Adjudication Matters: October 2023

UK Adjudicators 2023 London Adjudication & Arbitration Conference

Walker Morris will be attending the UK Adjudicators 2023 London Adjudication & Arbitration Conference on Thursday 21 December.

This conference brings together world leading adjudicators, arbitrators, dispute board members, lawyers, academics and students to discuss topical issues in adjudication and arbitration.

In attendance will be:

• Carly Thorpe
• Jessica Gates
• Jonathan Coser

If you would like to meet up with Carly, Jessica or Jonathan at the conference please do get in touch with them.

When will a stay of execution of an adjudicator’s decision be granted?

In Alun Griffiths v Carmarthenshire County Council [1] the TCC refused to grant a stay of execution of an adjudicator’s decision as the claimant had provided a parent company guarantee which was deemed to be sufficient security for the payment to be made.

Background

Alun Griffiths sought summary judgment to enforce an adjudicator’s decision against Carmarthenshire County Council. The Council didn’t accept that the adjudication decision reflected the true state of the parties’ account and intended to refer the issue of the true value of the works to a second adjudication.

The Council, whilst accepting that Alun Griffiths was entitled to summary judgment, sought a stay of execution pending the outcome of the second adjudication on the grounds that Alun Griffiths wouldn’t be able to repay the adjudication sum should the decision be overturned, and the parent company guarantee (offered by Tarmac Holdings) was inadequate.

Generally, the court may grant a stay if special circumstances make it inappropriate to enforce the decision [2]. The courts will exercise their discretion whilst considering the following points [3]:

• As adjudications are designed to be a quick and inexpensive method of resolving construction disputes, decisions should be enforced and the successful party shouldn’t be kept from its money.

• If the claimant is insolvent, and therefore unlikely to be able to repay the judgment sum, then a stay will usually be granted [4].

• Even if the evidence suggests that the claimant wouldn’t be able to repay the judgment sum, this won’t usually justify the grant of a stay if:
  • The claimant’s financial position is the same or similar to what it was at the time the relevant contract was made [5]; or
  • The claimant’s financial position is due to the defendant’s failure to pay the sums awarded by the adjudicator [6].

If a claimant can provide a bond or guarantee which provides sufficient security, it’s common for a judge to refuse the application for a stay [7].

The dispute

The Council argued that Alun Griffiths’ filed accounts showed a record loss and deteriorating financial position which rendered the balance sheet insolvent. They also argued the company’s growing net current liabilities indicated possible cash flow issues.

Alun Griffiths recognised the concerns raised and offered a parent company guarantee from Tarmac. The issue before the court was to determine the adequacy of the guarantee.

The Council raised two lines of argument against the parent company guarantee, concerning Tarmac’s balance sheet and cash flow.

Tarmac’s balance sheet showed a very positive net asset position, but the Council argued it was insufficient because:

• Whilst Tarmac’s balance sheet showed a positive net asset position, this was due to the carrying value of its investments in its subsidiaries; and

• The balance sheet showed a reduced net asset position compared to previous years.

It wasn’t surprising to the judge that the bulk value in a holding company’s balance sheet should be in its investments in subsidiaries. And whilst the net assets were reduced, they were still in excess of £1.5 billion. There was therefore no evidence to undermine Tarmac’s accounts based on its balance sheet.

In relation to cash flow, the Council argued that:

• Tarmac’s accounts showed substantial net current liabilities, an indicator of cash flow insolvency;

• As Tarmac didn’t hold any cash and had significant short-term liabilities, this made them cash flow insolvent; and

• The ability of Tarmac to repay the sum would depend on the cash holdings within the group.

The judge considered there were no merits to these arguments as Tarmac had a healthy balance sheet and the existence of net current liabilities doesn’t mean a company is unable to repay its debts. In any event, Tarmac’s own parent company had a substantial positive cash position and there was no evidence that it wouldn’t support Tarmac.

Decision and takeaway points

The judge concluded that the guarantee offered by Tarmac was sufficient to protect the Council’s position and so there were no grounds for a stay of execution of the adjudicator’s decision.

If a claimant can provide a parent company guarantee or bond (if there are doubts as to its solvency) which gives the defendant sufficient security, then the courts will strive to uphold the principles of adjudication – i.e., that the judgment sum shouldn’t be unnecessarily withheld from the successful party. It’s only in very rare cases that a judge will choose to stay the execution of an adjudicator’s decision.

Adjudication and breaches of natural justice

Background

Bexhill Construction and Kingsmead Homes were parties to an adjudication [8]. The adjudicator found that Bexhill was entitled to payment of the sum claimed for in its interim application and ordered Kingsmead to pay.

Bexhill issued this claim to enforce the adjudicator’s decision and Kingsmead filed a defence arguing that the adjudicator’s decision was unenforceable as it was made in breach of natural justice.

An adjudicator’s decision will normally be enforced by way of summary judgment and the court isn’t concerned with the merits of the underlying dispute. It will only be in very rare circumstances that the court will interfere with the decision of an adjudicator [9].

Kingsmead argued in its application for summary judgment that there was a breach of natural justice. This was because the adjudicator didn’t make specific reference in their decision to the arguments put forward by Kingsmead in its rejoinder. Note that the parties didn’t ask for full reasonings for the decision, but the adjudicator did choose to lay out some of their reasonings.

Following the decision, Kingsmead specifically asked the adjudicator whether the rejoinder had been considered. The adjudicator confirmed that they had considered all the submissions during the application and that those not expressly referred to didn’t impact the decision.

The judge concluded that Kingsmead didn’t have a real prospect of successfully arguing that the adjudicator failed to consider all the defences raised. There was no indication of deliberate exclusion of the rejoinder. The decision stated that the adjudicator had considered all of the submissions.

Conclusion and takeaway points

To uphold the principles of adjudication, it will only be found in rare cases that there’s been a breach of natural justice in an adjudication decision.

To avoid any doubt as to whether an adjudicator has considered all submissions, parties are advised to request that the adjudicator provides full reasons for their decision. It will also be sufficient for the adjudicator simply to state they have considered all submissions without showing how or where in detail.

Can without prejudice communications render an adjudicator’s decision unenforceable?

In AZ v BY [10] the court decided that the adjudicator had breached the rules of natural justice due to apparent bias, following one party including without prejudice documents in the adjudication.

As a matter of public policy, the “without prejudice” rule governs the admissibility of evidence and applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence. This prevents statements or offers made in negotiations for settlement being brought before the court as admissions on the question of liability, and is intended to encourage parties to settle their differences rather than litigate through the courts.

This case confirms that the test to be applied when establishing whether without prejudice material has been deployed is not whether the decision was significantly based on the without prejudice material, but instead whether the deployment of the without prejudice material gave rise to a question over the adjudicator’s decision. In other words, whether there had been a true risk of a lack of impartiality on the adjudicator’s part having had sight of the without prejudice material.

The admissibility of the communications was a question of law. The material in question contained implicit admissions which were not consistent with BY’s open position and, accordingly, was prejudicial to its interests in the adjudication. It was held that the disclosure of such material raised a question as to whether the adjudicator was inadvertently or unconsciously biased. The test for apparent bias is whether a fair-minded and informed observer would conclude that in regard to the without prejudice material there was a real possibility that the adjudicator was biased. It’s not necessary to establish actual bias. In this case there was an inevitable question mark over the result of the adjudication and whether the adjudicator had been unconsciously biased, with their decision having been shaped by the knowledge of the without prejudice communications. This rendered the decision unenforceable.

How should competing Part 7 and Part 8 claims be dealt with in adjudication?

In Lidl v Closed Circuit Cooling [8] Lidl and 3CL had a framework agreement which allowed the parties to enter into individual works orders for refrigeration and air conditioning works at Lidl’s premises. These orders each constituted separate contracts in their own right incorporating the terms of the framework agreement and the work order. 3CL, being an industrial refrigeration and air conditioning contractor, was entitled to make applications for payment subsequent to achieving defined milestones.

3CL sought payment of the amount of £781,986.22 under application for payment 19 (AFP19). Lidl argued that AFP19 was invalid because it failed to comply with the contract’s requirements (which included the identification of the milestones achieved and amounts claimed, with supporting photographs and evidence of insurance) and hadn’t been served correctly.

The dispute was referred to an adjudication in which the adjudicator rejected Lidl’s arguments and awarded 3CL the full amount claimed under AFP19 plus interest. The adjudicator decided that Lidl’s 2011-PAY-7 notice (valuing the works at nil) wasn’t a valid payment notice and that the final date for payment couldn’t be conditional on delivery of a VAT invoice. Lidl failed to pay in accordance with the adjudicator’s award and brought a Part 8 claim seeking various declarations, including a declaration that the parties’ agreement in terms of the final date for payment complied with the Housing Grants, Construction and Regeneration Act 1996. 3CL brought a Part 7 claim for enforcement and summary judgment application seeking enforcement of the decision.

Lidl raised a defence to the Part 7 proceedings, arguing that there was an alleged breach of natural justice. This was because the decision was based in part on an analysis of clause 7.4.2 of the contract. The adjudicator had reached their decision by reference to this clause but they considered there had been no opportunity to make submissions on it and neither party had raised it previously.

3CL had relied on the fact that 2011-PAY-7 described itself as being a pay less notice. The adjudicator had pointed out that the definition of the term payment notice was found at clause 7.4.2 of the contract, but the notice in question went further than what was required as described in the clause because it levied liquidated damages. When establishing what payment is due it’s not appropriate to make a deduction for liquidated damages. A withholding or deduction in the form of levying liquidated damages would fall under a requirement of part of a pay less notice because a deduction isn’t intended to be included in how a party establishes what amount is due in a payment notice. The judge rejected Lidl’s natural justice argument on the basis that Lidl had simply failed to address the clause in its Response and had failed to demonstrate that the point was properly arguable.

The Part 7 claim succeeded, and Lidl wasn’t entitled to the Part 8 declarations sought. Summary judgment was granted in 3CL’s favour, enforcing the adjudicator’s decision.

Here, the contract’s requirements were found not to be conditions precedent to the validity of a payment application. They were simply contract obligations rather than conditions precedent. Lidl hadn’t rejected any previous applications for payment due to a lack of photographic evidence. The judge found that any challenge to the validity of the payment notice now would fail on the basis of estoppel by convention.

Additionally, the judge found that the provision of a VAT invoice wasn’t a condition precedent to the validity of AFP19 and so payment couldn’t be contingent on submission of a VAT invoice. In other words, the final date for payment under a contract can’t be fixed to an event or mechanism. The final date for payment should only be calculated by reference to a period of time from the due date as required by Section 110(1)(b) of the 1996 Act. As the contract wasn’t compliant in this way, the provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 would be incorporated, which in turn meant that payment of AFP19 was overdue. It was decided that 2011-PAY-7 wasn’t a valid payment notice. It was an invalid pay less notice, being a combined pay less notice and payment notice as a matter of content and substance, in the absence of a prior payment notice. Parties can’t issue a combined payment and pay less notice under the Act.

Finally, AFP19 didn’t need to be served in accordance with the contract’s provisions for the service of notices, where the contract didn’t specifically stipulate this. Parties should always carefully check their contractual provisions. This judgment is specific to the contract in question as each case turns on its own facts.

The decision provides guidance on the correct procedure to adopt in cases involving a Part 7 summary judgment application and a competing Part 8 application seeking determination that an adjudicator’s decision was wrong and shouldn’t be enforced. The correct order in which to consider the issues is as follows:

• Are there any genuine substantive defences to the summary enforcement, for example, lack of jurisdiction or breach of the rules of natural justice, in the Part 7 defence or Part 8 claim? If so, these defences should be determined first and foremost. In the absence of any real defence, the adjudicator’s decision should be summarily enforced.

• In order for the court to determine, within the confines of a summary expedited hearing of the Part 8 claim, whether an adjudicator’s decision was wrong (because of any other substantive issues which have been raised in the Part 8 claim), it must first assess:
  1. whether or not it can fairly undertake that exercise on that basis;
  2. and whether or not the consequence, if in favour of the Part 8 claimant, would it be unfair for the court to enforce the adjudicator’s decision. It would be unfair for the court to enforce the adjudicator’s decision. It is not always easy to determine at the outset whether or not the Part 8 issues can fairly be determined at the hearing. In this case it was fairer to both parties to hear the arguments on a provisional basis whilst reserving judgment on the question of whether or not the court should proceed to determine them.

• If the court deems it appropriate to undertake the exercise of a summary determination of the issues in the Part 8 claim then it should do so and determine the consequences so far as summary enforcement of the adjudicator’s decision is concerned.

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, Jessica Gates or Georgina Blenkin.

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[1] Alun Griffiths (Contractors) Limited v Carmarthenshire County Council [2023] EWHC 2269 (TCC)

[2] Rule 83.7(4)(a) of the Civil Procedure Rules 1988

[3] Wimbledon Construction Company 2000 Ltd v Derek Vago [2005] EWHC 1086 (TCC)

[4] Bouygues (UK) Limited v Dahl-Jensen (UK) Limited (2000) EWCA Civ 507 and Rainford House Limited v Cadogan Limited [2001] BLR 416

[5] Herschel Engineering Limited v Breen Property Limited (unreported) 28 July 2000, TCC

[6] Absolute Rentals Limited v Glencor Enterprises Limited [2000] C.I.L.L. 1637

[7] FG Skerritt Limited v Caledonian Building Systems Limited [2013] EWHC 1898 (TCC)

[8] Lidl Great Britain Limited v Closed Circuit Cooling Limited (t/a 3CL) [2023] EWHC 2243 (TCC)

[9] Carillion Construction Limited v Devonport Royal Dockyard [2005] EWCA Civ 1358

[10] AZ v BY [2023] EWHC 2388 (TCC)