Adjudication continues to play a crucial role in resolving disputes in the UK construction industry. Three recent court decisions from the Technology and Construction Court ("TCC") have significantly affected how the Housing Grants, Construction and Regeneration Act 1996 and the statutory Scheme for Construction Contracts 1996 (as amended, both cases) ("the Construction Act" and "the Scheme" respectively) operate.
- Snapshot: A quick glance at the key developments of the cases discussed in further detail in this update.
- Parties must consent to an adjudicator hearing simultaneous or consecutive disputes: Under the Scheme, parties must consent to an adjudicator's jurisdiction to hear simultaneous or consecutive adjudication proceedings.
- A party may claim its adjudication costs of pursuing a debt: A party may claim its costs in an adjudication where they are clearly connected with and ancillary to the referred dispute and are properly considered part of it, and where the claim concerns a payment which is due as a debt.
- Care has to be taken when agreeing to a payment schedule: A payee may not be permitted to claim for additional interim payments which are outside a previously agreed payment schedule.
These cases have important implications for parties and adjudicators alike, as we explain below.
The cases dealt with in this update contain a number of key changes which will have practical consequences for parties to a construction contract.
A party to an adjudication may require the other party's consent when appointing an adjudicator in simultaneous or consecutive adjudications, or risk jurisdictional challenge during the adjudication or at the enforcement stage. Parties may also wish to notify the adjudicator nominating bodies before an appointment is made of any previous dealings or of any ongoing disputes between the parties. (See Deluxe Art & Theme Ltd v Beck Interiors Ltd  EWHC 238).
Further, an adjudicating party was permitted to claim its adjudication costs from the other party in circumstances where the adjudication related to the recovery of payment as a debt. (See The TCC in Lulu Construction Limited v Mulalley Co Limited  EWHC 1852).
Finally, caution is required for parties who receive payment under a construction contract when agreeing and incorporating a valuation and payment schedule into the contract. Such a party may be "cut off" in cases where a project overruns but where the schedule does not allow interim payments past a particular date. (See Grove Developments Ltd v Balfour Beatty Regional Construction Ltd  EWHC 168 (TCC)).
Parties must consent for an adjudicator to hear simultaneous or consecutive disputes
In Deluxe Art & Theme Ltd v Beck Interiors Ltd  EWHC 238, the TCC refused to enforce an adjudicator's decision where the parties had not consented to the same adjudicator presiding over two disputes at the same time.
The parties became involved in three adjudications, which were heard under the Scheme, relating to the refurbishment of a luxury hotel in Knightsbridge, London. Deluxe Art commenced court proceedings to enforce adjudication decisions two and three. Importantly, these two adjudications, which concerned claims for extensions of time and loss and expense, and the reduction of the contractual retention percentage respectively, were heard by the same adjudicator at the same time.
The court enforced decision two, but not decision three, as the Scheme applied and as the parties had not consented to the same adjudicator dealing with more than one dispute at the same time.
After deciding that adjudications two and three concerned two separate disputes, and therefore that section 108(1) of the Construction Act (which permits a party to refer "a dispute" in the singular to adjudication at any time) played no part in the jurisdictional challenge, the court then considered whether a party could refer two disputes to the same adjudicator at the same time under the Scheme.
Paragraph 8(1) of the Scheme applied to adjudications two and three. It provides that an adjudicator may only deal with more than one dispute at the same time with the parties' consent. In giving the judgment of the TCC in Deluxe Art, Coulson J found that the parties had not so consented, and so he refused to enforce adjudication three for want of the adjudicator's jurisdiction. He considered that, in the circumstances, the lack of such consent was an "insurmountable jurisdictional hurdle".
Specifically, Coulson J ruled that:
Adjudicators can be appointed to deal with more than one dispute at the same time or related disputes under different contracts, but under the Scheme, that can only happen with the consent of all the relevant parties
Importantly, Coulson J also made important remarks regarding paragraph 8(2) of the Scheme, which relates to a situation where an adjudicator adjudicates on related disputes under different contracts at the same time. He commented that an adjudicator would be prevented from deciding one adjudication where his decision may be affected by what he might have been told in another adjudication, unless it is with parties' consent.
Coulson J's judgment raises two practical considerations:
- He decided the Deluxe Art case on the particular wording of the Scheme, and remarked that different adjudication rules may produce different results. In Willmott Dixon Housing Ltd v Newlon Housing Trust  EWHC 798 (TCC), for example, the CIC Rules were found to permit a party to refer two disputes to adjudication at the same time, by giving two notices of adjudication and making two referrals, without the express requirement for consent.
- It is irrelevant whether the two disputes are referred to the same adjudicator on "different pieces of paper" or within the one notice of adjudication; consent would still be required under the Scheme in both instances.
In practice, it is common for parties to adjudications to seek the appointment of the same adjudicator on multiple disputes, which are referred to adjudication, whether consecutively or simultaneously. This may be because the adjudicator's knowledge of the dispute gained from previous or related adjudications may ultimately save the parties time and costs, or because the outcome of the next adjudication(s) may be more predictable, in the knowledge of the adjudicator's previous decision(s). Conversely, however, a party may wish to avoid the appointment of an adjudicator who has previously decided against it in previous adjudication proceedings. What Deluxe Art tells us is that parties will have to take care when appointing adjudicators in simultaneous or consecutive adjudications, and consider obtaining the other parties' consent, to avoid any jurisdictional issues arising, either during the adjudications or at the enforcement stage.
It may also be prudent for parties involved in simultaneous or serial adjudications to ensure that they notify the adjudicator nominating bodies and the adjudicator of any previous dealings or of any ongoing disputes between the parties, so that the matter of the parties' consent may be addressed at the outset.
A party may claim its adjudication costs of pursuing a debt
Under the original Construction Act, parties were required to include in their construction contracts eight particular provisions for statutory adjudication, and if they did so, then they would be free to agree other terms relating to how the adjudication would be conducted. In particular, they would be at liberty to agree how the parties' costs of the adjudication would be dealt with by the adjudicator.
This regime led to paying parties including provisions in their construction contracts that payee parties who brought adjudication claims against them would have to pay all of their costs of the adjudication proceedings, whatever the outcome of the proceedings. Such provisions became known as Tolent clauses, and their specific purpose was to deter payee parties from commencing adjudication against paying parties in the first place. This led to arguments in Court as to whether or not Tolent clauses were consistent with the statutory right which payee parties were supposed to have to bring their disputes against paying parties to adjudication at any time.
Tolent clauses were very unpopular with the supply side of the construction industry, and it successfully lobbied to have them outlawed by amendments to the Construction Act in 2009. The Construction Act as amended included a new Section 108A, which provided that any provisions in a construction contract concerning the allocation of the parties' costs in an adjudication would be "ineffective", unless they were the subject of an agreement in writing made after the relevant adjudication notice had been given.
As parties to an adjudication would only on rare occasion agree that the adjudicator should have the power to decide whether one party should pay the other party's costs of the adjudication after the adjudication notice had been given, the usual practice was that each side would bear its own costs of an adjudication, and that the adjudicator would simply decide how the adjudicator's fees and expenses of the adjudication would be allocated between the parties.
However, this customary approach has been thrown into doubt by the decision of the TCC in Lulu Construction Limited v Mulalley Co Limited  EWHC 1852, where the Court allowed a party to recover its costs of an adjudication awarded to it by an adjudicator, even though there had been no agreement between the parties after the adjudication notice under Section 108A.
In Lulu Construction, Lulu sought to enforce the unpaid portion of an adjudicator’s decision, which awarded it interest on an outstanding payment due under a construction contract as a debt and its costs in the adjudication. Mulalley had brought the adjudication to determine the amount of the outstanding payment which it had to make, and resisted enforcement of part of the decision relating to interest and costs. This was on the basis that the adjudicator had no jurisdiction to award interest and costs against it in his decision. This was particularly so, it argued, as neither its Adjudication Notice nor its Referral contained any claim for such interest or costs to be awarded to Lulu.
The TCC disagreed with Mulalley's arguments and found that the adjudicator did have such jurisdiction. Although acknowledging that interest and costs were not part of the dispute which had been referred to adjudication by Mulalley, the TCC Judge, Mr Acton-Davis QC, found that this was not surprising given it was the paying party, Mulalley, who commenced the adjudication to establish the amount of the outstanding payment due to Lulu. It was Lulu that had raised claims for interest and costs at a late stage in the adjudication.
In relation to those late claims, Mr Acton-Davis QC referred to Allied P&L Limited v Paradigm Housing Group Limited  EWHC 2890 (TCC), in which it was held that a reference to arbitration or adjudication "may unavoidably be widened by the nature of the defence or defences put forward by the defending party...", and that,
…if the basic claim, assertion or position has been put forward by one party and the other disputes it, the dispute referred to adjudication will or may include claims for relief which are consequential upon an[d] incidental to it and which enable the dispute, effectively, to be resolved."
Mr Acton-Davis QC therefore held that the dispute referred to adjudication by Mulalley did include the claims for interest and costs raised by Lulu, as they were "…connected with and ancillary to the referred dispute [and] properly to be considered as part of it".
In deciding that Lulu could claim its costs, Mr Acton-Davis QC commented that the Late Payment of Commercial Debts (Interest) Act 1998 had been amended by Regulations passed under that legislation in 2013, which entitled a party claiming a payment which was an outstanding debt to claim its reasonable costs of recovering the debt (see sections 1(1) and 5A(3) of the amended Late Payment Act).
Consequently, Mr Acton-Davis QC held that the adjudicator was afforded jurisdiction to award the debt recovery costs which he included in his decision in Lulu's favour, even though they were not claimed within Mulalley's Adjudication or Referral Notice.
The key implication of the Lulu case is that it opens the door for parties claiming overdue payments under construction contracts as debts via adjudication, to include claims for interest and costs in their adjudication claims documents. This is expected to be prevalent in what is now termed "smash and grab" adjudication, where paying parties have failed to issue valid or timely payment and pay less notices, and therefore the sum applied for by receiving parties has become due as a debt.
In addition, Lulu confirms that an adjudicator's jurisdiction will extend not only to the dispute expressly referred by an adjudication notice, but also to issues which are consequential upon or incidental to it. Such a position is reflected in Paragraph 20 of the Scheme, which provides that an adjudicator may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication, or which are matters under the contract which he considers are necessarily connected with the dispute.
Care has to be taken when agreeing to a payment schedule
The case of Grove Developments Ltd v Balfour Beatty Regional Construction Ltd  EWHC 168 (TCC) related to the design and construction of a hotel and serviced apartments in London, under a JCT 2011Design and Build Contract. The parties to the contract had agreed a schedule ("the Schedule") for 23 monthly interim payment applications and payments, which ran to interim payment application 23 ("IPA23"). However, the project overran and Balfour Beatty issued a 24th interim payment application ("IPA24") for approximately £23m.
Although the parties sought to negotiate terms for the extension of the Schedule, such terms were not agreed. Accordingly, when Balfour Beatty intimated a claim against Grove for a payment allegedly due in respect of IPA24, Grove did not agree that Balfour Beatty was entitled to submit IPA24 or that a 24th interim payment was due, as no such terms were contained in the Schedule. Grove therefore applied to the TCC for a declaration that Balfour Beatty had no contractual right to make or to be paid the amount in IPA24 (or any subsequent application).
Balfour Beatty asserted that it was entitled to serve IPA24 either under implied terms in the Contract or under the Scheme, on the basis that the parties clearly intended that a regime of monthly interim payment would apply during Balfour Beatty's works.
Balfour Beatty further argued that, as Grove had failed to serve either a Payment or Pay Less Notice within the applicable time limits, in relation to IPA24, the amount of IPA24 had become finally due to it.
The TCC found that the contract contained neither an express nor implied provision entitling Balfour Beatty to apply for further interim payments after IPA23. The prospect of further interim payments beyond those contemplated by the Schedule would be "inextricably linked" with the agreement of the terms under which those payments would be valued and paid. As the parties had not reached any such agreement, none could be applied by the TCC.
Further, the TCC considered the application of section 109(1) of the Construction Act, which states "[a] party to a construction contract is entitled to payment by instalments, stage payments or other periodic payments for any work under the contract", which last for longer than 45 days. Balfour Beatty asserted that section 109(1) applied to all work under the contract. However, the TCC rejected this argument, as such an interpretation would apply a "draconian restriction" on parties' freedom to contract to agree on interim payment terms.
Accordingly, the TCC held that Balfour Beatty had no contractual right to make or to receive any payment in respect of IPA24, or any further interim payment application for that matter. Balfour Beatty would have to wait for its final payment, once it had completed the works.
Clearly, in light of the decision in Grove, parties receiving payments under construction contracts must take care when agreeing and incorporating a payment schedule into a construction contract to which they are a party, over the precise terms in the schedule. Although such a schedule can greatly assist in providing certainty to the parties as to when interim payments have to be made, they can also act as a "cut-off" for further interim payments when the schedule expires. If this is not what the parties intend to achieve by their payment schedule, appropriate drafting will have to be included in it.