Construction Adjudication – A Reminder of Key Jurisdictional Issues.

AM Construction Limited v The Darul Amaan Trust [2022]

…The TCC addresses two common jurisdictional pitfalls in Adjudication… A failure to properly serve a Notice of Adjudication prior to commencement of the Adjudication…. and commencing a ‘True Value’ adjudication where a Notified Sum remains outstanding.

IBB Law LLP were instructed by the contractor AM Construction Limited (AMC) in this matter which came before Judge Ter Haar QC in the TCC. AMC commenced Part 8 proceedings against the Darul Amaan Trust (‘DAT’) to seek a declaration from the TCC that a prior true value adjudication decision obtained by DAT was invalid as a result of the adjudicator not having jurisdiction.

Further detail is set out below but the key takeaway points are:

1. Always ensure that the Notice of Intention to Refer a Dispute to Adjudication is properly given before the referring party makes its application to appoint an adjudicator. Failure to do so will inevitably result in any subsequent adjudication decision being a nullity as a result of a lack of jurisdiction.
2. A ‘True Valuation’ adjudication cannot be commenced until a notified sum has been paid, whether the payee has formally obtained an adjudicator’s decision confirming the validity of the notified sum or not.

The importance of the Notice of Intention to Refer a Dispute to Adjudication (‘NOA’), and its timing

The default position is that, where a construction contract fails to apply specific terms relating to the resolution of disputes by adjudication, the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the ‘Scheme’) will automatically apply to the contract. The Scheme is clear that a party shall only request an adjudicator’s appointment “following the giving of” an NOA[1]. It therefore stands that if an NOA is found to be not served at all, a decision by a subsequently appointed adjudicator will be found to have been made without jurisdiction and be invalid.

The Courts have interpreted this requirement strictly. Coulson J in Primus Build v Pompey Centre[2] held that “because an adjudicator derives his jurisdiction from the Notice of Adjudication, if it is proved that the Notice has not been validly served, it will generally operate to deprive the adjudicator of any jurisdiction”. More recently in the case of Lane End Developments Construction v Kingstone Civil Engineering[3], the TCC held that because the request to the nominating body preceded service of the NOA, the adjudicator’s appointment was void.

In the present case, the issue to be determined was a relatively simple factual issue – was DAT’s NOA contained within an envelope which was served on AMC’s registered address by a process server?

AMC’s position was that whilst a bundle of documents was contained within the envelope, the NOA was not amongst those, so had not been validly served and the approach by DAT to request the appointment of an adjudicator later that same day resulted in the adjudicator being without jurisdiction. Contrastingly, DAT argued that the NOA (alongside the other relevant documentation) had been sent to the process server for printing and serving, and it therefore followed that the NOA must have indeed been served upon AMC.

Upon weighing up the factual evidence before him, the Court found AMC’s evidence to be preferable. AMC’s factual evidence was compelling in that it reflected:

• Contemporaneous exchanges between AMC and IBB Law LLP concerning the missing NOA; and
• Electronic ‘Ring’ doorbell video evidence that better aligned with AMC’s factual evidence surrounding the events relating to the failed giving of the NOA.

Judge Ter Haar QC’s finding is a further stark reminder that unless a NOA has been properly served before a referring party seeks the appointment of an adjudicator, any resultant adjudication decision will be void as a result of there being no jurisdiction.

Failure to pay a notified sum

Aside from the question of whether the NOA was served on AMC, AMC also contended that the adjudicator’s decision should be set aside on the grounds that DAT had failed to pay a notified sum and it was therefore not entitled to commence a ‘True Value’ adjudication (meaning, in turn, the adjudicator did not have jurisdiction).

The Courts have repeated time and time again that an employer will be prohibited from “embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligations”.[4] Immediate payment obligations may arise contractually or under s.111 of the Housing Grants, Construction and Regeneration Act 1996 and where a paying party has failed to give an effective notice of an intention to withhold a payment. It is this failure which will result in a “notified sum” becoming payable.

In her judgment in the recent decision of Bexheat Ltd v Essex Services Group Ltd[5] O’Farrell J held at [76]:

“Thus, it is now clear that:

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.”

In the present case, it was left for the Court to determine if either of two default payment notices that had been issued by AMC resulted in a notified sum being payable in AMC’s favour. He determined that a second default notice was valid (the first being invalid but that having no bearing on the validity of the second). DAT’s failure to issue a pay less notice in response to the second default payment notice (nor the first) therefore resulted in the sum sought (a little over £200,000) being the notified sum for payment.

DAT’s Counsel sought to distinguish Bexheat on the basis that there was no unsatisfied adjudication confirming the notified sum in AMC’s favour. The submission by DAT’s Counsel, if it was preferred by the Court, would have set the precedent that a contractor is unable to prevent an employer from commencing a ‘True Value’ adjudication, unless and until it has first obtained an adjudication decision in its favour.

The Court rightly rejected DAT’s arguments on this. The Court’s reasoning for such was that this would contravene the consistent position reflected in the case law referred to.

This serves as a further reminder of the importance of employers ensuring that the relevant payment notices and/or pay less notices (as the case may be) are properly served, both in substance and on time. Providing always that a contractor’s application for payment is valid, an employer’s failure to ensure that the above notices are properly served will result in an employer having to pay the full notified sum, before looking to recover any alleged overpayment in later payment processes.

Speak to our specialist Construction and Engineering lawyers

If you have any questions about this blog, speak to one of our construction team on 03456 381381 or email construction@ibblaw.co.uk.

 

[1] The Scheme for Construction Contracts (England and Wales) Regulations 1998, Part 1, 2(1)

[2] [2009] EWHC 1487 (TCC)

[3] [2020] EWHC 2338 (TCC)

[4] S&T UK Ltd v Grove Developments Ltd [2018] EWCA Civ 2448 para 107.

[5] [2022] EWHC 936 (TCC)

Full judgement: HT-2021-000468 – AM Construction Limited -v- The Darul Amaan Trust [2022] EWHC 1478 (TCC)