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Payment and Pay-less Notices – Disputing the Adjudicator's Decision - To fight, pay or stay

STRUCTURE CONSULTING LTD v MAROUSH FOOD PRODUCTION LTD (2017)
HUTTON CONSTRUCTION LTD v WILSON PROPERTIES (LONDON) LTD (2017)

Following on from our recent articles concerning the interpretation of payment and pay-less notices in adjudication, two recent cases have provided some valuable guidance as to how the Courts will deal with any continuing 'notices' dispute once the adjudicator's decision is being enforced.

These cases concern what has become quite a common scenario. An adjudication takes place where, say, a sub-contractor and main contractor are in dispute as to the validity of a payment notice and/or a pay less notice and the adjudicator finds that a payment notice is valid and/or a pay less is invalid and, consequently that the sum claimed is 'automatically due' (often referred to as a 'smash and grab' adjudication).

So what happens next? In the event of non-payment, the claiming party will usually issue a claim to enforce the decision at Court and the paying party then has to consider if and how it will get its arguments as to notice validity before the Court. Can they resist enforcement or do they have to start separate proceedings? The general position is that where an adjudicator's decision is within his jurisdiction and in accordance with the principles of natural justice it must be complied with pending agreement or full blown litigation or arbitration. The Court will enforce the decision and won't look into the merits of the decision itself during those enforcement proceedings. However, because these (so called) 'smash and grab' adjudications often concern what is (relatively speaking anyway) a fairly straightforward issue, the losing party tends to try and get this issue heard in parallel with the enforcement to effectively prevent the decision being put into effect. Usually this is attempted in one of the following ways:

  • Issue separate Part 8 proceedings and get the matter heard at the same time as the enforcement,
  • Issue separate Part 8 proceedings try and get any decision as to enforcement stayed pending the hearing, or
  • Simply raise the disputed matter(s) as a defence in the enforcement proceedings themselves.

To explain, an adjudicator's decision is usually enforced by way of an expedited summary judgement claim procedure pursuant to Part 24 of the CPR whereby the Court will endeavour to have the hearing within 28 days of proceedings being commenced. The Court is concerned with the validity of the adjudicator's decision (jurisdiction and natural justice), not the substantive merits of the decision itself.

CPR Part 8 Proceedings are generally used as an alternative to full proceedings for a decision on a substantive issue but 'where there is not likely to be any substantial dispute of fact' - for example the validity of a payment/pay less notice.

In essence, a declaration that an adjudicator's decision is 'wrong' as opposed to 'invalid' is more involved and requires written evidence in support of/in defence of the declaration sought and may require additional procedures and a longer hearing than an enforcement so would seem more suited to a Part 8 process.

However, there has been some confusion as to whether, in the absent of inter party consent, separate Part 8 proceedings should be issued - and if so, whether a stay of the judgment is warranted and/or whether these arguments can be heard at the enforcement hearing. It is often the case that the parties agree a 'hybrid' procedure – but what if there is no such agreement?

Structure Consulting Ltd - Case Background
Here, there was an adjudication concerning the validity of a pay less notice which led to the commencement of adjudication proceedings by the Claimant. The adjudicator decided in the Claimant's favour and held that the pay less notice was not complaint with statutory requirements and awarded the sum claimed.

Following this, the Defendant issued Part 8 proceedings to overturn the adjudicator's decision and sought declaratory relief to determine whether the contract between the parties had incorporated the JCT contract conditions and thereby whether their pay less notice had been valid. Whilst the Defendant accepted that the Part 8 proceedings were separate from the enforcement, it submitted that the enforcement of the decision should be stayed until after the issues under the Part 8 proceedings had been dealt with. In the alternative, it sought additional time to pay the judgment sum.

In response, the Claimant's position was that the issue of validity of contract and pay less notice and the matter of contractual interpretation were not suitable for the expedited Part 8 process and should be dealt with under Part 7 (the 'full' procedure) given the dispute over a considerable amount of fact and that in any event the payment of the monies owed, as ordered by the adjudicator, should be enforced by way of summary judgment.

Decision
The Court held that the issues were sufficiently defined to allow them to be dealt with under Part 8 Proceedings. The Court were of the opinion that the issue of whether or not the essential terms of the JCT had been incorporated and agreed would not require lengthy proceedings or complex disclosure as it would turn on how the document was constructed. Interestingly, the Court considered witness evidence would be required and permitted the parties to call witnesses for cross examination – thereby confirming that contained disputes as to contractual formation may not fall foul of the 'substantial dispute of fact' exclusion from Part 8.

In relation to the Defendant's request to have the enforcement of the adjudicator's decision for payment stayed, the Court held that the robust approach which was adopted in Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2005] EWHC 778 (TCC) must be taken and there were not any special circumstances (such as financial position) in this instance which required a stay to be granted.

The Court ordered that the Defendant pay the Claimant the outstanding sum owed notwithstanding the on-going parallel Part 8 proceedings.

Hutton Construction – Case Background
Here, yet another 'payment notice' adjudication between the parties led to an adjudicator's decision that the Defendant had not issued a valid interim certificate or pay less notice and the sum claimed was therefore due and payable. The Claimant then applied for summary judgment to enforce the adjudicator's decision.

In response to the enforcement, the Defendant issued no defence and counterclaim and merely notified the Claimant that it intended to resist the enforcement and then served evidence in response to the claim. Some two weeks later, the Claimant issued a formal Part 8 claim seeking declarations as to the payment/pay-less notices and that the adjudicator's decision was therefore 'wrong'. The question for the Court was whether the issues raised by the Defendant could be considered by the Court in the enforcement hearing in the absence of inter party consent.

Decision
As with Structure Consulting, the starting point is that a valid adjudicator's decision should be enforced and the enforcement hearing is not concerned with substantive disputes. Here the Judge was highly critical of the Claimant's attempt to 'shoe horn' (as the Judge put it) the entirety of the adjudication dispute into the enforcement hearing. He made clear that, absent consent, there are very limited circumstances where a substantive issue could be used to resist enforcement. A Defendant must demonstrate that:

  • The dispute issue is short and self-contained,
  • Requires no oral evidence, or any elaboration beyond that which is capable of being provided during the hearing set aside for enforcement, and
  • The issue is one which it would be unconscionable in summary judgment for the Court to ignore.

The Judge then gives some examples of the above; such a decision that it is 'beyond rational justification, 'obviously wrong' and, specifically, the categorisation of a document as, say, a payment notice when on any view, it was not capable of being described as such. He said any 'inter leafing of issues' would almost certainly be fatal to an argument that the dispute in question was suitable for being dealt with in the enforcement hearing.

Here, he considered the Defendant's arguments as to matters such as the status of a pay less notice/payment certificate, the timing of the same and whether the content requirements were satisfied. Crucially, there were not only a number of issues but the Defendant was seeking to rely on evidence of fact as well as other arguments not raised in the adjudication itself. He therefore refused to allow these matters to be heard at enforcement and awarded the Claimant summary judgment in the sum sought.

Whilst critical of the piecemeal and late submissions of the Claimant, it seems clear that its arguments would not have been allowed into the enforcement hearing in any event.

Overall Case Commentary
From the two cases it seems that if there is a substantive dispute as to 'payment notices' post adjudication, this will not be allowed into enforcement proceedings (whether by Part 8 or otherwise) unless there is inter party consent as to the process or the dispute is very straightforward and does not require oral evidence/evidence of fact. The principle behind this is to prevent adjudications effectively becoming a two stage process with adjudications being subject to a detailed Court analysis post decision but pre-enforcement.

A Defendant wishing to raise substantive issues as to, say, 'payment notice validity' should issue separate Part 8 Proceedings challenging the adjudicator's decision and seeking clear declarations as to what is being sought. Whilst it may be possible to do this by way of defence and counter-claim to the enforcement claim itself, this judgment makes clear this this approach may be frowned upon by the Court. Part 8 has specific 'fact track' provisions for dealing with such disputes and this can include the limited submission of witness evidence where, for example, factual evidence is required in relation to contractual interpretation.

Where such Part 8 proceedings are commenced:

  • there is no automatic right to have the subject matter of this introduced into the enforcement process, or 
  • for the enforcement proceedings to be stayed pending the outcome of the Part 8 hearing.

With regard to the former, for such issues to be introduced, they would have to fall within the strict parameters set out above and any dispute as to whether or not these should be dealt with on enforcement would have to be heard at the enforcement hearing itself. Given these requirements and the inevitable hearing time constraints, it would be very difficult to persuade a Court to allow these to be raised as a defence to enforcement. Should the Defendant fail in its attempt to resist enforcement on this basis, it may then face consequential cost sanctions.

With regard to the latter, any stay would be at the discretion of the Court and unless 'special circumstances' exist (in other words certain financial constraints - see for example Galliford Try Building v Estura Ltd EWHC 412 (TCC)) the decision will probably be enforced without consideration of the parallel proceedings. If Part 8 proceedings are commenced promptly, then in any event, there should not be much of a delay between the two hearings.

Article author: Paul Barge

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Paul Barge

Partner

I am a Partner in DWF’s Manchester office and Head of the Construction & Infrastructure team in the North West.

Paul O'Kane

Partner - Head of Construction, Infrastructure & Projects

I am a Partner and head up the Construction and Infrastructure team.