GREENTHERM MECHANICAL SERVICES LTD v KDJ DEVELOPMENTS LTD

GREENTHERM MECHANICAL SERVICES LTD v KDJ DEVELOPMENTS LTD

The adjudicator was not in breach of the rules of natural justice where the parties allegedly agreed the type of payment notice to be served but he decided the payment dispute on a basis as to such notices not contended for by them
 

Technology and Construction Court
Ramsey J
10 October 2012

The adjudicator was not in breach of the rules of natural justice where the parties allegedly agreed the type of payment notice to be served but he decided the payment dispute on a basis as to such notices not contended for by them

The sub-contractor submitted payment application 9 for £125,000. The contractor submitted an undated payment sheet which (i) on the face of it referred to application 7 although a covering email stated that it was served in respect of application 9 and (ii) stated that due to various listed contra-charges the sub-contractor had been overpaid by the sum of some £50,000. The contractor made no further payment. The sub-contractor referred the dispute to adjudication. The adjudicator (i) made findings as to what the payment provisions were under the sub-contract and how they related to the provisions of the Construction Act (ii) found that this was a case where there should have been a payer's notice from the contractor within the meaning of section 110A(1)(a) (iii) found that the contractor’s payment sheet was not a valid payer's notice (iv) found that instead the sub-contractor’s payment application 9 was a valid payee's notice within the meaning of section 110A(3) (iv) found that the contractor did not serve any valid pay less notice and (v) ordered the contractor to pay £73,637. The contractor did not pay the sum awarded with the result that the sub-contractor began these enforcement proceedings and applied for summary judgment.

The contractor contended that the adjudicator was in breach of the rules of natural justice by going off on a “frolic” of his own where the parties agreed the type of payment notice to be served but he decided the payment dispute on a basis as to such notices not contended for by them. It submitted in support of that contention that (i) The adjudicator, in coming to the conclusion that this was a case where there was to be a payer's notice, departed from what was an agreed position between the parties, namely that this was a case where there was to be a payee's notice and (ii) The sub-contractor did not contend that if the contractor’s payment sheet was intended to be a payer's notice, it did not comply with the Construction Act (as the adjudicator found).

Ramsey J rejected the contractor’s contention. The overall question posed in the adjudication was what sum the sub-contractor entitled to as a result of the provisions of the contract, the two notices served by the parties and the provisions of the Construction Act. The adjudicator answered that question in his decision. Whilst the parties’ voluminous submissions on this question were not always either clear or consistent and left the door open for a number of alternatives, they sufficiently raised the issues of entitlement to payment based on the two notices, the sub-contract and the Construction Act. The adjudicator was entitled to deal with those issues in the way he did and was not required to provide any further provisional conclusions to the parties when he followed a possible alternative way which was open to him.

THE FULL TEXT OF THE JUDGMENT OF RAMSEY J

Introduction

1. This is a CPR Part 24 application by the Claimant ("Greentherm") to enforce the decision of an adjudicator dated 4 September 2012.

2. On 27 October 2011 Greentherm and the Defendant ("KDJ") concluded a subcontract under which Greentherm was to carry out mechanical and electrical works at a residential development in Barking ("the Subcontract"). The Subcontract consisted of a letter signed by both parties, a five-page set of subcontract conditions, a valuation schedule and a set of pre-order meeting notes. The letter expressly incorporated and referred to the JCT Design and Build Subcontract Conditions (2005 edition, revision 2).

3. Various payment applications were made and paid in the period up to June 2012. On 2 June 2012 Greentherm submitted its payment application No 9 in the sum of just over £125,000. On 8 June 2012 KDJ submitted an undated payment sheet. On the face of it, it refers to application No 7 but a covering email states that it is served in respect of application No 9. It states that due to various listed contra-charges Greentherm has been overpaid by the sum of some £50,000. No further payment was made.

4. Greentherm then referred the claim to payment under the application of 2 June 2012 and the email of 8 June 2012 to adjudication by notice of adjudication dated 23 July 2012. The Adjudicator was appointed by the RICS on 27 July 2012. The documents served by the parties in the Adjudication were, first of all, a Referral, then a Response, followed by a Reply, then a Rejoinder, and finally a Surrejoinder. The Adjudicator produced his written Decision on 4 September 2012 in which he ordered KDJ to pay Greentherm the sum of £73,637.10 plus VAT, together with interest and assessed costs.

5. These proceedings were commenced because payment was not made in relation to the Adjudicator's Decision and on this application for summary judgment the Adjudicator's Decision is challenged by KDJ on a number of grounds which are conveniently identified and dealt with in the skeleton arguments.

6. Essentially, the Adjudicator first had to construe the contractual provisions. With some justification, it appears, he came to the view that the contractual provisions were rife with inconsistencies but he made findings as to what the payment provisions were under the Subcontract and how these related to the provisions of the Housing Grants, Construction and Regeneration Act 1996. Finally he had to construe the two documents which had been served on 2 June 2012 and 8 June 2012 in the context of those contractual and statutory provisions.

7. Because this is a contract which was entered into after October 2011 the provisions of the Housing Grants, Construction and Regeneration Act 1996, as amended by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 ("the Act") apply to this adjudication. The provisions as to notice are relevant to the arguments raised.

8. Both Mr Brogden, who appears for Greentherm and Mr Webb, who appears for KDJ, have summarised the amended notice provisions in the Act in their submissions in similar terms. As substantially set out by Mr Webb those provisions as follows:

(1) Section 110A – Payment Notice

(a) Every construction contract must make provision for a payment notice under either:

(i) Section 110A(1)(a) from the payer or a specified person ("A Payer's Notice"); or

(ii) Section 110A(l)(b) from the payee ("A Payee's Notice").

(b) In each instance, a notice complies if it specifies the sum which the "notifier" considers to be or have been due at the payment due date and the basis on which that sum is calculated (ss.110A(2) and (3)).

(2) Section 110B - Payee's Notice in Default

(a) Section 110B of the Act permits the payee to serve his own payment notice in default if the payer or specified person under s.110A(l)(a) does not issue a notice ("A Payee's Notice in Default").

(b) Section 110B(4) provides that where the contract permits or requires the payee to give a notice before the Payer's Notice under s.110A(l)(a) and the payee does so then the payee cannot give a Payee's Notice in Default.

(c) The required content of a Payee's Notice in Default is the same as the required content of all the payment notices referred to in Section 110A.

(3) Section 111 - Requirement to Pay Notified Sum and Payer's Pay Less Notice

(a) Sections 111(1) and (2) provide for the payer to pay the sum specified in the Payer Notice, Payee Notice or Payee Notice in Default as applicable.

(b) However, Sections 111(3) to (6) allow the payer to serve a Pay Less Notice and in such circumstances to pay only the amount set out in that notice.

(c) Again, the content of a Pay Less Notice is identical to all other notices referred to in the Act, specifying the amount which the person considers to be due and the basis upon which the sum is calculated (s.111(4)).

9. The Adjudicator found that this was a case where there should have been a Payer's Notice. He found that the document which was submitted by KDJ on 8 June 2012 was not a valid Payer's Notice and that, instead, there was a valid Payee's Notice in the form of the document of 2 June 2012. Finally, he found that there was no valid Pay Less Notice submitted by KDJ.

10. Each of those findings is challenged by Mr William Webb, who appears on behalf of KDJ, and on the other hand each of those findings is sought to be justified on behalf of Greentherm by Mr Peter Brogden. It is convenient therefore to concentrate on those central issues.

Reliance on a Payer's Notice

11. The first issue put forward by Mr Webb is that, in coming to the conclusion that this was a case where there was to be a Payer's Notice, the Adjudicator departed from what was an agreed position between the parties, that this was a case where there was to be a Payee's Notice.

12. This was a case where, essentially, the Adjudicator had to decide whether on the basis of the two documents which had been served and the payment provisions in the Subcontract, as he construed them, together with the provisions of the Act there was an entitlement to payment on behalf of Greentherm.

13. Within the submissions to the Adjudicator, which counsel appearing today accept did not always elucidate with clarity the points which are being put forward, there are, it seems to me, a number of references which indicate that it was not a simple case where both parties said that this was a case where there was to be a Payee's Notice and only a Payee's Notice. Greentherm took the position in the Reply that the Subcontract provided for both Greentherm (the Payee) and KDJ (the Payer) to give notices but that the Act only permitted one party to give notice. This evidently raised the issue whether this was a case of a Payer's Notice, although Greentherm submitted that it was a case of a Payee's Notice.

14. Amongst the submissions referred to by Mr Brogden is paragraph 67 of the Referral. That paragraph states the following:

"Pursuant to section 110(B)(4), Greentherm's payment application number 9, dated 2 June 2012, constitutes a Section 110(A)(3) notice. Therefore the sum in that notice becomes the notified sum and, to that extent not already paid, it must be paid on or before the final date for payment."

15. This is a reference to the provisions of Section 110B which deal generally with Payee's Notice in Default and state that if the payer fails to give a Payer's Notice then the payee may give a notice complying with s.110A(3). This is clearly inconsistent with it being a Payee's Notice case and consistent with this being a Payer's Notice case where a valid Payer's Notice has not been given. In such circumstances, s.110B(4) states that if the contract permits or requires the payee to give notice before the Payer's Notice and the payee does so then the payee cannot give a Payee's Notice in Default. This formed the very basis on which the Adjudicator found that, absent a valid Payer's Notice, the Payee's Notice had effect: see paragraphs 2.78 and 2.79 of the Decision.

16. It is submitted on behalf of KDJ that this paragraph in the Referral seems to be erroneous and is not carried forward in any other submission. It certainly was not responded to by KDJ in their submissions, but it seems to me that it was putting forward something which, as Mr Webb said, was inconsistent with what went before and therefore is making a submission on some alternative basis. It seems to me that, at paragraph 63 of the Referral Greentherm referred to a Payee's Notice. Greentherm then says at paragraph 64 that KDJ did not serve a notice, without indicating whether it is referring to that being a Payer's Notice or a Pay Less Notice. Paragraph 67 would only be making a relevant point if this was a case of a failure to give a Payer's Notice and is therefore inconsistent with the case only being put forward on an agreed basis that there was a Payee's Notice. That is also the way in which the Adjudicator evidently read it.

17. Whilst I accept that the primary position was that the parties agreed that there was a Payee's Notice, clearly they put forward submissions on what were the notices which followed and, if the Adjudicator decided one way or the other on the subsequent notices, the parties provided alternative, fall-back positions.

18. In addition, in paragraph 55 of the Reply there is a reference to the document sent by KDJ on 8 June 2012 being a "Payment Notice", in other words a Payer's Notice, rather than a Pay Less Notice. At paragraph 56 of the Reply Greentherm refer to both parties serving payment notices and to KDJ's document of 8 June 2012 being a Payment Notice not a Pay Less notice. The fact that the Subcontract provided for both parties to serve a payment notice formed part of Greentherm's contentions in the Adjudication.

19. There is also the further reference in paragraph 35.2 of the Rejoinder, where in response to the contention in paragraph 55 of the Reply it is said by KDJ that, first, there can be only one payment notice and that is a Payee's Notice so that the document of 8 June 2012 must be a Pay Less Notice, but KDJ then said: "In any event, a given piece of paper can constitute more than one notice". In other words, the submission was that a notice could be both a Payer's Notice and a Pay Less Notice.

20. Overall, it seems to me that although the submissions are not always consistent or easy to read, this is not a case where the Adjudicator was required to comply with some agreed position between the parties. The submissions ranged over a number of topics relating to the Subcontract, the documents relied on as Notices and the provisions of the Act and I do not consider that the Adjudicator can be said to have failed either to comply with natural justice or, in this context, to have exceeded his jurisdiction on the basis that there was a clear agreed position between the parties and he proceeded in a way contrary to that position. He had to construe the contract in the light of the Act and did so.

21. Rather this case seems to me to be a good example of a case which falls outside cases such as Cantillon v Urvasco [2008] BLR 250 at [57(e)] where it was said that, if the adjudicator goes off "on a frolic of his own" there will be a breach of natural justice. This situation is illustrated by the decisions in Balfour Beatty v Lambeth [2002] BLR 288 where the adjudicator produced his own critical path analysis with the help of a programming expert and Primus v Pompey Centre [2009] BLR 437 where the adjudicator produced his own calculation of loss of profit which was not derived from the claim but from his own basis of calculation derived from accounts served with the Reply. These cases are ones where the adjudicator has decided the matter on a wholly different basis to the one which has been put before him by the parties, has relied on a wholly different methodology which was contrary to what the parties had clearly agreed. It is in those circumstances that the adjudicator breaches the rules of natural justice so as to justify an adjudicator's decision not being followed.

22. On the other hand, there is the case exemplified by the Court of Appeal decision in Carillion v Devonport Royal Dockyard [2006] BLR 15 where at [53], [71] and [72] Chadwick LJ approved the statement by Jackson J which was set out at [81.3] of the first instance judgment ([2006] BLR 310), as follows:

"It is often not practicable for an adjudicator to put to the parties his provisional conclusions for comment. Very often those provisional conclusions will represent some intermediate position, for which neither party contending. It will only be in an exceptional case such as Balfour Beatty v Lambeth that an adjudicator's failure to put his provisional conclusions to the parties will constitute such a serious breach of the rules of natural justice that the court will decline to enforce his decision."

23. That type of case was recently illustrated by the decision of Edwards-Stuart J in Hyder Consulting (UK) Ltd v Carillion Construction Ltd [2011] EWHC 1810 where he held that the adjudicator's failure to allow the parties to comment on his methodology of calculating target cost was not a breach of the rules of natural justice because, in particular, it had been based on the adjudicator's construction of the contract and information which had been put forward in the adjudication.

24. In the current case the position on this first ground of challenge by KDJ is that the Adjudicator decided the issue on the basis of submissions which dealt with the Subcontract, the Act and the key documents. Those submissions, as accepted before me, were not always as clear or concise as they might have been and, in my judgment, as indicated by the passages above put forward or at least leaving the door open for a number of alternatives. It does not seem to me that in those circumstances the Adjudicator was required to provide any further provisional conclusions to the parties when he followed what it seems to me was a possible alternative way which was open to him.

Validity of the Payer's Notice

25. The second point which is then raised in this case is the Adjudicator's finding that KDJ's notice of 8 June 2012 did not comply with Section 110A(2) of the Act. It is said that Greentherm did not contend that, if the letter of 8 June 2012 was a Payer's Notice, then that Payer's Notice had failed to comply with the Act. Whilst there were no submissions on the validity of the 8 June 2012 document as a Payer's Notice, there were submissions dealing with the position of that same document as a Pay Less Notice and the requirements of each of the notices in ss. 110A, 110B and 111 are the same. Equally, on the basis that the Payer's Notice was raised as a possibility by the submissions, the natural question which the Adjudicator had to ask was whether or not that notice was valid. That clearly follows from paragraph 64 of the Referral. In paragraph 62 of the Reply it was said by Greentherm that, besides denying that the letter of 8 June 2012 was a Pay Less Notice rather than a "Payment Notice":

"...even if (which is denied) KDJ had issued a pay less notice as opposed to a payment notice, to be valid it would need to detail the breakdown of the contra¬ charges. This is important since KDJ has sought to include items such as liquidated and ascertained damages which do not appear to accord with the contract and seek to contra-charge for damage which is caused by the theft of radiators from the site as opposed to defects for which Greentherm are responsible."

26. Those points would equally apply to a Payer's Notice. This was therefore a case where the validity of the document of 8 June 2012 as a statutory notice was plainly raised, albeit in the context of it not being a valid Pay Less Notice. The position therefore is that the validity of the document was challenged.

27. As set out above, the requirements of the Act in relation to notices are set out in Section 110A dealing with Payer's Notices and Payee's Notice. There is then s.110B which deals with a Payee's Notice in Default and the provision for a Pay Less Notice under s.111. In each case, the Notice has to specify the sum which the party considers to be due and the basis on which that sum has been calculated. On that basis a criticism made of one document as a Notice is in principle an applicable criticism of another Notice. In this case I accept that Greentherm did not put forward, in terms, a case as to why a Payer's Notice was not valid. But such a case was clearly consistent with the reference in paragraphs 64 and 67 of the Referral.

28. In these circumstances it seems to me, again on this issue, that this case does not come within paragraph 57(e) of Cantillon or Balfour Beatty or Pompey, but rather falls within the test in Carillion, and this is a case where the Adjudicator having held that it is a Payer's Notice case was not obliged to go back to the parties on a detail of the validity of the Payer's Notice but was entitled to consider the provisions of the Act and the criticisms which had been made of that document as a Notice and come to a conclusion whether the Payer's Notice was valid.

29. In those circumstances it does not seem to me that the second ground of challenge raises an arguable challenge in terms of natural justice. Rather, in the context of the overall claim for payment in this Adjudication, the Adjudicator was entitled to come to the conclusions he did on that particular issue in the way that he did so.

Payee's Notice in Default

30. The third issue put forward on behalf of KDJ is that this was a case therefore where the Adjudicator found that the document from Greentherm of 2 June 2012 was a valid Payee's Notice in Default. I consider that, as I have indicated, this was an argument which was effectively been raised by paragraphs 64 and 67 of the Referral and was not responded to at all in the context of the adjudication by KDJ. On that basis it seems to me that the Adjudicator was entitled to consider that issue and accept Greentherm's submission as he did at paragraph 2.78 and 2.79 of the Decision. He considered it, and came to a conclusion on it, which was consistent with the case in the Referral, and in that context it does not seem to me there is a challenge in terms of a breach of natural justice. It fell clearly on the side of the line in Carillion.

Failure to give reasons

31. Finally, it is said that the Adjudicator in making his finding that the KDJ notice was not a valid Pay Less Notice, did not give reasons and therefore did not properly deal with this issue by providing a decision which was consistent with the adjudicator's duty to provide a decision which is reasoned. Alternatively, it is said that there was a breach of natural justice in the way he came to that decision.

32. The Adjudicator's decision that KDJ's document of 8 June 2012 did not comply with the requirements of s.110A(2) is found at paragraph 2.77 of the Decision. He said that, on the evidence adduced before him, KDJ's Payment Sheet No 7 did not comply with those requirements. It was therefore not a valid Payer's Notice. He was evidently referring to his analysis of Payment Sheet No 7 of 8 June 2012 at paragraphs 2.74, 2.75 and 2.76. As I have stated above, the requirements for a valid Notice under the provisions of the Act are the same whether the document is a Payer's Notice or a Pay Less Notice.

33. At paragraphs 2.78 to 2.82 of the Decision the Adjudicator then dealt with the question of whether Greentherm's application No 9 complied with those requirements and at 2.81 he held that it did. He then said:

"There is no evidence that the respondent issued an effective pay-less notice in regard to application Nr 9. For reasons given above, the respondent's notice of 8 June 2012 does not stand as a pay-less notice."

34. It seems to me that taken with para. 2.77, which is the obvious reference back "for reasons given above", the reasons are those set out in para. 2.74, 2.75 and 2.76. Those are sufficient reasons. They may be challenged as not being good reasons in fact or in law, but in my judgment they are reasons sufficient to bring them within the requirement for reasons which an adjudicator has to give in this type of decision.

35. KDJ also contends that if the reference in paragraph 2.81 to "reasons given above" is a reference to paragraphs 2.74, 2.75 and 2.76 then it also relies on the point made above that they were not argued by Greentherm and therefore the Adjudicator was in breach of natural justice in not seeking KDJ's comments on this. Those matters followed criticisms which had been made by Greentherm as to the content of the Notice and other matters but consistent with what I found on the second issue above, I do not consider that there was a breach of natural justice in the way in which the Adjudicator carne to his decision.

Summary and conclusion

36. In summary, this is a case where the overall question posed in the Adjudication was: what sum is Greentherm entitled to as a result of the provisions of the contract and the two notices which have been served - see paragraph 59 of the Referral? That is the question which the adjudicator answered in his Decision. As can be seen, there were voluminous submissions on this question. Whilst those submissions were not always either clear or consistent, they sufficiently raised the issues of entitlement to payment based on the two notices, the Subcontract and the Act and the Adjudicator, in my judgment, was entitled to deal with those issues in the way he did. To the extent that there is anything which is inconsistent with a case which has been put forward or not argued by a particular party, it seems to me it comes within the principle set out by Jackson J and approved by Chadwick LJ in Carillion. The issues represented an "intermediate position for which neither party was contending" and fell within the area where it was "not practicable for an adjudicator to put to the parties his provisional conclusions" rather than the "exceptional case" where there is a "frolic" by the Adjudicator such as in Balfour Beatty where there is such a serious breach which leads to the court declining to enforce the decision.

37. In those circumstances I have come to the conclusion that KDJ does not have reasonable prospects of successfully defending the claim which is brought based on the Adjudicator's Decision of 4 September 2012 and I therefore give summary judgment in favour of Greentherm.