In Bexheat Limited (“BHL”) v Essex Services Group Limited (“ESG”)  EWHC 936 (TCC) the Technology and Construction Court handed down an interesting decision which confirms, clarifies and develops the law around payment disputes, governed by the Housing Grants, Construction and Regeneration Act 1996 (“The Act”). There were three key points:
The Court was also asked to grant a stay on the basis of an alleged poor financial position but concluded that the alleged position had not been sufficiently evidenced.
BHL submitted Application 22 valuing the works up to 31 July 2021 at £1,832,071.87. ESG issued a valid Pay Less Notice, valuing the works at £1,170,729.19. This resulted in a much lower net sum of £4,808.44 compared to BHL’s claim of £678,885.78.
BHL referred the dispute over the valuation of Application 22 to adjudication. The adjudicator decided that the true value was £1,319,830.61, entitling BHL to payment of £141,646.35, which ESG paid.
Prior to commencing that adjudication, BHL had submitted Application 23, valuing the works up to 31 August 2021 at £2,010,121.74. ESG did not issue a Pay Less Notice in time and BHL commenced a second adjudication seeking payment in default of the £706,029.70 set out in Application 23. The second adjudicator decided that this sum should be paid. ESG did not make payment and BHL sought summary judgement to enforce the adjudicator’s decision, which ESG resisted, leading to this decision.
Same claim, different dispute
ESG’s first argument was that the true value of BHL’s claim had already been decided in the first adjudication and therefore the decision in the second adjudication was the same dispute. The court disagreed with this analysis. It determined that the first adjudication was related to the true value of Application 22 valuing the works up to 31 July 2021 and that the second adjudication did not relate to that true value, instead it was related to the value of the works up to 31 August 2021 and concerned the validity of the document relied on as the Pay Less Notice to Application 23. Thus, the court decided that the dispute was not the same or substantially the same.
The lesson for Project Managers and Employers; it is very important to respond appropriately to applications for payment, as a contractor can continue to apply for a claim which has been determined elsewhere (including in adjudication). In responding, you may rely on that determination, but a failure to respond will still require you to make payment before disputing the valuation.
Prevention of set-off
ESG’s next argument was that it was entitled to set-off its contra charges against the adjudicator’s award under a clause in the contract allowing it to do so. O’Farrell J determined that such an unqualified right to set-off offended the statutory requirement for immediate enforcement of an adjudicator’s decision. Therefore, it must be construed as subject to the provision of the Scheme for Construction Contracts Regulations (“the Scheme”), which meant that unless the limited circumstances set out in Thameside Construction Co Ltd v Stevens  EWHC 2071 apply, the clause would be unenforceable.
The circumstances in Thameside are limited to when an adjudicator decides an amount is due or due for certification but does not direct that payment is due, or that the adjudicator makes it clear he/she is permitting a further set-off to be made from the sum they have decided is payable. Neither of these circumstances applied and O’Farrell J struck down the clause.
This conclusion is unsurprising. The goal of the Act is to maintain cash flow for contractors, and it would be rendered impotent if it were possible for a payer to simply manufacture contra-charges to avoid payment. Again, the lesson is that applications must be responded to appropriately.
The contract between ESG and BHL included a clause allowing ESG to unilaterally entitle the adjudicator to adjudicate on more than one dispute at the same time. Under this clause, ESG requested the second adjudicator to also consider the true value of Application 23, which the adjudicator refused to do. ESG argued that BHL’s refusal to allow ESG to exercise its rights under the clause was a breach of contract and if it had been allowed to do so, the decision would have resulted in the balance of nil being due to BHL, as the second adjudicator would have been required to follow the decision reached in the first.
In dismissing this argument, O’Farrell J referred to Section 111 of the HCGRA which precludes a paying party from referring a dispute over the ‘true value’ prior to satisfying its obligation to pay the notified sum, quoting S&T v Grove. Accordingly, BHL would be entitled to rely on this provision in any adjudication until payment had been made. The position is summarised sufficiently in paragraph 76:
“i) where a valid application for payment has been made, an employer who fails to issue a valid Payment Notice or Pay Less Notice must pay the ‘notified sum’ in accordance with section 111 of the 1996 Act;
ii) section 111 of the 1996 Act creates an immediate obligation to pay the ‘notified sum’;
iii) an employer is entitled to exercise its right to adjudicate pursuant to section 108 of the 1996 Act to establish the ‘true valuation’ of the work, potentially requiring repayment of the ‘notified sum’ by the contractor;
iv) the entitlement to commence a ‘true value’ adjudication under section 108 is subjugated to the immediate payment obligation in section 111;
v) unless and until an employer has complied with its immediate payment obligation under section 111, it is not entitled to commence, or rely on, a ‘true value’ adjudication under section 108.”
O’Farrell J considered that the clause in question was incapable of compelling an adjudicator to consider more than one dispute. Due to the burdens imposed on both the parties and the adjudicator by tight time limits, it would be inappropriate to allow one party to unilaterally require the determination of a raft of disputes within one adjudication.
Once again, this is an unsurprising conclusion as it would circumvent the principles of the legislation and the established case law if it were possible for a paying party to further delay payment of a notified sum by forcing the payee (and the adjudicator) to deal with a true value dispute.
The judgement represents a continuation of the court’s purposeful interpretation of the Act. It prevents paying parties from creating ways to avoid payment of a notified sum and it continues to give effect to Lord Denning’s famous statement “There must be a ‘cash flow’ in the building trade. It is the very lifeblood of the enterprise” and the intent of the HGCRA to maintain that flow.
The takeaway remains, as it has since the HCGRA’s enactment, that paying parties must respond appropriately to payment applications.
If any of the above issues concern you or your business do not hesitate to contact us. Quigg Golden are market leaders in adjudication in the United Kingdom and Ireland.
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