Resisting an adjudication enforcement through set-off

CNO Plant Hire Ltd v Caldwell Construction Ltd [2024] EWHC 2188 (TCC)

Factual Background

Pursuant to a subcontract, Caldwell Construction Ltd (“Caldwell”) engaged CNO Plant Hire Ltd (“CNO”) in September 2022 to undertake various works on a project at Poverty Lane, Maghull.

The subcontract agreement between the parties did not comply with the adjudication requirements under the Construction Act [1]. Therefore, as a result, the Scheme [2] applied.

In December 2023, CNO submitted an interim application for payment of £253,425.56 (“the Application”). Caldwell failed to issue a payment notice or pay less notice and did not pay the requested sum. Consequently, CNO said that the sum claimed in the Application was the notified sum due and referred the matter to adjudication on a “smash and grab basis”.

In the first adjudication, the adjudicator, ruled in favour of CNO, requiring Caldwell to pay the sum stated in the Application of £253,425.56 plus interest and the adjudicator’s fees. Caldwell did not comply with this decision and instead initiated a second adjudication for a “proper valuation of the final account.” The amount awarded to CNO by the second adjudicator was a significantly lower sum of £89,480.94.

In April 2024 Caldwell paid CNO £63,695.38. Caldwell calculated this payment as the £89,480.94 awarded by the second adjudicator less statutory CIS contributions.

CNO sought to enforce the first adjudication decision through the courts.

Caldwell defended this claim on the basis that the sum awarded in the second adjudication should be set-off from the sums awarded in the first adjudication. Caldwell did not issue any enforcement proceedings in respect of the second adjudication.

The parties also disputed whether Caldwell was correct to deduct CIS contributions from the sum awarded in the second adjudication.

Judgment

The judge rejected Caldwell’s set off defence and stated that a party seeking to offset decisions must have both decisions scrutinised for enforceability. Therefore, since Caldwell had not initiated enforcement proceedings for the second adjudication, the set-off should not be considered by the court.

The court highlighted that set-off is not generally permitted for adjudication decisions and awards are to be enforced summarily and expeditiously. The judge referred to key precedents such as HS Works Ltd v Enterprise Managed Services Ltd [3] and FK Construction Ltd v ISG Retail Ltd [4], which establish that courts cannot permit set-off between adjudication decisions without formal enforcement of both decisions.

Caldwell had not sought enforcement here and did not argue either of the two usual defences to enforcement – a lack of jurisdiction or a breach of natural justice – relating to the first adjudication and instead invited the court to order a set-off.

The court determined that, in any event, the second adjudication was unenforceable as it related to the same works and amounts as decided in the first adjudication.

Finally, the court also held that Caldwell had been wrong to deduct CIS contributions from the sum awarded in the second adjudication. The courts held that if the adjudicators had intended CIS contributions to be deducted, they would have expressly said this in their decisions.

Takeaway Points

This judgment reaffirms the principles that

• Adjudication decisions must be complied with without deduction.
• The courts will enforce adjudication decisions swiftly without set off, unless exceptional circumstances arise.

Interpretation of termination provisions in the JCT Design and Build Contract 2016:

Providence Building Services Limited v Hexagon Housing Association Limited [2024] EWCA Civ 962

The Court of Appeal has overturned the judgment of the TCC and the previous adjudication decision regarding the correct interpretation of the termination provisions in the JCT Design & Build Contract 2016.

Background

Providence Building Services Limited (“Providence”) was engaged by Hexagon Housing Association Limited (“Hexagon”) under a JCT Design and Build 2016 Contract for the construction of buildings in Purley, valued at £7.2m (“the JCT”). The JCT provided for interim payments by Hexagon, with each final date for payment being 21 days from its due date.

Clause 8.9 of the JCT states as follows:

“8.9.1 If the Employer:

1. does not pay by the final date for payment the amount due to the Contractor in accordance with clause 4.9 and/or any VAT properly chargeable on that amount…the Contractor may give to the Employer a notice specifying the default or defaults (a ‘specified’ default or defaults).

8.9.3 If a specified default or a specified suspension event continues for 28 days from the receipt of notice under clause 8.9.1 or 8.9.2, the Contractor may on, or within 21 days from, the expiry of that 28 day period by a further notice to the Employer terminate the Contractor’s employment under this Contract.

8.9.4 If the Contractor for any reason does not give the further notice referred to in clause 8.9.3, but (whether previously repeated or not):

1. the Employer repeats a specified default…then, upon or within 28 days after such repetition, the Contractor may by notice to the Employer terminate the Contractor’s employment under this Contract.” [Emphasis added]

In December 2022 Hexagon failed to pay the notified sum by the final date for payment. This prompted Providence to issue a default notice under clause 8.9.1 of the JCT. Hexagon eventually made the payment 13 days later.

In April 2023, Hexagon again failed to make payment by the final date for payment, leading Providence to issue a termination notice under clause 8.9.4 referring back to the December payment asserting that Hexagon had repeated its default. Less than a week later, Hexagon made the payment in full.

Hexagon argued that the notice of termination issued by Providence was invalid and that by issuing this Providence was in repudiatory breach. Hexagon referred the dispute to adjudication, in which the adjudicator found in favour of Hexagon.

Consequently, Providence filed Part 8 proceedings regarding the correct interpretation of clause 8.9 of the JCT.

TCC Judgment

In the TCC, the judge emphasised that termination clauses must be strictly construed and complied with. He interpreted clauses 8.9.3 and 8.9.4 of the JCT by focusing on their natural and ordinary meanings.

He found that clause 8.9.4 required that the Employer had failed to remedy the previous default within 28 days as set out in clause 8.9.3. Clause 8.9.4 did not require the Contractor to have served a notice under clause 8.9.3 for a right to terminate to arise, however the 28-day period stated in clause 8.9.3 must have elapsed for the original default to be relied upon.

Here Providence had made payment of the sum originally demanded within 28 days and so had remedied the specified default within 28 days.

As such the judge concluded that the right to terminate under clause 8.9.4 had not arisen and Providence’s termination notice was invalid.

Court of Appeal

The Court of Appeal held that the phrase “for any reason” under clause 8.9.4 is sufficiently broad to cover situations where the right to serve a notice under clause 8.9.3 had not arisen. In particular if the reason a notice had not been issued under clause 8.9.3 was because the 28-day period had not passed.

Under that interpretation, even in cases where the Contractor did not have a cumulative right to provide the additional notice mentioned in clause 8.9.3, the right to terminate under clause 8.9.4 would still arise.  Lord Justice Stuart Smith concluded that: “…the natural meaning of the words in Clause 8.9.4 viewed on their own does not give rise to an inference or an implication that the Contractor could have given a further notice but did not do so.”

Further, the judge pointed out that the purpose of these clauses is to incentivise and encourage the party in question to meet their contractual responsibilities (paying by the deadline in this case), and that the wronged party may terminate the agreement if the specified default is repeated.

Providence therefore had a right to terminate the Contract as a result of Hexagon’s repeated defaults despite the original default being corrected within 28 days.

Takeaway Points

This case highlights the importance of approaching termination cautiously and with careful consideration. A termination will be invalid if the clause requirements are not strictly adhered to.

Can an Adjudicator award more than what is claimed in a Referral Notice?

Bell Building Ltd v TClarke Contracting Ltd [2024] EWHC 1929 (TCC) [5]

Factual Background

This case is a continuation of an earlier judgement TClarke Contracting Limited v Bell Build Limited [6] from April 2024 which we discussed in our May 2024 Adjudication Matters bulletin (Adjudication Matters: May 2024 – Walker Morris).

In summary, Bell Building Ltd (Bell) and TClarke Contracting Ltd (TCL) entered into a Sub-Contract for Bell to supply and install the substructure and superstructure for a Data Centre at Greenwich Point, London.

On 20 April 2023 Bell issued its Interim Application 18 seeking payment of £20,915,777.43 less retention of £627,473.36. TCL issued a corresponding Pay Less Notice of £710,120.61 on 06 June 2023, and on 21 June 2023 TLC made payment of this sum to Bell.

Subsequently, TLC also made a further payment to Bell in the amount of £685,591.18 in relation to Interim Application 19.

Sometime afterwards, Bell contested the Pay Less Notice issued in respect of Interim Application 18 and commenced adjudication proceedings.

In their Referral, Bell argued that the adjudicator did not have jurisdiction to undertake a true value of the Payment Claim (it was a smash and grab based on the allegedly invalid Pay Less Notice), which according to Bell was valued at £1,443,981.51, plus VAT. Significantly, this was £385,732 more than what they had applied for in Interim Application 18. When asked by the adjudicator to explain this difference, Bell said “it was because the sum applied for under Application No. 18 reflected the increase in value of the completed work since the last application”. These sums were also less retention and sums already paid, including sums paid by TCL against Interim Application 19 (i.e. less the £710,120.61 and the £685,591.18).

TCL argued in its Response in the adjudication that if the Pay Less Notice were invalid, when determining Bell’s entitlement, the adjudicator was constrained to the sums claimed and paid to date in Interim Application 18 only.

The adjudicator determined that the Pay Less Notice was invalid.

The adjudicator agreed that Bell could not claim any of the monies in relation to Interim Application 19 in this adjudication. However, the Adjudicator did award Bell £685,691.18 more than what was claimed in Interim Application 18 because: (a) this was a “technical adjudication” i.e. smash and grab (which did not give jurisdiction to reassessing the claim value); and (b) in TCL’s submissions, they argued that the adjudicator should not have regard to payments made against Interim Application 19. This led to the payment figure being increased to £2,129,672.69, plus VAT, as payments made under Application 19 were not considered by the adjudicator.

Bell then sought to enforce the adjudicator’s award, and TCL sought to avoid enforcement. First, by way of Part 8 Proceedings by getting a binding declaration that the Pay Less Notice was valid. This claim was the subject of the Court’s April 2024 Judgment and was rejected.

In this second action, TCL defended the enforcement by arguing that the adjudicator lacked jurisdiction to arrive at his award, and/or was in breach of natural justice on the basis that the adjudicator took it upon himself to value the work done and award a sum higher than that sought by Bell in the Referral.

Judgment

In respect of the breach of natural justice claim, the Court held that the material relied on by the adjudicator to justify the sum that he decided to order was put before him by Bell in answer to a question from the adjudicator. The adjudicator therefore decided the case upon the facts presented to him by both sides. Both parties were aware of the relevant material and the issues placed to the adjudicator in correspondence. Therefore, there was no breach of natural justice.

In respect of jurisdiction, the Court held that the adjudicator did have jurisdiction to award the higher sum, on the basis that it was TCL themselves who invited the adjudicator to ignore the payments made by them against Interim Application 19. As the Court put it “TCL’s submissions therefore opened up the possibility of a different, greater assessment of the sum due than claimed. The Adjudicator was therefore acting within his jurisdiction to determine the sum due as he saw fit in response to the submissions made by TCL“.

Take Away Points

This case is a reminder that the courts will seek to enforce adjudication awards.

Parties should be mindful (particularly in their submissions) that even in a smash and grab adjudication, the potential exposure is not limited to the sums claimed in the Referral. Adjudicators are free to carry out their own evaluation of the sums due based on the material presented to them.

The Court’s Power to Correct Adjudication Awards

ISG Retail Ltd v FK Construction Ltd [2024] EWHC 1713 (TCC) [7]

Factual Background

The dispute concerned works executed by the defendant, FK Construction Ltd (FK), as sub-contractor, whilst acting under a construction contract for the claimant ISG Retail Ltd (ISG), as main contractor, in relation to works to a distribution centre located at London Gateway Logistics Park, Essex.

Brief Summary of Facts:

ISG applied to enforce an adjudicator’s award ordering FK to pay

• £191,740 for ‘pallet store works’.
• £303,706.54 for ‘rooflight underdrawing works’.

There was no issue regarding the award issued in relation to (1) and a summary judgment was granted by the court.

However, FK objected to the second part of the award at (2) arguing that the adjudicator had made an error in the quantification of damages.

Key Issues:

• Prior to this Part 7 claim in the Technology and Construction Court in Liverpool, FK had already issued a Part 8 in the Technology and Construction Court in London (seeking a declaration that the adjudicator had calculated the award incorrectly).
• In response to ISG’s application for summary judgment in the Part 7 claim, FK made an application seeking that its Part 8 claim should be heard alongside the summary judgment application, or that the two sets of proceedings should be consolidated. This application was granted and both proceedings were subsequently heard alongside each other.
• The issue was whether the adjudicator had erred in the approach he adopted to calculate the damages due to ISG. In assessing the damages, the adjudicator had used the amount payable for the value of the works to be carried out by FK. Nothing had been paid pursuant to the decision.
• FK argued that the adjudicator’s calculation was a breach of natural justice. In this way, it was not a simple arithmetic error, as the issue was pointed out to the adjudicator, and he refused to amend his calculation. On this basis FK argued that the good parts of the award could not be severed from the bad.

Judgment

The court held that the adjudicator had made an error in his approach to the assessment of damages. The error had been in giving ISG the benefit of the value of the works when it had paid only a fraction of the cost of them. When the contract was breached by FK, ISG had only partially paid for the completed works. This was something that the Adjudicator had not considered when calculating ISG’s loss. Rather, he calculated the loss based on the total value of the overall costs of the works (without considering ISG’s actual payment to FK). This greatly inflated ISG’s loss.

Adjudication decisions are usually upheld when it is evident that the adjudicator has broadly acted in accordance with the rules of natural justice, even where it is shown that they have made an error (see Macob Cicil Engineering Limited v Morrison Construction Limited) [8].

However, there are exceptions to this rule. For example, if it would be ‘unconscionable’ for the court to ignore the error. As established in (see Hutton Construction Ltd v Wilson Properties (London) Ltd) [9].

Here the Court found that:

• FK was simply pointing to an error in the adjudicator’s approach to the quantification of damages he had found. If the court were to ignore the error, this would be unconscionable as ISG would recover a windfall sum.
• Therefore, instead of the adjudicator’s award of £303,706.54, the second part of the Decision was reduced to £120.713.06.

Summary judgment was therefore granted on the amended award.

Take Away Points

This is a further example that enforcement actions are difficult to defend, even in cases where there has been an obvious error. What is unique, however, in respect of this case is that the error in question was not a simple arithmetic error, but an error in the approach to quantification adopted by the adjudicator. That summary judgement was granted (albeit it on the amended award value), also provides helpful guidance on these issues.

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[1] Housing Grants, Construction and Regeneration Act 1996

[2] Scheme for Construction Contracts (England and Wales) Regulations 1998

[3] HS Works Ltd v Enterprise Managed Services Ltd [2009] EWHC 799 (TCC)

[4] ISG Retail Ltd v FK Construction Ltd [2024] EWHC 1713 (TCC) (28 May 2024) (bailii.org)

[5] Bell Building Ltd v TClarke Contracting Ltd [2024] EWHC 1929 (TCC) (25 July 2024) (bailii.org)

[6] TClarke Contracting Limited -and- Bell Build Limited [2024] EWHC 992 (TCC)

[7] ISG Retail Ltd v FK Construction Ltd [2024] EWHC 1713 (TCC) (28 May 2024) (bailii.org)

[8] Macob Civil Engineering Limited v Morrison Construction Limited [1999] BLR 93

[9] Hutton Construction Ltd v Wilson Properties (London) Ltd [2017] EWHC 517 (TCC)