In a recent High Court decision a contractor failed in its bid to put a developer into liquidation which refused to pay an adjudication award
Statutory adjudication was introduced a little over 20 years ago by the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”) . It is often described as a “pay first, argue later” mechanism for resolving disputes in the construction industry and one of its primary purposes was to try and protect contractor cash-flow during construction.
A so called ‘smash and grab adjudication’ is where a contractor claims payment of the amount stated in an interim application due to a failure by the employer to serve either a payment notice or a payless notice, even though the interim application may not represent the true valuation of the work. However, many commentators and some judges felt that this use of the adjudication process was unsatisfactory and it recently led to a change in judicial approach.
In Grove Developments v S&T (UK) Ltd  one of the most respected judges in the Technology and Construction Court (Mr Justice Coulson – now Lord Justice Coulson following his recent elevation to the Court of Appeal) commented on the injustice that can flow from the payment mechanisms in the Construction Act. Lord Justice Coulson identified the difference between the sum stated as due as an interim payment (which is merely the consequence of a failure to serve a pay less notice) and the sum actually due which is the true valuation of the works. He awarded Grove a declaration that it was entitled to adjudicate the “true value” of S&T’s payment application even though its (Grove’s) payment and pay less notices might have been invalid (as contended for by S&T).
Hot on the heels of Grove comes a decision from the Insolvency and Companies List of the High Court (the old Companies Court). In Re a Company  the court had to decide if a contractor could wind-up (i.e. put into compulsory liquidation) a developer which had not paid an adjudication award, even though the contractor had a High Court judgment for the award. It took just a day for the judge to throw out the winding-up petition and order the contractor to pay the developer’s costs in full.
The judge in Re a Company  observed that it might seem odd that a judgment debtor could not enforce a judgment and so it is worth looking at the facts. The employer was the developer of a central London hotel. The contract was subject to substantial delays and the employer and contractor entered into a Memorandum of Understanding (“MOU”) which contained temporary alternative payment provisions. The contractor made a payment application under the contract during the currency of the MOU. The employer believed that it did not need to serve a payment certificate nor payless notice because of the MOU. The contractor issued adjudication proceedings and was awarded £819,363 including VAT. At the time of this award the contractor had already been paid approximately £8.5m under the contract.
The employer refused to pay and the contractor issued a winding-up petition based on the unpaid award. The employer issued proceedings in the Technology and Construction Court (TCC) contending that the award was invalid for breach of natural justice. The contractor made a cross-application for summary judgment. The contractor also commenced a second adjudication in respect of its next payment application in which it claimed a gross valuation of £11.7m (against £8.5m paid).
A deputy judge of the TCC dismissed the employer’s breach of natural justice claim and awarded the contractor summary judgment based on the first adjudication award. A short time later the decision in the contractor’s second adjudication was issued and the adjudicator (who was different to the first adjudicator) awarded the contractor nil. In fact, he decided that the valuation was just over £7m which meant that the contractor had already been overpaid by some £1.5m. The adjudicator did not have jurisdiction to order the contractor to repay this sum to the employer though. Notwithstanding the second adjudication decision the contractor pressed ahead with the winding-up petition in the hope of forcing the employer to pay the first adjudication award, even though it was more than cancelled out by the second adjudication award. Accordingly, the employer applied to strike out the winding-up petition as an abuse of the Court’s process.
There was no dispute that the contractor had a perfectly valid High Court judgment for £819,363 which could not be subject to set-off. However, the judge noted that, following the judgment in Grove Developments, the second adjudication result meant that the employer was entitled to claim a refund, by way of restitution, significantly in excess of the judgment amount. Therefore, applying the Court of Appeal authority in Re Bayoil SA  the judge decided that there was a bona fide cross-claim (as distinct from a set-off) on substantial grounds, so that the winding-up petition was not appropriate. It was struck out and the contractor was ordered to pay all of the employer’s costs of the strike out application.
The decision supports Lord Justice Coulson’s judgment in Grove and is consistent with the Court’s reluctance to apply the ‘pay now, argue later’ ethos of adjudication in all circumstances. Adjudication was intended as a procedure for resolving disputes without resorting to lengthy and expensive court proceedings. As case law develops around it though, and lawyers and construction experts are often involved, interim adjudication skirmishes can be very expensive, particularly on valuation. Contractors should think carefully about whether to adjudicate on the basis of an employer’s failure to serve a timely payless notice. They should consider the status of the overall account at that point because, if it is not firmly in the contractor’s favour, and the employer retaliates with an interim valuation adjudication, it could be left with a very expensive and pyrrhic payless notice victory.
11 July 2018
This Legal Update is published as a general guide only and it is not intended to contain definitive legal or professional advice, which should be obtained as appropriate in relation to any particular matter. This publication relates to matters prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
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