adjudicator’s decision. The first was a Part 8 claim made by Sleaford seeking a declaration that the adjudicator’s decision was not enforceable. The second was a Part 7 claim made by Isoplus to enforce the adjudicator’s decision in its favour.

In the adjudication proceedings, as part of the redress sought, Sleaford had asked the adjudicator to “advise” the parties if “all pre-requisites for payment have been complied with in respect to insurances and provision of sub-subcontract conditions etc to enable payment to be made without being in breach of the Subcontract”. Sleaford argued that Isoplus had not complied with clause 21.4 of the relevant subcontract which stated that, as a precondition to payment of any sum related to their work, Isoplus must provide to Sleaford copies of executed sub-subcontracts within a specified period of time.

Isoplus, in its Response, raised the point that the adjudicator was not empowered to “advise” the parties, such that the advice sought by Sleaford should be refused. In any event, Isoplus argued that Sleaford had not provided any particulars on the issue claimed.

The adjudicator decided that payment should be made to Isoplus, noting “on the balance of probabilities that compliance with clause 21.4 is required as a precondition to payment of any sums related to a sub-subcontractor. Based on the information provided I am not able to confirm whether [Isoplus] have complied with this obligation.” Sleaford asked the adjudicator to correct the decision on the basis that the adjudicator had clearly decided that clause 24.1 was a precondition to payment which Isoplus had failed to comply with. The adjudicator refused to amend her decision and as such, Sleaford issued a Part 8 claim seeking declaratory relief on the basis that Isoplus had not complied with the pre-requisites for payment in clause 21.4 and that as a result, Isoplus was not entitled to payment of the award as directed by the adjudicator.

Isoplus subsequently issued a Part 7 claim seeking enforcement of the adjudicator’s decision and the two claims were consolidated.

The court criticised the waste of public resource caused by Isoplus’ decision to issue the Part 7 claim in Manchester when Sleaford’s Part 8 claim had already been issued in London.

Having considered the consolidated claims, the court decided that the matters put forward by Sleaford were not suitable for determination by means of Part 8 proceedings and therefore dismissed the claim.

In coming to its decision the court noted that the fact that there were a number of questions to be answered as part of the proceedings was not, in itself, a reason to disallow Sleaford’s Part 8 claim. However, the court did note that the questions should be identified with a sufficient degree of clarity and was of the opinion that Sleaford had failed to do this.

After dismissing Sleaford’s Part 8 claim, the court found in favour of Isoplus in its Part 7 claim and awarded payment of £323,502.32 plus interest.

This case is an important reminder of a number of procedural points including:

• The factors a party should consider when deciding if it should seek a declaration by way of Part 8 proceedings, or whether Part 7 proceedings would be more appropriate, following an adjudicator’s decision.

• The importance of taking care to ensure that submissions in both adjudication and court proceedings are free from ambiguity, particularly when a party is drafting these submissions without the assistance of legal representation.

• Related proceedings should be issued in the same court so as not to waste public resources.

Is a missing appendix sufficient to make an application for payment invalid?

The Scottish case of AGB Scotland Ltd v McDermott [4] concerns the enforcement of a smash and grab adjudication decision. The adjudicator found in favour of AGB and directed that McDermott pay to AGB £380,000.00 plus VAT. McDermott failed to comply with the adjudicator’s decision and AGB issued enforcement proceedings.

In resisting enforcement, McDermott argued that the adjudicator had failed to exhaust his jurisdiction by not properly addressing a particular line of defence from McDermott. The Interim Payment Notice referred to an appendix which contained details of the sums awarded. This appendix was, in error, not included with the Interim Payment Notice when served. McDermott argued that this meant the Interim Payment Notice was not a valid application for payment because it did not set out the proper basis of the sums claimed.

McDermott argued that the adjudicator’s general assertion that he had considered all of the submissions made by the parties in coming to his decision did not remedy the adjudicator’s alleged failure to specifically consider one particular element of McDermott’s defence.

The court rejected McDermott’s arguments. The court found that the adjudicator’s decision clearly set out proper consideration of McDermott’s defence in respect of the missing appendix, and that the adjudicator had therefore properly exhausted his jurisdiction in this regard. McDermott was therefore ordered to pay the sums as set out in the adjudicator’s decision to AGB.

This case shows that the courts will continue to robustly enforce adjudicator’s decisions and it will be difficult to persuade the court that an adjudicator has failed to consider a particular aspect of a party’s case.

King’s College London launches the 2023 survey in construction adjudication

In 2022, the Centre of Construction Law & Dispute Resolution at Kings College London (CCDLDR) and The Adjudication Society published the report “2022 Adjudication in the United Kingdom: Tracing trends and guiding reform”. The report provided an extensive account and assessment of the state of play of construction adjudication.

The key findings of the 2022 report were:

• Parties generally comply with adjudicators’ decisions. 25% of participants had not experienced an adjudicated dispute being referred to litigation or arbitration. 42% of participants stated this occurs in less than 5% of cases.

• 40% of participants, on at least one occasion, felt that the adjudicator was biased towards one of the parties.

• Only 16% of participants said adjudications are typically resolved within the 28-day period. Most participants said adjudications typically take 29-42 days. Participants believed it was the complexity of the claim rather than the value causing the delay.

• The leading causes of disputes are inadequate contract administration (49%), changes made by the client (46%) and exaggerated claims (43%).

• Adjudication suffers from the poor diversity of adjudicators. For example, based on a limited number of publicly available Adjudicator Nomination Body panels, only 7.88% of adjudicators are women.

• The most common value of an adjudication claim is between £125,001 and £500,000.

The CCLDR now invites adjudication users to participate in the 2023 survey of UK construction adjudication to aid recommendations “for making adjudication more transparent, cost-effective and fair”.

The survey closing date is 23 June 2023.

Adjudication v Arbitration – the key points to note

If you are not regularly involved in legal proceedings it can be easy to confuse the dispute resolution processes of adjudication and arbitration. So we set out below a hand guide for ease of reference:

Length of proceedings

Adjudication: Adjudication offers a quick process for settling construction disputes on a provisional interim basis. It can take just 28 days, though the time period will often be extended if there is agreement between the parties.

Arbitration: Arbitration was initially intended to be a quick dispute resolution tool, but this has significantly slowed down as parties often seem to adopt a litigious approach. Arbitration can now take several months or even years to conclude.

Appointment

Adjudication: Part II of the Housing Grants, Construction and Regeneration Act 1998 (and, if applicable, the Scheme for Construction Contracts), sets out the adjudication timescales and procedure. Pursuant to this legislation, any party to a construction contract (within the scope of the Act) can appoint an adjudicator and refer any dispute arising under a construction contract to adjudication at any time.

Arbitration: The parties involved in a dispute will choose an arbitrator or panel of arbitrators to make binding decisions in respect of the dispute.

Formalities

Adjudication: The adjudication process is less formal than arbitration. Strict rules of evidence do not apply and the parties produce only the documents that they rely on. Rules of procedure are selected by the parties (usually the rules of the adjudicator nominating body or as set out in the contract) and the adjudicator must comply with the rules of natural justice.

Arbitration: Arbitration is more formal than adjudication but (typically) less formal/stringent than litigation. As with adjudication, strict rules of evidence do not apply. However, the arbitral rules agreed by the parties usually dictate the process of production of evidence and the disclosure process usually involves the production of categories of documents requested by the other party. There is also a statutory requirement on the arbitrator to adopt procedures suitable to the circumstances of the particular matter.

Consideration of issues

Adjudication: Due to the short timescales, adjudication may not fully examine all issues and will instead focus on the substantive points.

Arbitration: An arbitration should include a fuller examination of more complicated issues, hence why it can take much longer.

Legal fees

Adjudication: Costs are much lower due to the quicker process and usually adjudication deals with a single dispute. Each side bears its own costs. The parties are jointly and severally liable for the adjudicator’s fees and expenses.

Arbitration: Arbitration is costlier than adjudication as there is a more in-depth process.  There is, however, the possibility of recovering legal costs from the other party.

Outcomes

Adjudication: Adjudication usually leads to a monetary award or remedy where one party is instructed to perform a contractual obligation within a timescale.

Arbitration: The remedies requested in an arbitration must be legal remedies capable of being performed. This is subject to rules or laws surrounding the arbitration and enforcement of certain issues so creative remedies are not possible.

Binding decisions?

Adjudication: The adjudicator’s decision is binding until finally determined by arbitration, litigation or agreement.  If one side does not comply with the adjudicator’s decision, enforcement procedures are available through the court.

Arbitration: The arbitrator’s decision is legally binding and can be enforced through the courts.

Challenging the decision

Adjudication: Challenging an adjudicator’s decision and its subsequent enforcement should only be done following specialist legal advice and a successful challenge can be rare. However, it is possible to challenge a decision on the grounds that the adjudicator exceeded their jurisdiction or breached the rules of natural justice.  For example, this could be due to a lack of a construction contract, the dispute not crystallising, or the correct procedures not being followed when appointing the adjudicator.

Arbitration: There are limited grounds to appeal the final decision of an arbitrator.

Confidentiality/Privacy

Adjudication: Unlike court judgements, adjudicator’s decisions are rarely made public. However, adjudicator’s decisions are not considered to be confidential unless parties to adjudication enter into a confidentiality agreement.

Arbitration: Unlike court judgements, adjudicator’s decisions are rarely made public. However, adjudicator’s decisions are not considered to be confidential unless parties to adjudication enter into a confidentiality agreement.

How we can help

If you have any queries in respect of this bulletin or would like to know more about adjudication please contact Carly Thorpe.

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[1]   FK Construction Ltd v ISG Retail Ltd [2023] EWHC 1042 (TCC)

[2]   HS Works Ltd v Enterprise Managed Services Ltd [2009] EWHC 729 (TCC)

[3]   Sleaford Building Services Ltd v Isoplus Piping Systems Ltd [2023] EWHC 969 (TCC)

[4]   AGB v Scotland Ltd v McDermott [2023] CSOH 31