Whether previous dispute actually decided

By Victoria Russell, Fenwick Elliott

Matthew Harding (t/a MJ Harding Contractors) v Paice and Springall [2015] EWCA Cib 1231 (Court of Appeal – 1 December 2015)

During March 2013 Mr Paice and Ms Springall (‘the employers’) engaged Mr Harding, trading as M J Harding Contractors, (‘Harding’) to complete works on two residential houses at Purley in Surrey. The contract incorporated the adjudication provisions of the Scheme for Construction Contracts (‘the Scheme’).

Paragraph 9(2) of the Scheme provides that an adjudicator must resign where the dispute is the same or substantially the same as one which has previously been referred to adjudication and a decision has been taken in that adjudication.

Harding commenced work on 8 April 2013 but relations with the employers soon deteriorated and on 18 September 2013 the employers issued a notice of termination.

During October 2013 Harding commenced two adjudications against the employers and was successful in both, recovering some £285,022.00.

On 8 August 2014 Harding issued an account claiming a further payment of £397,912.00, and on 1 September 2014 commenced adjudication seeking recovery of this sum. The employers served a purported pay less notice on 2 September 2014.

In this third adjudication, in a decision dated 6 October 2014 the adjudicator found that: (i) the pay less notice of 2 September was invalid, having failed to specify the basis of the employers’ contentions so that the employers were required to pay the notified sum of £397,912.00; and (ii) it was not necessary to decide whether or not the £397,912.00 amounted to a correct valuation of the works. In paragraph 185 of his decision the adjudicator stated:

“… I have not decided on the merits of Harding’s valuation and have not decided that £397,912.48 represents a correct valuation of the works. The parties made submissions in this adjudication about the proper valuation but these did not fall to be considered by me because of the rule relating to a notified sum becoming automatically due in the absence of a valid pay-less notice.”

On 14 October 2014 the employers started a fourth adjudication seeking declarations as to the valuation of the contract works.

On 21 October 2014 Harding commenced proceedings in the TCC seeking an injunction to restrain the fourth adjudication on the basis that all of the valuation issues raised by the employers had already been decided in the third adjudication so that the adjudicator in the fourth adjudication lacked jurisdiction. On 21 November 2014, the TCC refused the injunction, on the grounds that: (i) the failure to serve a compliant pay-less notice could not permanently deprive the employers of the right to challenge the contractor’s account; and (ii) paragraph 9(2) of the Scheme applied where a dispute previously referred to adjudication had actually been decided. Harding then started an appeal. On 15 December 2014 the Adjudicator in the fourth adjudication issued his decision requiring Harding to pay the employers some £325,484.00. However, that decision was not enforced on grounds of apparent bias. Whether or not the employers could commence what would be a fifth adjudication depended upon the outcome of Harding’s appeal.

Harding appealed on two grounds: that in refusing the injunction the Judge had misinterpreted paragraph 9(2) of the Scheme and had incorrectly analysed the scope and effect of the adjudicator’s decision in the third adjudication.

The Court of Appeal found that the judge had not erred in his interpretation of the Scheme as in paragraph 9(2) the word “decision” meant a decision in relation to the dispute now being referred to adjudication. The Court therefore rejected Harding’s submission that if a similar dispute had been referred to adjudication without having been decided, that was sufficient to trigger paragraph 9(2).

The Court also dismissed the second ground on the basis that in the third adjudication the adjudicator had made it clear in paragraph 185 of his decision that he had not dealt with the valuation issue nor carried out a valuation exercise. Accordingly, the Judge had been correct to find that there had been no previous decision by an adjudicator on the valuation dispute referred by the employers in the (abortive) fourth adjudication. Hence paragraph 9(2) would not prevent the employers from referring this dispute to (a fifth) adjudication.

The Court of Appeal joined the Judge in adopting a common sense approach to paragraph 9(2) of the Scheme. As Jackson LJ observed, if a claimant refers twenty disputes or issues to adjudication but the adjudicator only decides one of those disputes or issues, it could not be right that the Scheme would prohibit future adjudications about the other matters. This approach will require incoming adjudicators to scrutinise previous decisions very closely to see what disputes/issues have and have not been decided, but as Jackson LJ pointed out, this should not create any particular difficulties.

In his judgment Lord Justice Jackson set out the summary by Mr Justice Edwards-Stuart in the case of Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412, when he described what he had intended to decide in the earlier case of ISG Construction Ltd v. Seevic College [2014] EWHC 4007 (TCC). Lord Justice Jackson said:

“I shall not embark upon an analysis of those two cases. Instead I shall set out the judge’s own summary in Galliford… This appears at paragraphs 18 – 20 of Galliford as follows:

“18. I held [in ISG v Seevic] that if an employer fails to serve the relevant notices under this form of contract it must be deemed to have agreed the valuation stated in the relevant interim application, right or wrong. Accordingly, the adjudicator must be taken to have decided the question of the value of the work carried out by the contractor for the purposes of the interim application in question.

19.  However, I made it clear that this agreement as to the amount stated in a particular interim application (and hence as to the value of the work on the relevant valuation date) could not constitute any agreement as to the value of the work at some other date (see paragraph 31).

20. This means that the employer cannot bring a second adjudication to determine the value of the work at the valuation date of the interim application in question. But it does not mean any more. There is nothing to prevent the employer challenging the value of the work on the next application, even if he is contending for a figure that is lower than the (unchallenged) amount stated in the previous application. If this was not made clear by my judgment, then it should have been, and it is certainly made clear by the decision by the Court of Appeal in Rupert Morgan Building Services (LLC) v Jervis [2004] 1WLR 1867 in particular the passage from paragraph 14 that is set out in paragraph 30 below. My judgment in ISG v Seevic was not intended to go below that”.

I do not need to decide whether or not that passage is correct in relation to interim valuations and interim payments. In almost all construction contract special contractual provisions apply to interim payments. Mistakes can usually be put right at a later stage, although that was not possible in Galliford because the contract prevented negative valuations.

The important point for present purposes is that the quoted passage (whether right or wrong in relation to interim valuations) does not apply to final accounts. Edwards-Stuart J said so in Galliford at [25], where he emphasised the “fundamental difference” between payment obligations which arise on an interim application and those that arise on termination.

In the present case we are concerned with a final account following termination of the construction contract. Clause 8.12.5 of the contract conditions require an assessment of the amount which is “properly due in respect of the account”. This clause expressly permits a negative valuation. Mr Linnett did not carry out any such valuation exercise in the third adjudication. Therefore PS were entitled to refer that dispute for resolution in the abortive fourth adjudication. They will be entitled to do so again in the proposed fifth adjudication.

This conclusion is consistent with the reasoning of HHJ Humphrey Lloyd QC in Watkin Jones and the reasoning of the Court of Appeal in Rupert Morgan. Nothing in ISG or Galliford contradicts this conclusion.

One may then ask, what did the third adjudication achieve? The answer is that the third adjudication achieved an immediate payment to the contractor. Harding will be entitled to retain the monies paid to him unless and until either the adjudicator in the fifth adjudication or a judge in litigation arrives at a different valuation of Harding’s final account under clause 8.12…

In my view the employer’s failure to serve a pay less notice (as held by the previous adjudicator) had limited consequences. It meant that the employer had to pay the full amount shown on the contractor’s account and argue about the figures later. The employer duly paid that sum, as ordered by the previous adjudicator. The employer is now entitled to proceed to adjudication in order to determine the correct value of the contractor’s claims and the employer’s counterclaims. Therefore the judge’s decision was correct.”

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