Adjudication Matters: September 2022

What changes are being introduced to the definition of “construction contract” under the Construction Act?

The Construction Act [1] grants a statutory right to refer to adjudication a dispute arising under a “construction contract“. A construction contract is defined as an agreement for the carrying out of (or arranging for, or providing labour for) “construction operations”.

Section 105(2) of the Construction Act lists types of work that are excluded from “construction operations”.

The Construction Contracts (England) Exclusion Order 2022 (the Order) comes into force on 1 October 2022 and will extend Section 105(2) of the Construction so that more types of work will be excluded from “construction operations” and therefore will not attract a statutory right to refer a dispute to adjudication or a statutory right to payment in instalments. The Order applies to England only and does not affect construction projects in Wales.

The additional types of work that will be excluded are infrastructure project contracts where a party to the contract is a sewerage or water undertaker and the project was designated by the Water Services Regulation Authority as a “direct procurement for customers project” in accordance with the conditions of the relevant undertaker’s appointment.

Now that the statutory rights will no longer be available, parties entering into these types of contracts going forwards may wish to include a contractual adjudication mechanism to take advantage of the cost and time savings in resolving disputes by adjudication.

Is a Pay Less Notice valid if it refers to the wrong application for payment?

In the absence of a valid payment notice or pay less notice, the sum claimed in an interim payment application becomes the “notified sum” which must be paid (pursuant to section 111 of the Construction Act [1]).

In Advance JV and others v Enisca Ltd [2] Advance issued a Part 8 claim to seek declaratory relief that a pay less notice which referred to a later interim application for payment could also be relied upon as a valid notice against the earlier interim application, because it was “in substance, form and intent” a pay less notice referable to the earlier application.

The Court dismissed Advance’s claim, rejecting the argument that a pay less notice could apply to two payment cycles. The Court referred to the Construction Act’s [1] payment regime, which requires notices to be referable to individual payment cycles.

This case is a reminder that the Court will impose strict requirements on payment notices and pay less notices and failing to serve a valid notice will have draconian consequences.

Can a Notice of Adjudication be served after applying for the appointment of an adjudicator?

When referring a dispute to adjudication under the Scheme [3] the Notice of Adjudication must be served upon the responding party before making the application for the appointment of an adjudicator.

In AM Construction v The Darul Amaan Trust [4], the Notice of Adjudication had not been printed and/or enclosed within the documents which were served on AM Construction. Whilst Darul Amaan Trust argued that the Notice of Adjudication had been sent to a process server to be printed and served, the Court confirmed that emailing documents to a process server did not constitute ‘pre-paid post’ and therefore this was not effective service of the Notice of Adjudication.

This case confirms that failing to serve the Notice of Adjudication properly will lead to the appointed adjudicator being found to lack jurisdiction and his/her decision being invalid.

Can a ‘true value’ adjudication be commenced before the notified sum has been paid?

AM Construction v The Darul Amaan Trust [4] also confirmed the established principle that where an adjudicator has directed payment of a notified sum, a true value adjudication cannot be embarked upon until the paying party has first discharged its duty to pay the outstanding notified sum to the other party.

Is an adjudicator’s decision on a ‘true value’ adjudication binding upon a subsequent smash and grab adjudication?

In BexHeat -v- Essex Services Group [5] the initial dispute referred to adjudication concerned the true value of interim Payment Application 22 of a residential and extra care facility project. In the first adjudication, the Adjudicator decided that the ‘true value’ which BexHeat was entitled to be paid was £141,646.35 plus VAT and interest. Essex paid this sum.

In a’ second adjudication in respect of interim Payment Application 23, Essex had served a Pay Less Notice a day late, laying the foundations for a ‘smash and grab’ adjudication to follow. The Decision of the first adjudication had been issued the day before the deadline for serving a pay less notice for interim Payment Application 23. The Adjudicator in the second adjudication awarded payment of the amount in BexHeat’s Interim Payment Application 23, which Essex failed to pay. BexHeat commenced enforcement proceedings and Essex relied upon the argument that the true value of interim Payment Application 23 had been determined in the earlier adjudication and so the Adjudicator in the second adjudication did not have jurisdiction to determine entitlement to payment of it.

The Court rejected Essex’s argument and concluded the parties must abide by their obligations under section111 of the Construction Act [1], which prohibits withholding payment after the final date for payment in the absence of a pay less notice. Essex was required to pay the notified sum before seeking to recover any alleged overpayment of monies in its own true value adjudication.

This case is a reminder that service of a valid timely pay less notice is of paramount importance and an adjudicator’s decision must be complied with before a further adjudication can be commenced.

Procedural fairness and breach of natural justice

In Liverpool City Council -v- Vital Infrastructure Asset Management [6], the court found that an adjudicator’s decision was unenforceable because the rules of natural justice had been breached.

The Court confirmed that it is not within its remit to decide whether the adjudicator’s decision was right or wrong, only whether the decision is unenforceable: “It is enough that they decide the dispute referred to them and do not fail to deal with the key points raised by the parties in such a way as to breach natural justice.”

To establish that there has been a breach of natural justice, the breach must be significant.  For example there must have been a fundamental departure from procedural fairness. On this issue, the Court found in LCC’s favour. There was a conflict in the Framework Agreement rates which the Adjudicator had not taken into account in his Decision.  Nor had he engaged with material points in LCC’s Response. The Adjudicator had not followed a fair procedure by not allowing LCC the opportunity to make submissions on an important point/issue which was significant to the outcome of the dispute.

This case confirms that an adjudicator must follow procedural fairness and permit the parties the opportunity to make representations on points which are material to his/her decision.

What adjudication trends have we seen this month?

• We are increasingly seeing adjudicators direct that their fees and expenses be paid by the winning party and then claimed back from the losing party. This places the burden of recovery upon the winning party (who might be faced with a losing party who refuses to reimburse them).
• In a recent adjudication, an adjudicator found that a payment notice served late took effect as a valid Pay Less Notice. It was immaterial that the document had been called “payment notice”.

Please get in touch with Carly if you have any queries or would like to know more about adjudication.

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Footnotes:

[1] Housing Grants, Construction and Regeneration Act 1996 (as amended)

[2] Advance JV and others v Enisca Ltd [2022] EWHC 1152 (TCC)

[3] Scheme for Construction Contracts 1998 (as amended)

[4] AM Construction v The Darul Amaan Trust [2022] EWHC 1478 (TCC)

[5] BexHeat Limited -v- Essex Services Group Limited [2022] EWHC 936 (TCC)

[6] Liverpool City Council -v- Vital Infrastructure Asset Management (VIAM) Ltd (In Administration) [2022] EWHC 1235 (TCC)