Construction adjudication, DTI reforms and latest cases on payment and enforcement

By Simon Tolson
Construction law programme for TEN/Einstein Network
January 2002

The purpose of this programme is to provide an update on the most important developments which have emerged since our last programme.

We shall be looking at:

The DTI proposals for improving adjudication in the Construction Industry;
The latest reported cases on payment and withholding being one of the areas where the law has been steadily developing;
The interplay between the Companies Court and the HGCR Act including discussion of some potentially “disturbing” developments.

We are joined by Simon Tolson, a partner of Fenwick Elliott, Stuart Kennedy who is a specialist construction counsel with 3 Paper Buildings and last but not least Mr Justice Forbes who is the Judge in Charge of the Technology and Construction Court.

The DTI proposals for improving adjudication in the construction industry

On 25 April 2001 the DETR issued for consultation proposals for improving adjudication procedures, setting out how the legislation might be amended relating to adjudication set up by the HGCR Act and the statutory Scheme for Construction Contracts (England and Wales) 1998 (“the Scheme”). Following the consultation period the DTI (the Department, which now has responsibility for the Construction Industry) has issued proposals to amend the legislation and proposed amendments to the Scheme on which there has been a further process of consultation which closed on 28 September 2001. In addition a draft Guidance has been set out for adjudicators.

The DTI have proposed the following amendments to the Scheme:

The amendment of Regulation 20 of the Scheme to ensure that the role of adjudicators does not extend to determining the allocation of the parties legal or other costs thereby giving effect to the policy in adjudication that each party should bear its own costs. It has been suggested by the DTI that this will help to ensure adjudication remains focused on the principle issues in dispute.
The amendment of Regulation 22 to make it clear an adjudicator may set a deadline by which the parties may request reasons for the adjudicator’s decision so as to prevent situations arising in which the parties ask for reasons late in the process.
The insertion of an express “slip rule” after Regulation 22 which makes it clear beyond doubt that the adjudicator has the power to correct manifest clerical or arithmetical errors in his decision and sets a tight timetable for doing so, namely, 5 days.

These draft amendments will only apply to the Scheme.

It is also proposed to amend the HGCR Act by outlawing the insertion in a construction contract of the requirement that a party that refers the dispute to adjudication should bear the other parties legal and other costs even in the event that it wins its adjudication. This proposal has been more or less universally welcomed, both in the interests of justice and to ensure a level playing field which was after all one of the prime purposes of adjudication ⁽¹⁾. The DTI have also produced some guidance to cover the following issues:

Natural justice;

Challenges to jurisdiction;
Unmanageable documentation;
Intimidatory tactics;
Reasons for the decision;
Parties’ costs
Clerical mistakes or errors.

These amendments are proposed to apply for England only.

Regulations amending the Scheme will be subject to affirmative resolution procedures by both Houses of Parliament. Subject to Ministers approval, the Department proposes to lay the draft Regulations in the next parliamentary session. The proposed amendments are likely to take effect during the early part of 2002.

The intention is that the Guidance to adjudicators will relate to the amended Scheme and will be issued to coincide with the formal amendment of it. A guidance on training of adjudicators will be issued soon afterwards ⁽²⁾.

Perhaps for some the change is not enough but Ministers have taken soundings and concluded that with barely three years practical experience in adjudication it is too soon to make fundamental changes. The intention of the DTI being to clarify some of the procedures, where these give rise to concern. It has been said that the opportunity to consider wider changes will take place on the next review in about two years of the current changes taking effect. The Construction Umbrella Bodies have agreed to establish a permanent group to monitor the continuing use of adjudication in the Construction Industry such as the Constructors Liaison Group⁽³⁾.

Of the two umbrella bodies who have made the chief contributions to the consultation debate the TeCSA response broadly supports the DTI proposal to outlaw the insertion into contracts of a requirement for the party that refers a dispute to bear the other side’s legal and other costs. Their proposals however express disappointment that of the numerous recommendations put forward for consideration by the Construction Industry Board in its report dated December 2000, the DTI have only adopted three recommendations which entail amendment to the Scheme. TeCSA also laments the DTI’s preference to concentrate on incorporating the majority of the CIB’s recommendations by including them in the Guidance rather than by amendment to the Scheme.

The Constructors Liaison Group, like TeCSA, supports the DTI’s proposal that there should be a review within two years of the proposed adjudication procedures under the 1996 Act but is concerned that amendment to the Act will be confined to outlawing the contractual clauses requiring a party referring a dispute to adjudication to bear the other party’s legal and other costs. Much of their submission concentrates the prejudice such clauses have caused due to the threat of exposure to liability to meet the other side’s costs which will impact on a very large number of small businesses and likely scare them from using the process. As regards the Guidance they wish to see a redrafting of paragraph 11 to ensure that evidence an adjudicator has obtained through his own enquiries and on which he intends to rely be made known to both parties so that they have an opportunity to respond. Further with respect to paragraph 12 concerning natural justice, they wish to see firmer emphasis that whilst the adjudicator is at liberty to direct the course of the proceedings by setting timetables and dates in respect of actions he is only required to achieve “a commonsensical and practical balance between delivering his decision within the type of constraints of the Scheme and ensuring that the parties are treated even-handedly …”. Details of the CLG proposals are available on their website www.clg.org.uk and TeCSA’s available through the contact references on their web page www.tecsa.org.uk.

1. Lord Ackner said during the passage of the HGCR Bill in the House of Lords: “What I have always understood to be required by the adjudication process was a quick, enforceable interim decision which lasted until practical completion when, if not practicable, it would be the subject matter of arbitration or litigation. That was a highly satisfactory process. It came under the rubric of “pay now argue later”

2. Separate consultations are being held relating to adjudication in Scotland, Wales and Northern Ireland.

3. The other umbrella bodies are the Construction Industry Board (which was wound up in June 2001), the Construction Industry Employers’ Council (lead contractors) and the Construction Clients Forum.

The Proposed changes – The detail

Amendments to Regulation 20 - costs

The amendment to Regulation 20, which clarifies that the role of the adjudicator shall not extend to determining a parties’ legal or other costs, has been broadly welcomed.
The general view at the time the legislation was introduced was that in adjudication, each party should bear its own costs. For example, there were concerns that the risk of liability to the other party’s costs would deter small businesses from embarking on the process.

However, TeCSA ⁽⁴⁾ has suggested that the rule should be varied so that the adjudicator has some discretion as to costs where the responding party has made a prompt, without prejudice offer akin to a Part 36 offer. The thought behind this suggestion is that this may prevent the parties from pursuing grossly inflated claims.

The Constructor’s Liaison Group (CLG) disagree with this. They want the proposal extended to include a statement that the parties shall bear their own legal and other costs arising out of the adjudication. For the avoidance of doubt the CLG want this to be included as part of the primary legislation so that it will cover all adjudications.

It seems likely that these amendments will be adopted largely unchanged.

Reasons for a decision

It is generally felt that the proposal that the adjudicator may set a deadline by which the parties may request reasons and the modification to Regulation 22 needs to be clarified in order to ensure that the request for reasons should be received before delivery of the adjudicator’s decision.

It is not uncommon for adjudicators to receive a request for reasons 24 hours before they are due to publish their decision which makes it extremely difficult for the adjudicator to get his decision out, without a short extension agreed with the parties.

Commonsense would suggest a period of say 7 days notice would be reasonable. We shall have to wait and see what Parliament in its wisdom decides.

4. The Technology and Construction Solicitors Association

The Slip rule

The insertion of an explicit “slip rule” after the existing Regulation 22 is seen by most cognoscente as a sensible proposal. It in fact reflects what has now become custom and practice as a result of an earlier reported decision ⁽⁵⁾.

The slip rule already exists in other walks of commercial dispute resolution and formed part of Section 17 Arbitration Act 1950. It is now found in Section 57 of the Arbitration Act 1996. Lord Mustill commented on s17 that the Court, unlike an arbitrator, has an inherent power to vary its own judgments and orders. Provided that this is borne in mind, the cases on the Court’s power of correction may be resorted to for assistance as to in the scope of the power. It is not unlikely that such arguments may prevail when the rule is made in adjudication.

The Proposed Guidance to Adjudicators

The guidance to adjudicators arises out of the Construction Industry Board’s review of the first two years of operation of the Scheme under the HGCRA Act. The Guidance specifically states that it should be treated as suggestions to adjudicators rather than rules and relates primarily to adjudication conducted under the Scheme, but much of the Guidance is obviously applicable when a contractual adjudication procedure is followed.

The guidance sets out the relevant rule, then discusses the relevant law and finally puts forward suggestions.
The Guidance takes into account the amendments proposed to the Scheme. Whilst there is no substitute for reading the Guidance notes themselves, the following is a brief synopsis for the key points:

5. Bloor Construction v Bowmer & Kirkland (2000) CILL 1626 and confirmed in Edmund Nuttall Limited v Sevenoaks District Council (2000) [LTL 27.9.2000]

(i) Natural justice

As we saw in earlier programmes there is no single established definition of what natural justice precisely entails. As Lord Hewart said 77 years ago in a now famous decision ⁽⁶⁾“natural justice is a compendious label for its general requirement is that: “Justice should not only be done but manifestly and undoubtedly be seen to be done.”

It is noteworthy that the section in the Guidance dealing with natural justice is approximately twice as long as any of the other sections which perhaps speaks for itself. The guidance starts with the proposition that the adjudicator must act in accordance with the principles of natural justice. In short, the adjudicator must consider whether his actions might give rise to the possibility that he might be (ie seen to be or perceived to be) biased and must do his best to ensure that every party had a reasonable opportunity to present its case. The Guidance refers to the decision in Wiseman v Borneman ⁽⁷⁾where one judge considered natural justice "... requires that the procedure before any tribunal which is acting judicially shall be fair in all the circumstances, and I will be sorry to see this fundamental principle degenerated into hard and fast rules."

There are two main aspects:

No bias: no-one making a decision on the dispute should be, or seem to be, directly interested in the dispute.
Fair hearing: where one party makes an allegation against another, that other party should have a reasonable opportunity of answering the allegation.

In relation to the test of bias this is whether there is a real possibility, not probability, the adjudicator is biased but the Guidance says that the test is applied to the situation as perceived by the complaining party. Bias it is suggested may occur in a number of ways, for example if the adjudicator:

Has a personal relationship with one of the parties;
Has an interest in the outcome of the adjudication (a conflict of interest);
Conducts the adjudication in a manner which seems to favour one party;
Acts in a manner which might be seen as supporting one party to the detriment of the other.

In fairness, the Guidance suggests that ensuring each body has a reasonable opportunity of presenting its case means ensuring that it knows the case it has to answer and is in possession of all the evidence that is adduced against it. What is a “reasonable opportunity” has to be measured in the context of the time in which the adjudicator has to reach his decision.

The Guidance recognises comments made by some of the Technology and Construction Court judges already in the context of adjudication, as one judge has put it, "It is accepted that the adjudicator has to conduct the proceedings in accordance with the rules of natural justice given the limitations imposed by Parliament permit."

6. R v Sussex Justices ex parte McCarthy [1924] 1KB 256

7. [1971] AC 297 HL per Lord Reid

One thing which interestingly is not dealt with in the guidance is the effect of how an adjudicator should act when he has transmogrified from adjudicator to mediator, a problem highlighted in the decision of Glencot Development and Design Company Limited v Ben Barratt & Son (Contractors) Limited⁽⁸⁾.

There are 11 main touchstones given in the guidance dealing with this:

Where the Adjudicator is aware of any connection, however remote, with one or other of the parties.
Showing that the Adjudicator’s actions are seen to be fair.
Providing a reasonable opportunity to the Respondent to respond to the case put.
Using great care of communicating with one party in the absence of the other.
Before meeting with one party in the absence of the other taking steps to get the agreement of both parties.
In the case of telephone calls, considering whether to set up conference calls.
Taking views of the parties or at least considering doing so before making directions.
Notifying the parties as early as possible of deadlines for information and meetings.
When undertaking investigations asking rhetorically whether the adjudicator is attempting to make or supplement one of the parties’ cases which might not have been argued.
Not acting in a manner which indicates disapproval of the way in which a party has acted.
Ensuring that any information you intend to rely on in reaching the information is made known to both parties.

Most of the touchstones will be well known to those viewers who are already used to acting judicially as arbitrators. One or two of them are controversial because the process of adjudication inherently does require the adjudicator to take a certain amount of control and to act at times inquisitorially. It is a question of a fine balancing act ⁽⁹⁾.

(ii) Challenges to jurisdiction

An adjudicator does not have jurisdiction to make a final decision about jurisdiction (unless he has been given the power by the parties) as was considered in the case of Nordot Engineering Services Limited v Siemens plc ⁽¹⁰⁾. However the Guidance confirms that a prudent adjudicator should investigate any jurisdictional challenge and reach his own non-binding conclusion ⁽¹¹⁾.

The considered wisdom is that an adjudicator should obtain confirmation from the referring Party that his fees will be paid and many, in practice, seek an indemnity as soon as such challenge materialises ⁽¹²⁾.

The Guidance gives us examples of the grounds on which jurisdictional challenges may be made as:

That the contract is not a construction contract within the meaning of sections 105 to 107 of the HGCR Act.
That the relevant activities are not “construction operations” as defined by section 105.
That the adjudicator was not properly appointed, for example because he was not the adjudicator named in the contract, or his appointment was made by the wrong appointing body ⁽¹³⁾.
The gist of the Guidance basically therefore suggests that faced with a jurisdictional challenge, the adjudicator should investigate and reach his own conclusion. His Honour Judge Thornton said in the Christiani & Nielsen decision:-

It is clearly prudent, indeed desirable, for an adjudicator faced with a jurisdictional challenge which is not a frivolous one to investigate his own jurisdiction and to reach his own non-binding conclusion as to that challenge. An adjudicator would find it hard to comply with the statutory duty of impartiality if he or she ignored such a challenge.

The Guidance also suggests that adjudicators in such a predicament may be wise to take legal advice and that if they conclude they have jurisdiction in light of that, to tell the parties immediately and continue with the adjudication and if to the contrary, give notice promptly to the parties and resign your appointment.

The Guidance goes on to say that if the adjudicator is unsure about the position he should nevertheless make a decision as to whether to proceed or not.

(iii) Unmanageable documents

The adjudicator is master of his procedure. The adjudicator should therefore consider imposing (reasonable) limits upon the documentation ⁽¹⁴⁾. It is not uncommon for one of the parties, in fact sometimes for both, to submit vast quantities of documentation disproportionate both to the amount in dispute and the complexity of the issue to be dealt with, making the life of the adjudicator more difficult and less straightforward.

The adjudicator is still obliged by Regulation 17 of the Scheme to consider all documents, if only to conclude that they are irrelevant.

The Guidance seeks to verify the concern expressed by some adjudicators that if they fail to take into account all the information they will in some way breach natural justice. A point I am commonly consulted upon.

The notes in the Guidance show that the responsibility for judging what is or is not relevant information lies with the adjudicator but in principle if it is information that is evidential of the issues or events that the party has to prove then it should properly be considered.

The adjudicator should also consider seeking to put a cap on the amount of material that may be submitted in view of the nature and value of the dispute, preferably at the outset.

He should consider requiring a party to provide a concise statement of case, cross-referenced to a bundle of back updocumentation and a chronology.

(iv) Intimidatory tactics

The emphasis, once again, is that the adjudicator is master of his procedure. The parties are obliged to comply with the request of the adjudicator. The Guidance recognises that there is growing evidence that some adjudicators are experiencing intimidatory or bullying tactics from parties or their representatives designed to reduce the control that the adjudicator has over the process. This might involve, for example, challenging the adjudicator’s jurisdiction, causing delay with the intention of obtaining an extension of time, deliberately confusing the adjudicator through the use of technical or esoteric legal arguments and threatening to take no further part in the jurisdiction or take legal action against the adjudicator himself personally or report him to his professional institution.

None of these tactics generally endear the representatives to the adjudicator but unfortunately they are not unusual in my experience.

So far as the law is concerned, Regulation 13 of the Scheme as currently drafted lists some of the steps the adjudicator can take in order to determine the dispute and Regulation 14 requires the parties to comply with any request or direction of the adjudicator.

The Guidance goes on to suggest that adjudicators recognise the tactics of a party trying to intimidate and do this early on and counter them firmly but fairly and amongst other things emphasises the need not to lose one’s temper.

(v) Reasons for the decision

Following the amendment proposed the adjudicator should consider setting a date at the outset of the adjudication by which the request for reasons should be made in light of the change which will be made to Regulation 22.

(vi) Costs

There has been some uncertainty as to whether or not an adjudicator has power to decide that one party should pay another party’s costs.

The Scheme as currently set does not include any provision about the power of the adjudicator to order that one party be responsible for reimbursing part or all of the other party’s costs. However it is not rare for a claimant to include in its Referral Notice a claim for costs either in a specific sum or such amount as the adjudicator shall assess.

Arguments over costs became more prevalent following a decision of Judge Marshall Evans QC in John Cothliff v Allen Build (Northwest) Limited [1999] CILL 153 in July 1999 which suggested that it was open to the adjudicator to decide such costs.

However the question of costs was raised again in Northern Developments (Cumbria) Limited v J&J Nichol [2000]. This was another Scheme case which went to enforcement. Having found in favour of the subcontractor on the main issues, Judge Bowsher went on to deal with costs and in doing so reviewed the earlier decision of Judge Evans in John Cothliff. He disagreed with Judge Evans in describing the power to award costs as being analogous to the powers given by the Scheme to give directions for the management of the case, and held that there was no implied statutory power granted to the adjudicator to award costs.

Having done that, however, he found that the parties were able to enlarge the power given to the adjudicator by the Scheme if they wished and he found that they had done so in this case and so created a law to the effect that under the Scheme it was possible to give the adjudicator acting under the Scheme power to deal with costs simply by including claims for costs in the submissions made by the parties.

This has been seen as retrograde and as a potential stifling of the adjudication process hence the amendment proposed.

(vii) The Slip rule

This has already been referred to briefly by me above. The main point to note is that there is a proposed strict five day period given to the adjudicator to perfect such corrections.

Conclusion

The Guidance notes will perhaps take on greater importance than perhaps they are intended. This tends to be a repercussion of most forms of guidance in one shape or another. However they are not by any means cast in stone and will not necessarily be relevant to every adjudication in providing a ready answer for every problem. However adjudicators must be cognisant of them and I suspect it will not be long before a Judge at the TCC will be making some ruling with respect to one or other of them.

8. Where His Honour Judge LLoyd QC held that the test was whether the circumstances of the case would lead a fair minded and informed observer to conclude that there was a real possibility of danger that the tribunal was biased. This was an objective test.

9. Whilst on this topic, some useful guidance has recently been given by His Honour Judge Gilliland QC in Balfour Kilpatrick Limited v Glauser International SA [2001] [unreported] where the Judge rejected arguments that the very number or complexity of the matters made them unsuitable for adjudication. He found the Referring Party would have been prepared to grant further time and as such, the process was neither unfair to the Defendant nor in breach of natural justice.

10. Where the parties were found by His Honour Judge Gilliland QC to have given ad hoc jurisdiction to the Adjudicator on the Section 105(1) issue

11. As was held to be a sound course to adopt by His Honour Judge Thornton QC in the case of Christiani & Nielsen v The Lowry Centre [2000] [TCC 29.6.2000]

12. Whether an indemnity is given is of course not something which cannot be insisted upon but it may well practically decide whether that adjudication proceeds any further or not.

13. John Mowlem & Co Limited v Hydra-Tight Limited trading as Hevilifts [2000] [CILL 1650].

14. As in fact some express adjudication rules provide.

Legal developments concerning notices of withholding payment and Company Court pronouncements

As most viewers will know, the HGCR Act introduced amongst other things new payment rules set out from sections 109 through to section 113 of the Act.

The Act states a construction contract must contain an “adequate mechanism” for determining what payments become due and when ⁽¹⁵⁾.

The proper calculation of the instalment, stage or periodic payment in respect of what is claimed/invoiced/certified/notified is the amount due.

The end of the interval over which the payment obligation crystallises is known as the due date. It is not however the date by which payment must be made. That is provided by way of the final date for payment which marks the end of the period of grace running from the due date, when the debt matures and the date payment must be made by.

In essence, the payment machinery introduced by the HGCR Act provides that there will be dates or periods or moments when money becomes due during the contract and that internal machinery in the contract must be adequate and say what is due and when. The machinery must say how the “what” is calculated whereupon a Green notice ⁽¹⁶⁾ saying “what” must be issued showing what the payer will pay. If the payer wishes to retain or hold back monies, otherwise due, he must issue an “Amber notice” in time.

A withholding notice, as provided by section 111 of the HGCR Act, is only required where the amount due is being held back or set off in part or in whole.⁽¹⁷⁾

The 70 or more adjudication enforcement decisions which have come before the courts have been cluttered with cases concerned with the service of payment and withholding notices but we shall concentrate on three recent cases which underline just how essential it is that you serve your notices within the time strictures set by the contract ⁽¹⁸⁾.

Let us first explode some myths. A commonly misheld view is that failure to serve a payment notice under section 110 is in some way fatal. There is in fact no sanction for failing to send such a “Green notice”. This was clearly upheld in SL Timber Systems v Carillion Construction Limited [2001] CILL 1760 and previously in earlier cases such as the decision of His Honour Judge Hicks QC in VHE Construction plc v RBSPB Trust Company Limited [2000] BLR 187.

SL Timber is a Scottish decision of Lord Macfadyen and whilst not binding on the courts of England is particularly relevant because Lord Macfadyen said that the Adjudicator was wrong in law to simply award the Claimant under the adjudication the sum claimed in full because of a failure to give timeous notice under section 111 ⁽¹⁹⁾. The Adjudicator here had adopted the position that any or every attempt to dispute a claim made under a construction contract was to be regarded for the purposes of section 111 as an attempt to withhold payment and therefore requiring a notice of intention to withhold.

An important aspect of both section 110 and 111 is that they refer to payment “due” “under the contract” and there is a rather important subtlety here which the Judge emphasised is often missed. If the sum of money has not become due, eg because the work referred to in the application for payment had not been carried out or performed, or has been valued according to the wrong principles of valuation under the contract or because of some condition precedent then the absence of a section 110 or section 111 notice does not prevent the paying party from defending the illegitimate part of the application. Sense at last you might cry ⁽²⁰⁾.

In fact here we have the first real case which makes it clear that the words “withhold payment” does not simply mean pay less than the amount demanded. Indeed in KNS Industrial Services (Birmingham) Limited v Sindall Limited [2000] CILL 1652 His Honour Judge Humphrey LLoyd QC said, at paragraph 17:

The term withhold is … used in section 111 to cover both the situation where in arriving at the valuation the contractor has not taken account of a countervailing factor as well as the situation where there is to be reduction in or deduction from an amount that had been declared or thought to be due. In the former case the word “withhold” may not always be correct for one cannot withhold what is not due.

The fact that the paying party has not given the calculation of the sum it intends to pay or given notice of how much it intends to set off or contra charge, does not mean that the whole sum in the application for payment is deemed to be “due” ⁽²¹⁾. It follows that it is possible to maintain that applications for payment may not reflect the true contractual entitlement, or that the work performed, and therefore the sums payable against it, can properly be abated whether notice under section 111 has been served or not. This reasoning was considered generally to be a proper construction of the HGCR Act ⁽²²⁾ until some of the cases after the Act came into force had cast doubt on the proposition. However, here the court plainly stated that even where notices had not been given, the argument that sums applied for are nevertheless not due may still be put forward.

Lord Macfadyen said:

In my opinion, the absence of a timeous notice of intention to withhold payment does not relieve the party making the claim with the ordinary burden of showing that he is entitled under the contract to receive the payment he claims. It remains incumbent on the claimant to demonstrate, if the point is disputed, that the sum claimed is contractually due. If he can do that, he is protected by the absence of a section 111 notice, from any attempt on the part of the other party to withhold all or part of the sum which is due on the basis that the separate ground justifying that course exists … I see no difficulty in an adjudicator reaching a determination of a dispute as to whether the sum claimed is due under the contract … in my opinion therefore the Adjudicator erred in holding that the pursuers were relieved, by the defendant’s failure to give a timeous notice of intention to withhold payment, of the need to show that the sums claimed were due under the contract.

Thus the absence of a withholding notice does not necessarily prevent the paying party from arguing that the sum claimed is not due. However, whilst the reasoning of the Judge may give some comfort to anyone who has failed to submit a section 111 notice of withholding within the relevant period where a fresh application/valuation was made for the purposes of each interim application there is a sting in the tail.

The Adjudicator in this particular case had been asked to determine whether a timeous notice of intention to withhold had been given. He said it had not been. The question, which then arose, was whether, in that event, an obligation arose to pay the sums claimed. He addressed the question and answered it in the affirmative.

Even though Judge Macfadyen held that he had got the answer wrong, because he had answered the right question, albeit wrongly, the decision would be upheld ⁽²³⁾. The Adjudicator had therefore not made a jurisdictional error even though he had wrongly shut the door on reviewing what sum was properly due. The error was therefore one made within the scope of his jurisdiction.

Most legal commentators in construction seem to have taken the view that the decision in SL Timber Limited is correct on balance and cast doubt on some of the English decisions such as Northern Developments (Cumbria) Limited. Interestingly Lord Macfadyen said of Judge Bowsher QC’s decision in Northern Developments ⁽²⁴⁾ that to have taken the absence of a section 111 notice to mean that no dispute of any sort could be entertained as to the true amount due was quite wrong. Lord Macfadyen found that if that is what the Judge meant, it goes too far. The true amount due can still be disputed despite the absence of either notice.

The second case I turn to is that of His Honour Judge Gilliland QC in the Technology and Construction Court in Salford which is a timely reminder that section 111 does not simply have application to adjudication precedents. Judge Gilliland is one of the leading Judges of reported adjudications outside of London in his case of Millers Specialist Joinery Company Limited v Nobles Construction Limited [2000] it concerned Millers’ claim to recover monies concerning 10 unpaid invoices⁽²⁵⁾. There had been no preceding adjudication and Millers sought summary judgment on those unpaid invoices. Perhaps rather surprisingly, His Honour Judge Gilliland QC granted summary judgment as a result of the failure by the Defendant, Nobles, to provide a valid withholding notice pursuant to section 111 and emphasised there was no need to have run an adjudication for a Claimant party to pray in aid the machinery of section 111 as a basis of pursuing summary judgment. It was still possible for the Claimant to argue that the Defendant had no real prospect of success in his defence.

His Honour Judge Gilliland held that:

The effect of section 111 is to prevent the paying party if he does not have appropriate notices from exercising his right to retain and withhold payment of monies which would otherwise be due and payable but for the existence of some right to withhold payment. Section 111 refers to “withholding” payment generally. It must have been intended to include situations where the paying party was legitimately entitled under the general law and under the terms of the contract to withhold monies which were otherwise payable …

There is nothing in section 111 to indicate that it has only a temporary effect or that it is only applicable for the purposes of adjudication proceedings ... the Adjudicator and the court, whether on an application for summary judgment or a trial, would, it seems to me, be bound to give effect to the failure to serve a notice under section 111 and to order payment in full. On the other hand, if the failure to give a notice under section 111 merely deprives the payer of any right he may have to withhold payment of monies otherwise payable, there would be nothing to prevent the payer from seeking to recover any payment he may have made by separate proceedings in the exercise of the underlying right …

Which goes to show that there may be quite properly cause for concern in some quarters that the contracting community can pursue recovery straight from the courts (assuming there is no binding arbitration clause) and obtain a final judgment in such circumstances. Given the right to adjudicate is of course not a condition precedent to seeking an application for summary judgment there is no reason why the HGCR Act provisions regarding payment should be seen as applying only in the four corners of an adjudication. The practical repercussion of this case is the way it emphasises the need to have a sound prosecutable case to argue that the sum is not due if you want to be sure of raising a real arguable defence in the face of a summary judgment application.

15. Section 110(1)(a).

16. A term coined by Tony Bingham in the columns of Building magazine.

17. There is at present legal uncertainty as to whether section 111 extends to abatement. In Woods Hardwick Limited v Chiltern Air Conditioning Limited [2001] BLR 23 His Honour Judge Thornton QC held an abatement would not be caught by section 111. On the other hand His Honour Judge Bowsher QC held that the HGCR Act made no distinction between set-off and abatement and that if abatement was sought it must be included within a section 111 notice – Whiteways Contractors (Sussex) Limited v Impressa Castelli Construction (UK) Limited [2000]

18. Obviously on the supposition that they are compliant with the HGCR Act.

19. Unfortunately a rather common outcome with some of the less experienced construction adjudicators and perhaps more importantly the point lacks consistency in the English reported decisions.

20. This is a very important issue because it is commonly misunderstood that the “amount due” is what has been applied for; that the amount due is what is set out in the payment notice under section 110 (the green notice) and equally, there are some who believe that where there is no section 110 notice, the application becomes “the amount due”. This is not the case unless the particular contract makes this express, such as JCT 98 WCD clause 30.5. In this regard see VHE Construction plc v RBSPB Trust Company Limited (ante) and the Court of Appeal’s most recent decision of 14 December 2001 in C&B Scene Concept Design Limited v Isobars Limited (2001) which is so far unreported.

21. However note that whilst most construction contracts approach interim payment valuations as a fresh start on each occasion, eg most of the JCT contracts and DOM/1, it is not the case with all contracts, as will be seen in the Miller case below.

22. See Keating on Building Contracts, 7th Edition, paras 15-15H

23. The proposition put in Nikko Hotels (UK) Limited v MEPC [1991] 2 EGLR 103 and adopted by Mr Justice Dyson as he then was in Macob Civil Engineering v Morrison Construction [1999] BLR 93

24. Northern Developments (Cumbria) Ltd v J&J Nichol [2000] BLR 158

The Interplay between the Companies Court and the HGCR Act
In his judgment in the case of Outwing Construction Limited v H Randell & Son Limited ⁽²⁶⁾ His Honour Humphrey LLoyd QC said:

The course taken by the Plaintiff, namely to issue a writ [to enforce an adjudicator’s decision in their favour] was proper and prudent, given that there was not settled practice for enforcement under section 42. It is the obvious and natural way to enforce a decision which required the payment by one party to the other of a sum of money.

When, then, considering whether or not to abridge the time limit in the particular case he said that “action to enforce an adjudicator’s decision is not comparable to the ordinary process of recovery for an apparently undisputed debt.”

Summary judgment proceedings have been the most common means of enforcement employed in the majority of cases following an unsatisfied adjudicator’s decision but there have now been some judgments in relation to the use of statutory demands which must not be ignored.

In an earlier programme we looked at the decision in George Parke v The Fenton Gretton Partnership ⁽²⁷⁾ where the partnership obtained an adjudicator’s decision in their favour following an adjudication in which Parke played no part. The partnership sought to enforce the decision by way of statutory demand. Parke applied to set the statutory demand aside on the ground that they had a counterclaim, set off or cross claim, the amount of which exceeded that of the adjudicator’s decision.His application failed and he then appealed to the Chancery Division. By the time of the appeal, he had instituted proceedings in the TCC in Birmingham against the Fenton Partnership, seeking a declaration that they had in fact been overpaid. He challenged the sum adjudicated as due in its entirety. He said that the Adjudicator’s decision did not give rise to a debt, it was a mere declaration of entitlement to payment and, further, it was subject to a final decision, arrived at by court proceedings or arbitration, which would decide the underlying dispute. Parke also said that the debt was disputed on substantial grounds and that he had a counterclaim or cross claim which equalled or exceeded the debt. Fenton Partnership argued in response that the HGCR Act was designed to provide “a speedy remedy which results in financial disputes being resolved quickly and causing financial liabilities to be discharged without prevarication”. They said that they were entitled to “stand on the adjudication and pursue it by way of bankruptcy proceedings even if there was an underlying challenge”.

The Judge held that the adjudication did create a debt, which could form the basis of a statutory demand, however, whilst there might be no grounds for resisting summary judgment, that did not mean that the statutory demand could not be set aside. With reference to the proceedings brought in the TCC by Parke, the Judge said:

In my judgment there is a valid cross claim going to the sum demanded and I am satisfied that there is a genuine triable issue about the final account. This is confirmed by the defence in the TCC proceedings. On this basis the statutory demand ought to be set aside … in my judgment it cannot be right that an employer or main contractor can be made bankrupt when it is known that he has proper proceedings on foot which if successful, will result in a payment to him. I do not accept that the Scheme or the 1996 Act is that an adjudication can be pursued to bankruptcy no matter the underlying state of the account. The court would be required to close its eyes to the overall position, which in the context of bankruptcy is in my judgment wrong in principle.

On the basis of the cross claim contained in those proceedings, the Judge thus allowed the appeal and set aside the statutory demand.

25. Unlike SL Timber, Judge Gilliland decided in this case that earlier payments, which were argued by the Defendant to be overpayments, required a section 111 notice because, unlike the JCT “fresh start approach” to each application, this was a special contract where each interim application might be termed a further work interim rather than a fresh start valuation.

26. 1999 BLR 156

27. CILL March 2001

The Judge in this case followed the reasoning of Lord Justice Nourse in Seawind Tankers Corporation v Bayoil SA ⁽²⁸⁾ who held that provided there was a “genuine and serious” cross claim which was “of substance” and which exceeded the debt, then a winding up petition, even where the debt was undisputed, should be dismissed unless there were “special circumstances”. This was considered in Re A Company [number 1299 of 2001] where the Deputy High Court Judge concluded that without a withholding notice having been issued under section 111, a subcontractor has an undisputed debt for the amount demanded and if that was not paid, then the subcontractor could serve a statutory demand and subsequently petition the court for a winding up order, irrespective of the existence of a potential set off or cross claim! ⁽²⁹⁾

In this case there was an application for a final injunction to prevent the issue of a winding up petition on the grounds that the petition had no real prospects of success. A temporary injunction had already been obtained. The Judge held that “there are in essence two separate limbs to the analysis of this question:

Is the debt capable of bona fide dispute?
If not, is the grant of an injunction otherwise justified?

The Judge considers what might be “special circumstances”, bearing in mind the judgment of the Court of Appeal in Seawind Tankers. He quoted Lord Justice Nourse’s statement that “the ability of a petitioning creditor to levy execution against the company does not entitle him to have it wound up” and said that “the fact that the debt falls within the 1996 Act cannot in my view be a “special circumstance” in favour of a winding up order”. If there was no such “special circumstance”, then there are two specific matters which a court hearing a petition based on a debt will have to address, namely:-

whether there is genuine and serious cross claim in excess of the debt;
whether the cross claim is one which the company has been unable to litigate.

The material before the Judge relating to the cross claim was described as “somewhat meagre” and he was reluctant to base his decision on it. This appeared to be a motivating factor. In relation to the second point, he noted that since becoming aware of defective work by the subcontractor the main contractor had taken no steps to adjudicate or litigate a cross claim, despite having a reasonable chance to do so. The Judge decided that there was “at least a significant possibility” that a future court hearing a winding up petition would decide to make a winding up order and therefore allowed the subcontractor to present its petition, if it wished, and he refused the injunction sought by the contractor. So the contractor failed to meet the threshold tests.

Thus, merely asserting that one has a set off and/or claim for abatement will not constitute a defence to a winding up petition on the basis of this decision. The case emphasises the importance of cross adjudicating, litigating or arbitrating as soon as possible and there are indeed parallels to be drawn with Chadwick LJ’s judgment in Bouygues (UK) Limited v Dahl-Jensen (UK) Limited [2000] BLR 522 where it was found that where one of the parties was in liquidation and the other party had cross claims a company in liquidation should not be able on a summary judgment application to subvert the scheme established by the Insolvency Rules 1986 as the policy of the HGCR Act is not to transfer as between the parties to the construction contract the risk of insolvency of one of the parties.

28. [1999] 1 WLR 47

29. Contrary to the stand since taken by Lord Macfadyen in SL Timber Systems

Perhaps most worryingly, in light of Re A Company, if there is no withholding notice, and payment is not made by the final date for payment, then the payee seemingly can simply claim the outstanding amount as a debt, without the need to go to adjudication. It is salutary that the courts have grasped the nettle that the final and drastic step of winding up a company is inappropriate as it is more than a means of enforcement where a debtor company has just and presentable grounds which show money is due in the other direction. The most recent unreported decision on just this point and the third main case we look at is the case of William Oakley and David Oakley v Airclear Environmental Limited and Airclear TS Limited ⁽³⁰⁾ decided in the Chancery Division on 4 October 2001.

In this case, Airclear was chosen as a subcontractor, adopting terms and conditions of NAM/SC, clause 35 of which specified that disputes were to be resolved by adjudication. Airclear did not complete section 2 of NAM/T detailing its proposals for timing, insurance and other provisions, but returned a sheet showing a breakdown of the tender sum. Oakley wrote to the employer, Scottish & Newcastle Retail Limited, stating that it had not received formal documentation engaging Airclear and that whilst it was prepared to pay Airclear’s invoices, it would not agree to do so without formal instructions. Airclear then faxed Oakley a completed section 3 of NAM/T that Oakley never signed.

Notwithstanding that there was no formal agreement between the parties Airclear proceeded with the works. Oakley made stage payments to Airclear but deducted sums for delay, discount and contra charges. Airclear objected, saying there was no contract between the parties, or, if there was, that NAM/SC applied. Oakley applied to appoint an arbitrator under NAM/T and Airclear instigated the appointed of an adjudicator under NAM/SC. Despite considerable dispute as to the adjudicator’s appointment, an adjudicator’s decision was made determining that he had jurisdiction (having investigated it) and that monies retained by Oakley should be released to Airclear. Oakley did not pay and Airclear issued a statutory demand.

Oakley contended that there was no contract between the parties that incorporated NAM/SC or NAM/T terms and therefore the Adjudicator had no jurisdiction and his decision was a nullity. They went on to say, in the alternative, that even if there was a contract, it was not in writing within the meaning of section 107 of the HGCR Act and therefore the debt was a disputed debt.

The Judge found, on the facts, that at the time of the appointment of the Adjudicator there was a common assumption between the parties that they were governed by NAM/T and NAM/SC. However, the Adjudicator had not been validly appointed and his decision was a nullity. The statutory demand did not show a legal cause or basis for which debts were demanded, and on the basis of the evidence, the threat of insolvency proceedings was not a proper way to resolve a dispute between the parties and the statutory demands were set aside.

30. [2001] All ER (D) 59

Summary

It is unfortunate that with so many disputes being referred to adjudication and many hundreds of millions of pounds at stake on the process at any one time, that the courts have not been consistent in their approach to withholding notices and the effect of their absence on any underlying claim.

It seems pretty clear that as a starting point neither section 110 or section 111 invert to the burden of proof on the referring party as to what is due under the contract. Lord Macfadyen’s judgment in SL Timber has taken a welcome and strident line in holding, on the facts, that a withholding notice is not in principle required where there is a dispute that work had simply not been done, that work claimed had not been properly executed, or that the work had not been properly valued. However this decision does not sit happily with Judge Bowsher’s judgment in Northern Developments even though his brother Judge in the Technology & Construction Court Judge, His Honour Judge Thornton QC, does not seem to share Judge Bowsher’s view that section 111 extends to abatement. It seems that Lord Macfadyen and His Honour Judge Humphrey LLoyd QC 31 teased out the important fact that there may be other countervailing factors which mean the sum is not due under the contract which in addition to the points mentioned above could arise, where a contractor/subcontractor has had its employment properly determined at some stage shortly after the application it pursues by adjudication.

One must however be cautious to examine what the precise interim payment machinery of a contract is before formulating any views as to the applicability of section 111.

It is time that adjudicators realise the absence of a section 111 notice is not an event which makes their life easy by effectively awarding the referring party the amount it claims. At least not in circumstances where the contract does not deprive the paying party of arguments as to what sums were due.

Having just learned that the Court of Appeal delivered judgment in open court on 14 December 2001 in the case of C&B Scene Concept Design v Isobars Limited where the Court of Appeal overturned the High Court’s decision and reinstated an adjudicator’s findings under JCT With Contractor’s Design to the effect that failure to serve a section 111 notice made the contractor’s application payable it is disappointing to learn that one of the issues in the appeal did not get to be decided, in part because the respondent did not attend the hearing. This issue is the question of notices and the consequences of failing to serve them in the border context of section 111.

Clearly this issue requires the introduction of clarity by our courts and for the present it seems that there are two schools of thought which are running in parallel, something which is generally not very good for anyone but the lawyers! For this reason the proposed amendments to the Scheme and the review of the HGCR Act by the DTI are likely not to go far enough. If this is right then it represents an opportunity missed in not having tackled this issue.

31. In KNS Industrial Services