Payment Watch: You Put Your Left Arm In

You put your left arm in
Your left arm out
In, out, in, out
You shake it all about
You do the hokey cokey

As with all things in life it is too easy for there to be a dispute. This once popular song “The Hokey Cokey” has claims of at least three possible authors and therefore three announcements of the deaths of the possible authors.

One report says Larry LaPrise, the man who wrote The Hokey Cokey, died peacefully at the age of 93. The most traumatic part for his family was getting him into the coffin. They put his left leg in … and then the trouble started.

Whether you are in or out at any point applies in terms of what has become an unnecessarily complex payment system under the Construction Act.

The original idea was simple, an Application for Payment was made, and it was met with either a Payment Notice or a Pay Less Notice. If neither of the notices was issued it became the sum that had to be paid.

But being the construction industry payment is not necessarily forthwith in a default position or even when subsequently awarded on the above basis in an Adjudicator’s Decision.

This is probably why there is so much argument in the courts which lead to enforcement proceedings.

But aren’t the Decisions of Adjudicator’s binding? Yes, they are see s108 (3) of the Construction Act - binding until you do something permanent.
You are meant to “pay now and argue later”. But binding does not necessarily mean that a party will give effect to a Decision and pay up. 

The temptation has been to have another go to try to reach the answer that you want. Why mess about with one, let’s do another three! And so the current complex landscape has evolved through case law. A more straightforward approach can be seen in some earlier cases.

In Mentmore Towers Ltd & Ors v Packman Lucas Ltd. [2010] EWHC 457 (TCC) (16 March 2010) a judgment which picks up a previous set of stay proceedings Anglo Swiss Holdings Ltd & Ors v Packman Lucas Ltd [2009] EWHC 3212 (TCC) (09 December 2009)(“Anglo Swiss”).

In Anglo Swiss Mr Justice Akenhead ordered that the three actions be stayed on the grounds that there had been unreasonable and oppressive behaviour, and some element of bad faith, by the Claimants in pursuing those claims without first honouring the Adjudicator's decisions, in particular, and the judgments of the court enforcing them. The Claimants were also ordered to pay security for costs.

Following the stay the Claimants issued adjudication proceedings. The Defendant issued an application to restrain the proceedings by an injunction.

The stay and the injunction applications were joined and came back before the court. The case considers both applications and there is some overlap in the arguments which the court had to consider as to whether the stay should be lifted and the injunction granted.

Paragraph 13 of the judgment sets out the issues to be decided.

1.    It seems to me that this application raises the following issues:

(1) Does the court have the power to grant an injunction restraining a party from pursuing a referral to adjudication?

(2) If so, is there any difference in principle between the criteria for granting an injunction to restrain the pursuit of a referral to adjudication and the criteria for ordering a stay of the same claim if brought in the courts?

(3) On the assumption that the Claimants are no longer exaggerating the extent of the alleged overpayment to the Defendants (as referred to by Akenhead J at (d) of his summary), does this affect his reasoning and, if that had been the position before him, would it have been likely to have affected the outcome?

(4) Should the Claimants be restrained from pursuing the referrals to adjudication on the basis of the evidence and material before the court

It was argued on behalf of the Claimant that the stay should be lifted because further evidence suggested that there had not been “bad faith” on the part of the Claimant and its behaviour should not be considered oppressive. This was rejected by the judge at paragraph 28 stating. 

“I can see no basis upon which Akenhead J would have reached a different conclusion as to whether the Claimants' conduct was unreasonable and oppressive if there had been no exaggeration by the Claimants of the extent of the alleged overpayment. The factor that loomed largest in his consideration was that if the Claimants were permitted to pursue their claims for a final assessment of the amounts due, if any, to the Defendants without first honouring the adjudicator's awards, the purpose of the HGCRA would be seriously undermined. With that I entirely agree.”

The judgment then turns to the final issue of whether the injunction should be granted.

The arguments are familiar and it is worth setting out this part of the judgment in full as I have done below.

4. Should the injunction to restrain further pursuit of the adjudication be granted?

During the course of the argument I asked Mr Rowlands what purpose would be served by pursuing the claims in the adjudication. In particular, I asked what would happen if the adjudicator were to hold, say, that there had been no overpayment and that the Defendants had been paid the right amount: where would that leave the original award and the judgment that had been given to enforce it? In those circumstances, the subsequent decision would not give rise to any entitlement to payment but, equally, could not affect the outstanding and unsatisfied judgment for the amount found due as a result of the adjudicator's first decision.

It was perhaps a little unfair to bounce this question on Mr Rowlands during the course of the argument, but he could not come up with any cogent answer. In those (hypothetical) circumstances the second adjudication would have achieved nothing. The position would, of course, be better from the Claimants' point of view if the adjudicator were to decide the second adjudications wholly in their favour, but it is not obvious that in those circumstances the court would be prepared to enforce the second award in favour of the Claimants - not being a final and binding decision - whilst the original award and judgment in favour of the Defendants remained unaffected and unsatisfied.

Mr Rowlands was driven to submit that the pursuit of the current adjudications would have the advantage of at least producing a decision on the true position in relation to the accounts between the parties and therefore might lead to a consensual resolution of the dispute. However, the same result could have been achieved if the Claimants had honoured the first award and immediately set about, whether by litigation or adjudication, obtaining a determination of the true amount owing. They chose not to do this.

The courts have said, again and again, that the decisions of the adjudicators are to be strictly enforced unless there has been some excess of jurisdiction or breach of natural justice. That is the "pay now, argue later" approach that underlies the legislative purpose.

In this case the Claimants have persistently refused to honour the adjudicator's first decisions and have put the Defendants to the trouble and expense of taking the necessary steps to enforce the awards, to obtain charging orders and so on. The Claimants have not even agreed to instruct the London solicitors to accept service of these various proceedings, so that the Defendants have been put to the additional expense of obtaining leave to serve and serving proceedings out of the jurisdiction.

A theme underlying the submissions by Mr Rowlands was that the Claimants found themselves in severe cash flow difficulties following the collapse of the property market and that it was simply the constraints imposed by their financial position that led them to conduct themselves as they had done over the last six months or so. However, at no time have the Claimants disclosed either the financial position relating to the equity in the properties or information showing the extent to which they can call on funds if required. The claimant companies are said to be the creature of an offshore family trust, but there is no information available about the assets of that trust. Mr Rowlands correctly points out that the trust is not the claimant and that the Claimants are limited companies, but that does not mean that the assets of the trust are irrelevant: on the contrary, the assets may be such that there would be plenty of money available to the Claimants if the trustees chose to provide it.

The inescapable fact is that when it has suited them the Claimants have been able to instruct a well-known firm of London solicitors and leading or junior counsel. The court is in no position to know, because it has not been told, whether the Claimants' refusal to honour the first awards and the judgments is the result of genuine financial stringency or a simple reluctance to pay money which they consider, rightly or wrongly, not to be due. There is no basis for making any assumptions favourable to the Claimants on these matters: the court simply does not know, and that is because the Claimants have not volunteered the relevant information”

So, no complex distinction between the payment obligation v true value. The proceedings in the 2010 case hit the ‘pay now argue later principle’ of honouring Adjudicator’s decisions. 

In summary the judgment was hard hitting as follows;

“36. In my judgment the main reasons given by Akenhead J for ordering a stay of the claims started on 15 October 2009 apply equally to the current referrals to the adjudication (that is, the reasons apart from the bad faith aspect). The current referrals are simply another attempt to circumvent the machinery and policy of the HGCRA. It is unreasonable and oppressive for the Defendants to be subjected to further proceedings by way of adjudication when the Claimants have still failed to honour the first awards and the subsequent judgments of the court. It is not enough for the Claimants to make, for example, offers to pay money into court, even if such payment were to be made tomorrow. The Defendants are and were entitled to have a cash award paid in cash. That is the purpose of adjudication.

37.    For the same reason, I do not accept that the availability and use of remedies by way of charging orders are a substitute for the satisfaction of an adjudicator's decision or a judgment of the court by payment in cash.

38.    Accordingly, and in spite of the careful and measured submissions of Mr Rowlands, I consider that there is really no answer to the Defendants' application to restrain the Claimants' further referrals to adjudication commenced by the notices dated 23 February 2010, and I therefore make the following orders:

(1) That the stay of these proceedings imposed by the Court's judgment of 9 December 2009 be lifted for the purpose only of hearing and determining the Defendants' application dated 26 February 2010.

(2) That each of the Claimants be restrained from taking any substantive step in the adjudications commenced by the Notices of Adjudication dated 23 February 2010 or seeking to enforce or implement any decision made by the adjudicator until that Claimant has complied with:

(a) the Court's orders in the proceedings under claim number HT-09-288 dated 16 October 2009 by paying the costs assessed therein;
(b) the Court's orders in these proceedings dated 9 December 2009 by providing security for costs of £50,000 and paying the Defendants' costs of £10,000;
(c) the Court's orders in the proceedings under claim number HT-09-288 dated 3 August 2009 by paying the judgment debt therein plus accrued interest.”

No messing here, you have an Adjudicator’s decision or a judgment against you, pay up!

It is surprising that these two judgments were not picked up in 2009 and 2010 and were not picked up in Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) (27 February 2018), S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448 (07 November 2018) or M Davenport Builders Ltd v Greer & Anor [2019] EWHC 318 (TCC) (20 February 2019). 

What we finish up with after these three cases are a set of broad rules;

  • The payment obligation, that arising from the various notices or lack of them, must be honoured.
  • A separate mechanism exists called ‘true value’. A payment dispute and a true value dispute are separate disputes.
  • From the S&T v Grove cases you must honour the payment obligation before you can have another go on a true value dispute.

In Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC) (19 April 2022) the first Adjudication was a ‘true value’ affair on Application for Payment 22.

This was not a response to a payment (technical) adjudication but a straightforward dispute to a Pay Less Notice.
It simply sought an answer to what is my account worth? Bexheat stated the sums it sought and was largely successful. 

On 19 July 2021 BHL submitted Payment Application 22 (dated 16 July 2021) in the gross sum of £1,832,071.87 for the valuation period to 31 July 2021, seeking a net payment of £678,885.78.

On 13 August 2021 ESG issued a Pay Less Notice, setting out its cumulative valuation of the works for that period of £1,170,729.19, giving rise to a net sum due to BHL of £4,808.44.

On 18 August 2021 BHL commenced the First Adjudication, seeking the following relief as set out in its Notice of Adjudication:

"1. That the true value of BHL's Application for Payment Number 22 dated 16 July 2021 is £2,010,121.83, plus any applicable VAT or such other value as the Adjudicator shall decide.

2. That the Respondent, ESG, shall pay to BHL on 13 September 2021 (the final date for payment of AFP22) the sum of £797,423.01 plus any applicable VAT or such other sum as the Adjudicator shell determine.

3. Should ESG fail to make payment of the sum due to BHL on 13 September 2021 that BHL is entitled to payment of interest in accordance with clause 19.18 of the Sub-Subcontract.

4. That BHL is entitled to be reimbursed compensation of £100.00 as compensation in accordance with the Late Payment of Commercial Debts (Interest) Act 1998, as amended, or such other sum as the Adjudicator shall determine.

5. That the Respondent immediately pays or reimburses the fees and expenses of the Adjudicator."

On 12 October 2021the decision in the First Adjudication was that:

i) the true value of Interim Application 22 was £1,319,830.61;

ii) BHL was entitled to payment of £141,646.35 plus VAT;

iii) BHL was entitled to interest pursuant to the Contract but not under the Late Payment of Commercial Debts (Interest) Act 1998;

iv) BHL should pay 35% of the adjudicator's fees and ESG should pay 65% of the adjudicator's fees.

On 17 August 2021 (one day before commencement of the First Adjudication) BHL issued Payment Application 23 in the gross sum of £2,010,121.74 for the valuation period to 31 August 2021, seeking a net payment of £847,675.97.

This was then the subject of the second adjudication.

Any Pay Less Notice was due by 14 October 2021, as set out in the Second Schedule to the Contract. BHL contended that ESG did not issue its purported Pay Less Notice until 15 October 2021 and therefore it was invalid. ESG failed to make any payment in respect of Interim Application 23.

On 18 October 2021 BHL commenced the Second Adjudication, seeking the sum of £706,029.70, as the notified sum applied for under Interim Application 23, taking into account the payment made by ESG in respect of Interim Application 22, together with VAT and interest.

In the Second Adjudication ESG argued that a document served on 13 October 2021 amounted to a valid Pay Less Notice, BHL was improperly seeking to circumvent the decision in the First Adjudication and BHL was not entitled to any further payment. ESG sought the following relief:

i) that the notice given on 13 October was in form and substance an effective Pay Less Notice;

ii) that BHL was not entitled to any further payment;

iii) that BHL pay the adjudicator's fees and expenses; and

iv) the adjudicator gives reasons for his decision.

On 12 November 2021 the adjudicator issued his decision that:

i) ESG failed to issue a valid Pay Less Notice in response to Interim Application 23;

ii) ESG should pay BHL the sum of £706,029.62 plus VAT;

iii) BHL was entitled to contractual interest and statutory compensation of £100 under the 1998 Act; and

iv) ESG was liable for the adjudicator's fees and expenses.

ESG did not make any payment in respect of the Second Adjudication award.

ESG issued a Pay Less Notice too late based on dates in the contract so BHL commenced Adjudication No. 2.

BHL got home on the failure of ESG to issue a valid Pay Less Notice.

On 19 October 2021 ESG issued a notice of adjudication seeking a determination of the true value of Interim Application 23. Mr Linnett was appointed as the adjudicator for this Third Adjudication. Following a meeting at which he heard representations from both parties, Mr Linnett resigned without producing an award.

There was a third Adjudication commenced but the Adjudicator resigned.

So unusually in this case, the true value was first. ESG suggested because the true value had been determined in Adjudication No 1 that true value usurped anything in Adjudication No 2.

It is easy to understand how a true value adjudication overrides a payment or technical adjudication but in Adjudication No 1 there had been no prior adjudication. BHL had gone straight for the jugular seeking a  true value because where there are valid Payment Notices or Pay Less Notices no technical or payment dispute is available.

Prima facie both adjudication decisions are valid and importantly binding and in this instance ESG was stuck with paying up on both. Instead it sought to resist enforcement.

On 23 November 2021 BHL issued proceedings, claiming the sum of £706,029.62 plus interest, statutory compensation and the adjudication fees.
The issues before the court were:

i) whether the 'true value' of Interim Application 23 was determined in the First Adjudication, with the result that Mr Silver had no jurisdiction to determine the payment due under Interim Application 23 in the Second Adjudication Decision and/or ESG satisfied its payment obligations in respect of the same;

ii) whether ESG has an entitlement under clause 30.2 of the Contract to set off or make deductions against the Second Adjudication award in respect of any amounts which may at any time be due or have become due from BHL to Essex;

iii) whether ESG was entitled under clause 30.3 of the Contract to elect to have the 'true value' of the application payment in dispute determined at the same time by the same adjudicator as the 'notified sum' dispute;

ESG stopped putting its left arm in and out and took a swerve.

The problem with serial adjudicating is not simply the binding nature, but in subsequent adjudications there is a question of what has been decided previously. Where something has been decided it is no longer in dispute, no dispute nothing to adjudicate. 

ESG wanted it both ways, on the one hand that the true value had already been decided in Adjudication No 1, everything stopped at that point, but secondly in Adjudication No 2 they sought to run true value at the same time as the notified sum dispute on Application for Payment 23. 

ESG's case is that Mr Silver wrongly refused to allow joinder of the 'true value' of Interim Application 23 with the 'notified sum' issue in the Second Adjudication. Ms Briggs submits that pursuant to clause 30.3 of the Contract, ESG was entitled to elect that the same adjudicator shall adjudicate (at the same time) both the 'notified sum' and the 'true value' dispute in respect of Interim Application 23, which would have enabled the parties to set off one decision against another. In breach of the Contract BHL refused to allow ESG to exercise this entitlement. Had ESG been able to do so, both disputes would have been determined at the same time and resulted in a balance of nil due to BHL because Mr Silver would have been obliged to determine the true value of Interim Application 23 in line with the determination made by Mr Cope in the First Adjudication

The argument was rejected by the court on the basis that joinder was not an obligation but in any event the court went on to say;

“Applying the above principles, ESG's exercise of any contractual right under clause 30.3 of the Contract to require the adjudicator to determine the 'true value' dispute together with the 'notified sum' dispute in the same adjudication must be subject to compliance with its immediate payment obligation of the 'notified sum'. As ESG failed to comply with its immediate payment obligation in respect of the 'notified sum', it was not entitled to adjudicate on the 'true value' dispute, whether pursuant to clause 30.3 or otherwise.

Further, as submitted by Mr Kaplan, even if both the 'notified sum' and the 'true value' disputes were before the adjudicator, BHL would be entitled to rely on section 111 of the 1996 Act, which requires ESG to pay the 'notified sum' by the final date for payment, unless it has specified a lesser sum in a timeous Payment Notice or a timeous Pay Less Notice, prior to any determination of the 'true value' dispute. Therefore, once Mr Silver decided that the purported Pay Less Notice relied on by ESG was invalid, given that it was common ground that ESG had not paid the 'notified sum', Mr Silver could not at that stage go on to determine the 'true value' dispute. Indeed, that was the correct conclusion reached by Mr Linnett in the abortive third adjudication.”

The swerve is that the substance of the decision in Adjudication No 1 was either the same or substantially the same as Adjudication No 2.  If that was correct there would have been no jurisdiction in Adjudication No 2. This was considered in issue (i)

It is what the law calls a matter of fact and degree as to whether a dispute is the same or substantially the same.
In theory all interim applications are different and capable of giving rise to separate disputes and again the final account is capable to giving rise to a further separate dispute.

What is clear is it is possible as part of these successive disputes what parts fall away as they are subject to binding decisions, i.e., it is possible to make a decision on the final value of a particular variation in an interim account. That part is binding in all successive adjudications.

Here the Court found there was no overlap, what had been decided in Adjudication No 1 did not trespass on anything in Adjudication No 2, both were upheld.

What is now clear from this case, which really did pull all the strings together is;

i)    where a valid application for payment has been made, an employer who fails to issue a valid Payment Notice or Pay Less Notice must pay the ‘notified sum’ in accordance with section 111 of the 1996 Act; 

ii)    section 111 of the 1996 Act creates an immediate obligation to pay the ‘notified sum’; 

iii)    an employer is entitled to exercise its right to adjudicate pursuant to section 108 of the 1996 Act to establish the ‘true valuation’ of the work, potentially requiring repayment of the ‘notified sum’ by the contractor; 

iv)    the entitlement to commence a ‘true value’ adjudication under section 108 is subjugated to the immediate payment obligation in section 111; 

v)    unless and until an employer has complied with its immediate payment obligation under section 111, it is not entitled to commence, or rely on, a ‘true value’ adjudication under section 108.

The problem with these very clear rules is the industry excels at ignoring rules.

Move on a mere two months from BHL and the binding nature of an Adjudicator’s decision is visited again in Essential Living (Greenwich) Ltd v Elements (Europe) Ltd [2022] EWHC 1400 (TCC) (08 June 2022). 

Of course, applying any rules ‘in extremis’ can become vogue. Of course, the Adjudicator’s decision is binding, but not that it is cast in stone for eternity and beyond.

Essential Living was a Part 8 claim, not seeking to attack in any way the adjudicator’s decision but to seek declarations as to the extent that the decision was binding.

The court quickly identified that the questions posed here were very fact heavy and a detailed examination of the disputed facts deemed these proceedings unsuitable as a Part 8 claim.

The ‘hope’ by Essential Living was that the binding nature of the decision which was on an interim account, would also bind the parties into the Final Accounting process.

The issues concerned the binding effect of the Adjudicator’s Decision on the subsequent contractual processes, including dispute resolution, in particular;

i)    the impact of the Adjudication Decision on claims for extensions of time, liquidated damages and delay damages;

ii)    the impact of the Adjudication Decision on evaluation of the Final Trade Contract Sum, including variations and loss and/or expense; and

iii)    the impact of the Adjudication Decision on any subsequent adjudication.

But aren’t adjudications on each interim account and the subsequent Final Account all separate disputes one not bound by the other? 

At best the answer to this is maybe!

It all goes to the questions asked and the questions answered in each adjudication as to whether subsequent proceedings amount to the same or substantially the same dispute.

The problem with this is that it warrants a detailed examination of what went before to determine what is being sought in subsequent proceedings. 

The Court did not deal with the detailed analysis in this case but established the rules for examination of fact and degree.

These are;

i)    the parties are bound by the Adjudication Decision on any dispute or difference determined therein until it is finally determined by the court or by subsequent settlement;

ii)    the parties cannot seek a further decision by an adjudicator on a dispute or difference if that dispute or difference has already been the subject of the Adjudication Decision;

iii)    the Adjudication Decision is not binding on the parties for the purpose of the Construction Manager's final determination of the Completion Period under clause 2.27.5, from which would flow any liability on the part of Elements for liquidated damages and finance charges;

iv)    the Adjudication Decision is not binding on the parties for the purpose of determining the Final Trade Contract Sum;

v)    the Adjudication Decision is binding in respect of variations considered and assessed by the adjudicator, unless and until the Adjudication Decision is overturned, modified or altered by the court, or unless either party identifies a fresh basis of claim that permits such variation claim to be opened up and reviewed under the terms of the Contract;

vi)    it is a matter of fact and degree, requiring careful analysis of the evidence and argument on each disputed item, as to whether the Adjudication Decision is binding on any other discrete issue referred to and determined by the adjudicator, unless and until the Adjudication Decision is overturned, modified or altered by the court;

vii)    it is a matter of fact and degree as to whether any matters which Elements might seek to refer to a subsequent adjudication are the same, or substantially the same, as the matters determined by the Adjudication Decision; absent any Notice of Adjudication before the court, it is not possible for this issue to be determined.

So, we have two forces operating here, the immovable object of a binding decision, which must be honoured before there can be another adjudication and then to what extent was the previous adjudication binding

So potentially payment has become even more complex and so has Adjudication where the Adjudicator is faced with arguments on how binding a previous Decision might be!

John Riches, Henry Cooper Consultants Limited