Posted: 15/12/2023
Level 1 Raised Flooring Ltd (the claimant) had engaged JM Construction (SW) Ltd (the defendant) under the JCT Minor Works Building Contract, 2016 edition, to complete works to a property in East London. The relationship between the parties broke down and the claimant terminated the contract using its termination provisions. The claimant argued that the defendant had been significantly overpaid at the point of termination.
Level 1 Raised Flooring Ltd referred the issue of ‘what was the value of work at termination?’ to adjudication. The adjudicator’s decision was given on 09 March 2022, agreeing that if the claimant had lawfully terminated the contract, there was in principle an overpayment to the defendant of £67,042.84. However, the adjudicator declined to order payment as clause 6.7 of the contract laid down a specific final accounting procedure for payment in the event of a contractual termination. This procedure had not yet been completed. Similar, if not identical, final accounting terms appear in most standard form JCT contracts.
Following the decision, the claimant completed the procedure set out in clause 6.7, issuing a final account to the defendant claiming the sum of £350,050.82 (which included the adjudicator’s award), on 31 March 2023. As the procedure had now been completed, the claimant sought to enforce the adjudicator’s early decision concerning the ‘overpayment’, claiming it became payable upon the procedure being completed.
However, the defendant argued the adjudicator had conducted no more than a valuation of the work at a specific point in time, and in fact, had made a conscious decision not to award payment. Furthermore, the adjudicator’s finding of an overpayment was expressly based on the assumption that the claimant had correctly terminated the contract.
The matter came before District Judge Baldwin in the Liverpool Technology and Construction Court (TCC). The judge agreed with the defendant and declined to enforce the adjudicator’s decision. It was accepted that the court could enforce an adjudicator’s valuation decision, even where the adjudicator did not award a payment, but this was subject to a payment being the ‘logical and indispensable’ result of the decision. That was not the case here.
The adjudicator’s earlier finding of an overpayment had been based on an assumption of the claimant lawfully terminating the contract (with termination an issue yet to be determined). Also, the adjudicator had, in fact, decided that no payment was due, and had not decided that the overpayment must be repaid once the final account procedure was completed.
Given the outcome, you would be forgiven for wondering ‘what was the point of adjudicating then?’. The judge posed the same question at the end of his judgment but declined to comment further. However, it should be remembered that the judge did not conclude that the decision was non-binding (as would be the case for a breach of natural justice or lack of jurisdiction), rather that the circumstances of the case and adjudicator’s decision meant there was nothing the court could enforce.
Disputes about valuation often include arguments about whether (amongst other things) something is or is not a variation or defective. While the judgment does not provide much detail about precisely what sub-issues the adjudicator considered when valuing, it is not unrealistic to expect that similar issues were considered during the valuation. The matter of defects certainly was.
The TCC has previously confirmed that an adjudicator’s decision on discrete items, such as whether additional work is a variation or not, that form an essential part of the adjudicator’s reasoning, will generally be binding on the parties (at least temporarily) and on a future adjudicator. In the present case, whilst the claimant could not enforce the adjudicator’s ultimate decision on value, findings made in the decision may still be binding. Therefore, the claimant may well have narrowed the issues that can be considered again in a subsequent adjudication.
There may well be. Such adjudications can be a very effective means of ‘picking off’ key points in dispute, which may assist those dealing with valuation or conducting commercial negotiations. The situations in which an adjudication over the value of the works to date will be useful outside of the contractual payment processes will be more exceptional. They might include the following.
1. Referring a dispute of ‘what is the current value of work completed?’ to adjudication has the potential to ‘time stamp’ the value and extent of the work at a specific date. This would provide both parties with a (hopefully) accurate record and a ‘checkpoint’ to be used in any future disputes. All too often large projects reach a conclusion, and a contractor will unexpectedly claim it was delayed for months due to an event that may have happened years ago, or an employer will unexpectedly claim that the contractor has repeatedly failed to fix a defect that has been there since day one of the project. Instead, parties could refer to the ‘checkpoint’ to show issues had or had not been raised previously. Also, the prospect of going back over documents created since the ‘checkpoint’ is far less daunting and time consuming than going back to the start of the project as a whole.
2. The use of such an adjudication in an insolvency context could be particularly helpful. Where a construction company enters insolvency before it completes a project, it will generally be liable to its employer for any additional costs for completing the work. However, what if practical completion was only a few days away? The cost to the employer of completing could be minimal, but the now insolvent company may still have one to two months’ worth of work that has not yet been paid for. It is not unusual to see employers allege that the cost of the contractor’s insolvency to the employer far outweighs any money that may have been owed to the contractor. The employer then refuses to make any further payment to the insolvent company.
Adjudicating on the value of the work at the point of termination/insolvency could provide a key starting point for the insolvency practitioner when determining where the net balance lay between the employer and contractor. It may also help bring the parties’ positions closer together and increase the chances of a settlement. Adjudication also offers a potentially more cost-effective route for an insolvency practitioner to determine an entitlement under the contract, as opposed to full litigation or arbitration.
Whether the claimant’s adjudication in this case proves useful remains to be seen.
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