UK: UK Adjudication Review

Last Updated: 10 August 2018
Article by Akin Akinbode, Gurbinder Grewal, Kirsti Olson and Tracey Summerell

Our summer adjudication review includes the following updates:

  • Using a winding-up petition to enforce an adjudication is unwise (a review of Victory House General Partner Ltd, Re A Company [2018] EWHC 1143 (Ch) in which the court refused a winding-up petition to enforce an adjudication);
  • The court's approach to set-off claims in adjudication enforcement proceedings (a review of MI Electrical Solutions Ltd v. Elements (Europe) Ltd [2018] EWHC 1472 (TCC) in which the court refused to allow a contractor to set-off its cross-claim against an adjudication decision); and
  • A last word on the benefits of adjudication

Using a winding-up petition to enforce an adjudication is unwise

You've made it through an adjudication, got a decision in your favor – but the "losing" party is refusing to pay up. What then?

The usual way to enforce an adjudication decision is by starting enforcement proceedings under the Civil Procedure Rules (CPR) using either Part 7 or Part 8. If the debtor can't pay, issuing winding-up proceedings against the debtor company might seem attractive. Such proceedings would be based on the debtor's inability to pay its debts as they fall due and would follow the debtor's failure to pay within three weeks of receiving a statutory demand for payment.

However, winding-up petitions are a risky approach to enforcement as shown by cases such as Shaw v. MFP Foundations & Piling Ltd. The court will dismiss them if the debt is disputed in good faith on substantial grounds – for example if there is a cross-claim. In Victory House General Partner Ltd, Re A Company [2018] EWHC 1143 (Ch), Morgan J summarised the legal principle the court will consider when dealing with a petition involving a disputed debt:

"Where a debt is bona fide disputed on substantial grounds the normal response of the court is to treat the [winding-up] petition as inappropriate, as being an abuse of the process and as being one the court should dismiss, leaving the alleged creditor to pursue the alleged debt in the other ways available to it."

Victory House and other decisions make clear that winding-up proceedings are not suitable for adjudication enforcement. There are obvious downsides to winding up a debtor for a creditor. For example, the creditor will join the ranks of the debtor's unsecured creditors, there is no guarantee of recovery and any amounts recovered will inevitably be much smaller than the debt and paid late. Further, winding-up orders have an air of finality: such proceedings are out of step with the aims of the Housing Grants, Construction and Regeneration Act 1996 as amended (the Construction Act) to give a swift but reviewable decision to keep cash flowing.

In Victory House, Morgan J decided that the employer's cross-claim made it inappropriate to wind up the company because it had not paid the judgment debt. His decision should give those considering this form of enforcement action more pause for thought.

What was the background?

RGB P&C Limited (the contractor) contracted with Victory House General Partner Ltd (the employer) on a standard form JCT Design & Build Contract 2011 to carry out development and conversion works (the contract). The contract was compliant with the Construction Act. When a payment dispute arose on interim application (IA) 30, the contractor referred the dispute to adjudication (No1) and was awarded £682,802.88 (plus VAT and interest).

The employer started proceedings under CPR Part 8 arguing it was not obliged to make the payment. In turn, when the employer did not pay, the contractor started enforcement proceedings. Miss Joanna Smith QC (sitting as a deputy judge) upheld the decision in adjudication No1 and ordered the employer to pay by a certain date. She also left two of the employer's Part 8 issues – which were irrelevant to the payment issue – for future determination.

The employer did not pay the judgment debt. The contractor went on to serve IA31 which led to a second adjudication in which the contractor sought an interim payment of £11 million (including sums claimed under IA30).

However, before the second adjudication took place, the employer paid a sum in excess of £8.5 million on account. The adjudicator went on to decide that the gross value of the contractor's work was £7,087,027.59 – less than the sum paid on account by the employer – but he did not (and could not) make a payback order.

The contractor petitioned to wind up the employer for not paying the judgment debt. In response, the employer argued that were it to pay that debt, it would immediately become entitled, in the law of restitution, to recover that sum. This effectively created a cross-claim which made it inappropriate for the court to wind up the employer for its non-payment of the judgment debt.

So, the employer was not disputing the judgment debt itself in arguing that a winding-up petition was inappropriate. (The contractor could enforce the judgment debt immediately and the deputy judge's decision to leave some issues outstanding did "not in any way detract from the final and binding character of that judgment".) Rather, the employer relied on its cross-claim.

The rule applies to cross-claims too

Morgan J also reviewed the Court of Appeal's conclusion in Re Bayoil SA [1999] 1 WLR 147: that the established rule about disputed debts also applies to disputed cross-claims – where they exceed the petition debt. (See Morgan J's summary of the rule above.) The rule is essentially the same for both disputed debts and cross-claims although "there could be exceptional circumstances where it would be appropriate to allow a petition to proceed even where there was a disputed cross-claim exceeding the disputed debt".

A right to repayment would arise and amounted to a cross-claim

Morgan J's task in assessing the substance of the employer's alleged cross-claim was made easier by the decision in Grove Developments Ltd v. S&T (UK) Ltd. [2018] EWHC 123 (TCC). (See also "Restoring fairness to the process: another episode in the smash and grab adjudication saga".)

In Grove, Coulson J held that once an adjudicator had found a certain sum to be payable for works done under the contract, without having valued the works in accordance with the contract, a second adjudication referral could be made to value the works done pursuant to the contract. If the valuation of the interim payment in the second adjudication turned out to be a smaller figure than actually paid, the employer could request a repayment.

In this case, the second adjudicator had found that, following the contract valuation, the employer owed less to the contractor than it had paid on account. If it paid the judgment debt, the employer would immediately have a cause of action for a repayment. Morgan J concluded this amounted to a cross-claim which prevented the contractor from winding up the employer for non-payment of the judgment debt. It was bad enough that the employer had already paid £8.5 million when the second adjudicator had found only £7 million due. It would be worse if the employer had to pay the extra £3 million or so to avoid being wound up.

Morgan J concluded that the employer's "nascent cross-claim" (the claim in restitution) was a bona fide claim. It was made on substantial grounds and was (at that point) a claim that would succeed. Finally, there were no special circumstances to take the case outside the application of the general rule.

Practical points

The judge's decision broadens the definition of a cross-claim to include a "nascent" right to repayment based on a valuation in a subsequent adjudication. It is another indication of the court's reluctance to use a winding-up order to enforce an adjudication decision. Here, justice demanded that it would be "quite wrong" for the employer to be wound up for failing to pay a further sum given that it had already paid a substantial sum in excess of the second adjudicator's valuation.

The court's approach to set-off claims in adjudication enforcement proceedings

When an adjudicator decides a party should pay, that party must pay up straight away. The adjudicator's decision is binding and enforceable unless there is a valid jurisdictional challenge or the adjudicator is in breach of natural justice (Macob v. Morrison, (1999)). The losing party can argue about the decision's merits in later court or arbitration proceedings. This principle underpins the aims of the Construction Act to keep cash flowing on projects.

But what happens if the paying party has a cross-claim – for example, because it has found defects in the payee's work? Can the payer set off the value of its cross-claim from the amount the adjudicator has ordered it to pay?

This is what the Technology and Construction Court (TCC) had to consider in MI Electrical Solutions Ltd v. Elements (Europe) Ltd [2018] EWHC 1472 (TCC).

The defendant (the contractor) had appointed the claimant (the sub-contractor) to supply and install mechanical and electrical works in apartment modules on the "Orchard Village" project. A dispute arose and an adjudicator decided the contractor owed the sub-contractor £179,931.57. Having identified defects in the sub-contractor's works for which it had valued the remedial works at £168,453.33, the contractor deducted that sum and paid only the balance. The sub-contractor applied to the court for summary judgment on the £168,453.33.

A court may award summary judgment where: "(a) it considers that ... (ii) the defendant has no real prospect of successfully defending the claim or issue; and (b) there is no other compelling reason why the case or issue should be disposed of at a trial."

There was no issue about the adjudicator's jurisdiction or any breach of natural justice which prevented the sub-contractor from enforcing the judgment. The only issue was whether the contractor could set off its cross-claim of £168,453.33 against the adjudicator's decision. The sub-contractor argued it could not on the principal basis that the adjudicator had dealt with set-off in the adjudication. The parties had agreed (under the Scheme for Construction Contracts which applied to their sub-contract) that the adjudication decision was binding until finally determined in litigation or arbitration. The contractor could not now raise the set-off issue again in the summary judgment enforcement proceedings.

The judge reviewed the adjudicator's decision and agreed with the sub-contractor: the adjudicator had indeed dealt with set-off in the adjudication. The contractor should have deducted the cost of repairing the defective works from the payment applied for in the pay less notice. It had not done so and could not now raise the cross-claim in defence to the summary judgment application.

The contractor could have started CPR Part 8 proceedings to introduce substantive law issues on the merits for the judge's determination at the summary judgment hearing –or sought to establish the criteria in Hutton Construction v. Wilson Properties. (Hutton provides that when deciding whether a contractor can raise issues in defence of an enforcement hearing, the court's starting point is whether there is a jurisdictional challenge or a breach of natural justice (see Macob). The contractor must then show the issue raised in defence of an enforcement application is suitable for the CPR Part 8 process. The issue must be short and self-contained; must already have been raised in the adjudication; or require no oral evidence or elaboration that would extend the enforcement hearing unreasonably. The defendant must also show that it would be unconscionable for the court not to hear the point. The judge in Hutton made clear that scenarios where substantive points can be raised will be rare.)

In MI Electrical, the contractor also raised alternative arguments that it could set off its cross-claim under two set-off clauses in the contract. In dismissing these arguments, the judge made a passing ("obiter") comment after reviewing the relevant precedents. To be effective, the contractual terms allowing set-off must either be consistent with the policy of the Construction Act or be struck down as inconsistent with its policy. (There are exceptions where set-off was granted such as in Parsons Plastics (Research & Development) Ltd v. Purac Ltd [2002] EWCA Civ 459 – but Parsons was an unusual case.)

The judge dismissed the contractor's contractual set-off arguments. He interpreted the Scheme for Construction Contracts to mean that the adjudication decision was binding irrespective of the terms of the contract. Alternatively, he interpreted the two set-off clauses relied on by the contractor as not applying to the adjudicator's decision – as that was the only way in which they could be consistent with the Construction Act (and therefore effective). Other interpretations would stop payment and thwart the underlying policies of the Construction Act to keep cash moving.

The contractor was left with no right of set-off. Its defence to the summary judgment application failed. The case was suitable for summary judgment and the judge enforced the adjudication decision and awarded judgment to the sub-contractor.

Practical points

  • Include any cross-claims that arise during the works in the relevant pay less notice, clearly explaining the deduction/set-off.
  • When considering making a defence to enforcement proceedings, remember that the Construction Act was introduced to improve payment procedures and cash flow. Most adjudication decisions will be enforced.
  • If you defend an enforcement action and intend to raise substantive issues in response to an adjudication decision, ensure you come within the ambit of Hutton and make an early CPR Part 8 application. Failure to do so could leave you with a failed defence, a large costs bill and an outstanding duty to pay the sum due under the adjudication decision.

Last word on the benefits of adjudication

MI Electrical Solutions shows the downside – the so-called rough justice – inherent in the adjudication process for those who have to pay up while their own claims are outstanding. The overall benefits, however, should be kept in mind. Twenty years ago, the usual option to recover payment was full-blown litigation. Lengthy, costly proceedings in the TCC are now both unthinkable and unaffordable for most. As The Honourable Mr Justice Fraser commented in his recent judgment in Imperial Chemical Industries Ltd v. Merit Merrell Technology Ltd [2018] EWHC 1577 (TCC) ("a long-running and bitter dispute"): "[This] litigation also stands as something of an advertisement for adjudication". Adjudication remains a swift process for resolving payment disputes while maintaining a party's right to seek a final resolution in the courts or arbitration.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions