Michael Hopkins reviews some recent cases on adjudication which give further guidance on the consequences for the Employer in failing to serve withholding and payment notices, where adjudicators can breach the rules of natural justice and where adjudicators exceed their jurisdiction.
WHILST new cases on the enforcement of UK Adjudication decisions seem to be handed down on a ‘daily’ basis the following four cases handed down in the last 6 months are worthy of particular attention.
Withholding Notices
In Rupert Morgan Building Services (LLC) Ltd v David Jervis and Harriet Jervis (12 November 2003) the Court of Appeal gave judgement in favour of a builder seeking payment pursuant to an interim payment certificate. It agreed with the builder that if a payment certificate has been issued and no effective withholding notice under s.111 served then the certified sum must be paid. Under the terms of the building contract the architect was required to issue interim payment certificates every 14 days and payment was to be made by the employer within 14 days. The employer refused to make full payment of an interim certificate contending that the certificate included sums in respect of items of work not done, items already paid or incorrectly charged as extras. However, the employer did not serve a notice of intention to withhold payment in accordance with s.111. The employer argued that as the sum certified by their architect included amounts for work not done it was not a sum due under the contract and the requirement to serve a withholding notice under s.111 did not apply as one cannot withhold what is not due.
The Court of Appeal held that because the contract specifically stated that “the employer shall pay to the contractor the amount certified within 14 days of the date of the certificate, subject to any deductions or set-offs due under the contract”, it was therefore the certificate that determined the sum due, not the actual work done. Accordingly, the employer was obliged to pay the amount certified having not served a withholding notice.
A number of points follow from this judgment:
(1) Where an employer wishes to challenge a certificate this case emphasises the need to save a timeous withholding notice.
(2) It follows that under a contract where there is a certification process, withholding notices must deal with all and any sums that the employer intends not to pay whether they are sums allegedly not due, abatements, set-offs or counterclaims.
This case very much represents a return to the sentiments of Court of Appeal Judgment of Lord Denning MR in the 1971 decision Dawnays v Minter in which the Master of the Rolls held that “An interim certificate is to be regarded virtually as cash, like a bill of exchange. It must be honoured”.
Payment Notices
In M.J. Gleeson Group Plc v Devonshire Green Holding Limited (19 March 2004) the court held that the employer was required to comply with an adjudicator’s decision and pay to the contractor the amount that it had applied for on an interim application for payment. The contract between the parties was in the JCT Standard Form of Building Contract with Contractor’s Design 1998 which provided that if the employer fails to serve a notice setting out what it considers is due to the contractor and what, if any, monies it intends to withhold from the sums due, then the amount applied for by the contractor becomes payable in full by the employer.
It was immaterial to the enforcement of the adjudicator’s decision that the employer had since raised its own claims in respect of the contractor’s delay.
This is yet another case, along similar lines to the cases such as Watkin Jones v Lidl (2002), which concerns the payment provisions particular to the Standard Design & Build form. Employers failing to serve payment notices, and indeed Main Contractors failing to serve payment notices under the DOM/2 form, clearly do so at their peril.
Natural Justice
In London & Amsterdam Properties Ltd v Waterman Partnership Ltd the court refused to enforce an adjudicator’s decision in favour of LAP on the grounds that the adjudicator had proceeded in breach of the rules of natural justice.
LAP were pursuing substantial claims against Waterman, the consulting engineer, for negligence and breach of contract.
Prior to the adjudication a considerable amount of correspondence was exchanged in relation to the claims, however Waterman repeatedly observed that they had not received sufficient particulars to deal with the claims made against them. Waterman requested further information, however, LAP refused to provide that information relying on the broad assertion that it had paid additional sums to the steelwork contractor and that those costs in their entirety fell to the account of Waterman.
LAP commenced adjudication proceedings and came to rely upon, by way of Reply to Waterman’s defence, a great deal of information that the court observed had been available to LAP prior to the adjudication but which it had chosen not to disclose, despite Waterman’s request for the same. Waterman complained to the adjudicator that by dealing with the material put forward by LAP there would be procedural unfairness. LAP refused to grant any further extension of time for the adjudicator to reach his decision and the adjudicator continued and made a decision in favour of LAP.
On enforcement Waterman objected to the adjudicator’s decision on the ground that there had been a breach of the rules of natural justice. Waterman referred to LAP’s conduct as an evidential “ambush”.
The Court confirmed that the adjudicator should either have excluded the additional material put forward by LAP in its Reply or should have given Waterman a reasonable opportunity to deal with it. There had been a breach of natural justice.
The points that follow from this Judgment are:
(1) The claimant referring party should consider carefully before refusing to supply any material or documentation requested by the respondent, especially if there is a risk that such material may later need to be relied upon;
(2) If a respondent is faced with material that it has not seen
before and is denied a reasonable opportunity to deal with it the respondent shouldconsider immediately inviting the adjudicator to ignore such material or withdraw from acting;
(3) The courts are starting to express certain disapproval of the applicability of the adjudication process to large and complex disputes.
Jurisdiction
In Image Decorations Ltd v Dean & Bowes (Contracts) Ltd (5 March 2004) the court refused to enforce an adjudicator’s award in favour of Image on the grounds that the adjudicator had exceeded his jurisdiction.
The parties entered into a construction contract in February 2002 for plastering, partitioning, decorating, drylining and suspended ceiling works on D&B’s main contract for works at a leisure club in Epsom. It was alleged that there were a number of variations and Image sought additional payment of £640,795.15. No further sum was paid.
As a result Image sent D & B a notice of adjudication contending that a dispute had arisen as a consequence of the withholding of monies by D & B, seeking to refer the dispute to adjudication under section 108 of the Act.
Confusion arose between the parties exactly as to what the adjudicator was to decide and during the course of the adjudication, the adjudicator invited the parties to consent to his jurisdiction being extended to allow him to decide upon the sum due under the contract rather than just matters of withholding.
The parties did not consent to theadjudicator’s jurisdiction being soextended.The adjudicator nevertheless wenton to decide what sum was due toImage. He sought to justify so doingby reference to the decision in S LTimber System Ltd Carillion Construction Ltd 2001. He statedthat under paragraph 20 of Part I ofthe Scheme he was entitled to takeinto account matters under thecontract which he considered to be necessarily connected with thedispute. He considered that suchmatters allowed him to make aprovisional determination of the sum due under the application forpayment.
On enforcement, and on refusing to enforce the decision, the Court tated that the object of paragraph 20 of the scheme was to empower theadjudicator to make such subsidiaryfindings on disputed matters as arenecessary for him to decide the issuesreferred. It was not to enable him todecide an additional issue. All theadjudicator had to find was that some monies were being improperly held;he did not have to decide how much.The SL Timber Systems case wasdistinguished on the grounds that inthat case, the adjudicator hadjurisdiction to decide what sums weredue under the contract.The points that follow from thisJudgment are:
(1) The redress sought by theReferring Party (and therefore jurisdiction of the Adjudicator)must be clearly stated in the
Notice of Intention to Adjudicate;
(2) The parties are free, during the course of the Adjudication, either to expand or narrow the ambit ofthe Adjudicator’s jurisdiction;
(3) Adjudicators should be careful in seeking to rely on the powersgiven to them under paragraph 20of the Scheme in arriving at adecision, particularly where thereis an agreement between theparties that he has no jurisdictionto make that decision. Paragraph20 is not as wide as one mightthink.
Michael Hopkins is a Partner with Masons Solicitors Construction & Engineering Division in Manchester (tel: +44 161 234 8234, email: michael.hopkins@masons.com)