In the recent decision of Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd  EWHC 2441 (TCC), the court considered whether there had been a breach of natural justice as a result of the adjudicator’s deliberate decision not to consider the employer’s defence to a contractor’s claim for payment.
The court held that the adjudicator had made an error in deciding not to consider the defence and as such, the Decision was not enforceable.
The project was a residential development in Hackney for seventy-nine units. The relevant notices were:
- The Contractor’s Interim Application 34 claiming that the sum due was £1,888,660.70.
- Payment Notice 34 issued by the Employer’s Agent stating a sum due of £0.97. However, somewhat oddly, in its covering email the Employer in effect acknowledged that they had not considered Interim Application 34 in full and that a further Payment Notice would be issued.
- The Employer then indeed sent a much more detailed Payment Notice 34a and a valuation assessment in the sum of £657,218.50 (which the Employer then paid).
- The Contractor was not happy with this and commenced adjudication stating that while they could have gone for a “smash and grab” then were not doing so and were instead looking for a decision “the correct sum due to the Referring Party in Interim Payment Nr 34”. The redress sought was to be that the Employer pay £1,307,169.59.
As part of its defence to the sum claimed, the Employer asserted a contra charge relating to a breach of contract in respect of the works to the capping beam. The issue was that the capping beam had allegedly been installed at a greater height than provided for in the Contract. The Employer’s position was that this meant that some basement units would have less natural light than they otherwise would have done leading to a loss of rental income in respect of those units of £149,692 – which it contended should be set off against any sum claimed by the Contractor.
The Adjudicator’s Decision
The adjudicator concluded that the capping beam claim did not fall within his jurisdiction and made his decision without taking the capping beam claim into account. He decided that a proper valuation of Interim Application 34 required him to effectively take a snapshot of the position between the parties at that time. As no mention was made of any counterclaim related to the design or construction of capping beams in the Employer’s evaluation and certification, the adjudicator concluded it was not relevant at the time.
The Employer commenced proceedings challenging the enforceability of the Decision on the footing that the adjudicator had deliberately declined to address a line of defence asserted by the Employer.
In considering this issue the court confirmed the principles that:
- a deliberate failure to address a material issue which was before the adjudicator on a proper view of their jurisdiction will be a breach of natural justice.
- an issue will be material for these purposes if it is shown to have had the potential to make a significant impact on the overall outcome of the adjudication.
The court also cited the key principles from Pilon Limited v Breyer Group Plc  EWHC 837 (TCC) that:
- an adjudicator must attempt to answer the question referred – which may consist of a number of separate sub issues
- if the adjudicator has endeavoured generally to address those issues in order to answer the question then the decision is enforceable
- however, if the adjudicator fails to address the question referred as a result of taking an erroneously restrictive view of jurisdiction then that may make the decision unenforceable, either on grounds of jurisdiction or natural justice
- for that to be the case, the adjudicator’s failure must be deliberate rather than inadvertent
- any such failure must also be material i.e. the error must be shown to have had a potentially significant effect on the overall result of the adjudication
- a factor which may be relevant to the court’s consideration of this topic in any given case is whether or not the claiming party has brought about the adjudicator’s error by a misguided attempt to seek a tactical advantage
- where the adjudication is concerned with a party’s entitlement to be paid money then a defence which would if successful remove that entitlement or diminish the sum to be paid will potentially be an issue in the adjudication.
The court held that in this instance, the exercise the adjudicator was engaged in, was to address the sum due in payment cycle 34. The capping beam claim was being put forward as a matter which the Employer said reduced the amount which was due in that cycle. It was, accordingly, being raised as a defence in respect of the matter in issue in the adjudication and the adjudicator had jurisdiction to consider it (despite it not having been mentioned in Payment Notice 34). In choosing to ignore it, the court held that the adjudicator took an unduly narrow view of his jurisdiction. It was held that this was also a material error as the defence could have determined the state of the balance lay as between the Employer and the Contractor.
Was Payment Notice 34 Valid?
The court also considered whether or not Payment Notice 34 was valid. It is unusual in this case that Payment Notice 34 in effect acknowledged it had not been fully considered and that a further notice would follow. Section 110A (2)(a) of the HGCRA provides that a payment notice is valid if it specifies:
“(i) the sum that the payer considers to be or to have been due at the payment due date in respect of the payment; and
“(ii) the basis on which that sum is calculated.”
Noting the decisions in Henia Investments v Beck Interiors Ltd  EWHC 2433 (TCC) and Surrey & Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd  EWHC 17 (TCC) (which indicate that if the notice provides an agenda for adjudication, then it will meet the statutory requirements), the court held that Payment Notice 34 was not valid as it did not provide an agenda for adjudication. This was because it set out no basis for the contention that the gross valuation had only increased by £0.97 and so there was no material on which the validity of that contention could be assessed. That could be contrasted with Payment Notice 34a which put forward a larger figure and also accompanied by detailed calculations showing how the Employer had arrived at the figure which was being put forward. It is significant that Payment Notice 34a did in fact provide an agenda for the adjudication.
Parties commencing adjudications, particularly to claim payments, should be mindful that they have their own “house in order” before they do so given the risk of wider issues which may be raised in defence to such claims. Once a “true valuation” of an application is sought, the risk of broader (and potentially unexpected) issues being brought in is greater. An option to avoid this is not seek a specific payment but to simply seek declarations on specific issues which will affect the overall sum due in further applications.
It is also clear, as it always has been, that Payment Notices should be sufficiently detailed to fully explain how the balance due has been calculated – this is usually best by reference to a detailed mark up of the Contractor’s application or similar and should be included with the Payment Notice.
Clearly it is not very helpful to state in the Payment Notice that it is not conclusive and that a further notice will follow. In this case, there was some discussion around whether the notice could be valid if it satisfied the formalities in providing an agenda for adjudication but did not “set out the sum which the relevant employer genuinely considers due”. This was not fully explored but could open a door for parties to seek to claim the sums certified did not “genuinely” represent what the Employer thought. As such, Employers should as a rule, avoid creating any documents which evidence that the sums stipulated do not actually reflect their views (unless of course those documents are clearly marked as being without prejudice for the purposes of settlement of the issues).