Directions from the Court of Appeal on use of Part 8 proceedings in adjudication

Published 29 junio 2023

This Court of Appeal judgment raises issues arising out of the parallel jurisdictions of an adjudicator, on the one hand, and the courts, on the other.  The Court also made some useful comments regarding a party's obligation to provide prompt notice if they dispute the validity of a payment application.

Background

J&B Hopkins ("JBH") were the main M&E contractors on a university project. JBH engaged A&V Building Solutions Limited ("AVB") to carry out certain M&E works. The Sub-Contract sum was £368,000. The works did not go smoothly and there were disputes between the parties.

Sub-Contract

The following clauses of the Sub-Contract[1] were key.

"9.2. It is a condition precedent to payment that the Sub-Contractor shall make monthly applications ("Interim Application") for payment to the Contractor on the dates specified in Appendix 6...

9.3. The payments shall be in accordance with Appendix 6"

Appendix 6 set out the relevant interim payment schedule. LJ Coulson stated these dates were clear because "the dates in column A were mechanically calculated, in that they were always 10 days before the valuation dates in column B, which were in turn was always the last day of the month".

Appendix 6 went on to provide:

"…For the avoidance of doubt if applications are not received from the Sub-Contractor 7 days prior to the Valuation Date then the Sub-Contractor shall not be entitled to any payment, whether or not a payment notice is served by the Sub-Contractor until the procedure set out above is repeated in relation to the next Valuation Date."

Facts

AVB issued its interim payment application No.14 ("IA14") on Monday 22 March 2021 despite it being dated and due on Sunday 21 March 2021[2].  On 16 April 2021, JBH sent AVB a "sub-contractors payment certification" (the "Payment Notice"). Despite this title, the covering email described it as payment notice 14. The parties disputed the sum due for under IA14.

On 17 November 2021, AVB commenced an adjudication seeking sums due under IA14. Only on 26 November 2021 did JBH claim for the first time that IA14 was invalid due to it being issued 1 day late.

During the adjudication, on 2 December 2021, JBH made a "pre-emptive strike" and started Part 8 proceedings against AVB. JBH sought declarations as to the invalidity of IA14 and the validity of its Payment Notice.

The Adjudicator's decision on 19 January 2022 ("First Adjudicator's Decision") found that IA14 was valid and a net sum of £138,010.86 was due to AVB. JBH failed to pay this sum to AVB.  AVB did not commence enforcement proceedings in respect of the First Adjudicator's Decision until 24 March 2022, which meant the hearing for those proceedings was not listed until after the Part 8 application had already been heard.

The Part 8 application was heard in April 2022

1. The judge at first instance approached the matter on the documents and submissions before him and did not adopt the First Adjudicator's Decision as the starting point for his decision.

2. It was held that the wording "condition precedent" in clause 9.2 meant that applications should be made on the date specified and if this date was missed then AVB had no entitlement to payment.

3. Therefore "although the consequence of an interpretation requiring the notice to be on the Sunday is an unusual one it is not one in my judgment which leads to an unfair result such as to cause the court to say clear words are needed before that conclusion can be reached".

4. Eyre J also rejected the secondary submissions that there had been a variation or waiver due to previous course of conduct between the parties. 

AVB appealed the Part 8 decision.

It should be noted that since permission to appeal was granted, a second adjudication was launched by JBH in June 2022 in relation to the final account, this was resolved in favour of JBH ("Second Adjudicator's Decision"). AVB did not pay the sums due in the Second Adjudicator's decision.  The hearing of the enforcement application in respect of the Second Adjudicator's decision was due to take place after the hearing of the appeal but, for our purposes, it is sufficient to note that, on the face of it, the Second Adjudicator's decision means that no sums are now due to AVB.

AVB's appeal

There were 3 accepted grounds of appeal. Coulson LJ gave the leading judgment. Ultimately, he upheld AVB's appeal.

Ground 1 -  procedural propriety of the Part 8 proceedings or were the part 8 proceedings an abuse of process?

The judgment looks at both the wording in the TCC guide and relevant case authorities. These were said to make it crystal clear that "court proceedings remain open to parties to construction adjudication. There is nothing in the 1996 Act to suggest otherwise. Whilst I regret JBH's costly decision to set up two competing sets of proceedings, with the Part 8 claim relevant only if JBH lost the first adjudication, it was an approach that, as a matter of law, was open to them". Albeit it was considered that the Part 8 proceedings should have been viewed "through the prism of AVB's successful claim in the first adjudication, and the decision of 19 January 2022 in their favour", although it was "much too late for that to change anything now".

Ground 2 – was IA14 a valid application?

Unlike the TCC, Coulson LJ decided that the date in the payment schedule for IA14 was not “sacrosanct”. Instead he focused on the flexibility in relation to the payment schedule’s dates. IA14 was held to be valid.

Ground 3 – had there been variation/ waiver or estoppel in relation to the dates in the payment schedule? These were addressed obiter.

The Court did not need to reach a concluded view based on the above but since these sorts of arguments regularly arise in adjudication enforcement, particularly arising out of 'smash and grab' adjudications, Coulson LJ briefly set out his conclusions.

• In relation to the prior event case, Coulson LJ held that one instance in 2020 did not sufficiently amount to a variation or waiver in respect of future applications. In respect of the treatment of IA14 he considered that JBH "unequivocally affirmed the validity" of IA14. Throughout the period between March and November 2021, both parties were operating on the basis that IA14 was a valid application. It seems clear that AVB relied on that common assumption to make IA14 the focus of their Notice of Adjudication. If at any time prior to that time, JBH had indicated that they considered application 14 to have been served one day late, then AVB could have taken the necessary steps to resolve that debate, by repeating the claim for the next monthly cycle in April (or indeed for any month prior to the commencement of the adjudication in November). AVB did not do so because JBH had not taken the point.

Key takeaways from the Court of Appeal: this case provides the following useful guidance

1. How the Court may approach a Part 8 claim brought for the purpose of querying an element of an adjudicator's decision. The Court of Appeal held a party was entitled to commence and continue with Part 8 proceedings seeking a declaration challenging the validity of the payment application on which the adjudicator’s decision was based. Such parallel part 8 proceedings were not an abuse of process.

2. While such an approach is permissible, it should be noted that use of the process in these circumstances led to an academic result as the decision in the Second Adjudication meant no sums were due to AVB. The Court lamented the costs that had been incurred to achieve such a result (particularly given the relatively small sums in dispute) and no order as to costs was made for the entire proceedings, meaning that each party essentially had to bear their own costs.

3. Further criticism was levied as both parties seemingly ignored the "pay now, argue later" principle of adjudication; this was cautioned against and should be avoided in future cases.

4. Parties may be (although obiter) estopped from challenging the validity of a payment application if they do not provide prompt notice of their objections.
   
   a) Parties should be cautious to reserve their position or explicitly set out the grounds of any challenge that are likely to be relevant when dealing with a smash and grab adjudication.
   
   b)If a party receives a payment application from the other party which it considers to be defective or to have been served out of time, it should object to its validity immediately and hold that position consistently.

[1] n.b. this was in JBH's own standard form

[2] AVB also did this similarly in 2020. Then, JBH had without objection made an interim payment in respect of this 2020 application notice, due on a Sunday but sent on the following Monday.