Morganstone Ltd v Birkemp Ltd

[2024] EWHC 933 (TCC)

On 23 February 2024, an adjudicator decided that £207k was due to Birkemp following their interim payment application dated 31 August 2023. On 4 March 2024, Morganstone issued a Part 8 claim seeking a declaration that Birkemp had no contractual right to make the August application or any interim payment application after March 2023 and that, inasmuch as the adjudicator’s decision determined that Birkemp was entitled to make or be paid for the August application, the decision was wrong in law and unenforceable. The next day, Birkemp issued an application seeking summary enforcement of the decision. 

The parties had agreed a monthly payment schedule which was updated in 2022. The updated schedule was the same as that of the original. The due date was the 14th day of the month. The date for the payment notice was the 19th day of the month, subject to the adjustment where that was a Saturday or a Sunday. The final date for payment in each month was the second Friday of the month, and the date for the pay less notice was the Wednesday two days before.

On 24 March 2023, shortly before the final date in the 2022 payment schedule, Morganstone sent to Birkemp by email a further monthly payment schedule running for an additional twelve months. There was one difference from the previous schedules, in that the final date for payment in each month was the third, not the second, Friday. 

On 30 March 2023, Birkemp complained that the 2023 payment schedule was incorrect as the specified dates for pay less notices and for payments were one week late. Birkemp asked that the schedule be amended and reissued. Morganstone maintained that the dates were correct. 

The parties never reached an agreement. Birkemp made payment applications in accordance with the 2023 payment schedule, as it took no issue with the due date in that document, but Morganstone consistently issued pay less notices by reference to the dates in the 2023 payment schedule. It was accepted that Birkemp never agreed to be bound by the 2023 payment schedule and that Morganstone never agreed to revise it so as to make the final date for payment the second Friday in each month.

On 8 September 2023, Morganstone issued a pay less notice against the August application, making a number of deductions. However, it did so expressly without prejudice to its primary position that Birkemp had no entitlement to apply for any interim payments essentially because the 2023 payment schedule had not been agreed. Birkemp contested many of the deductions which lead to the dispute referred to adjudication. 

Morganstone relied on the CA case of Balfour Beatty Regional Construction Ltd v Grove Developments Ltd, (see Dispatch, Issue 197). Grove had asserted that Balfour Beatty had no entitlement to receive interim payments beyond the final date in the payment schedule. The CA, by a majority, agreed. Jackson LJ held that there was no “fresh” contract for monthly interim payments after the payment schedule expired. The parties had never agreed the terms upon which interim payments would be made.

Morganstone said that the parties agreed to the 2022 payment schedule, which therefore had contractual effect. But the parties never agreed a payment schedule for the period after March 2023; therefore, as shown by Balfour Beatty, there was no ongoing right to interim payments. Any lack of “commercial common-sense” in the resulting position was simply the consequence of Birkemp failing to make an agreement. 

Birkemp relied on an express provision in the contract for interim monthly payments during the progress of the subcontract works. In Grove, the parties were bound by the terms of their agreement. Here, unlike in Grove, the parties could fall back on the contract. 

HHJ Keyser agreed with Birkemp. Grove was a case that turned on the precise terms of the parties’ agreement. The parties there may have envisaged and intended that further interim payments would be made but they had not actually reached agreement on essential matters The case did not  establish any significant wider propositions of law. Here, the parties doubtlessly envisaged and intended that payment schedules would continue to be agreed for all periods during the currency of the development. However, they failed to agree a schedule for the period after March 2023. The question then became whether or not they had any applicable contractual agreement for that period. Morganstone said that they had not. The judge disagreed.

Once any further agreed schedule ended, there was nothing to displace the original contractual timetable. If the parties did not mutually adopt a new payment schedule, the original timetable in clause 10 would be operative, because there would be nothing to which it would cede precedence. 

Therefore, the Part 8 claim failed. 

However, when it came to the summary enforcement, the judge noted that the adjudicator did not address the substance of the cross-claims raised by Morganstone, because the adjudicator had made the preliminary decision that their consideration fell outside the scope of their jurisdiction. 

The judge noted that Birkemp was not merely seeking a ruling on the appropriate of specific deductions in the pay less notice. It was seeking, and it obtained, an award of payment. Birkemp’s manner of drafting the notice of adjudication and its subsequent reliance on the confines of that drafting clearly sought to “put beyond the scope of the adjudication the defending party's otherwise legitimate defence to the claim” – that is, the claim for payment. Further: “Birkemp’s tactic amounted to the use of a fallacious argument that, once the validity of the deductions in the pay less notice had been determined, it was entitled to payment of the resulting amount”.

Morganstone was not seeking to widen the scope of the adjudication by raising other, freestanding disputes. It was engaging with and responding to the issues in the adjudication by raising cross-claims as a defence of set-off to Birkemp’s claim for payment. As Lord Briggs JSC stated in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd  [2020] UKSC 25:

“However narrowly the referring party chooses to confine the reference, a claim submitted to adjudication will nonetheless confer jurisdiction to determine everything which may be advanced against it by way of defence, and this will necessarily include every cross-claim which amounts to (or is pleaded as) a set-off.”

Therefore, here, the adjudicator took an erroneously restrictive view of their jurisdiction. As a result, the adjudicator’s failure was deliberate rather than inadvertent, in that they specifically addressed their mind to the question as to whether the cross-claims could be raised on the adjudication and decided that they could not  as they fell outside the scope of the adjudication. The error was material, in that the cross-claims would, if upheld, have had a very significant effect on the overall result of the adjudication. Moreover, the error was brought about by Birkemp’s deliberate attempt to achieve a tactical advantage by confining the scope of the adjudication in such a manner as to exclude potentially relevant defences to the claim for payment. The adjudicator’s decision was, therefore, unenforceable. 

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