PFG DESIGN LTD v MASMA LTD
PFG DESIGN LTD v MASMA LTD
Technology and Construction Court
15 November 2017
The decision in Enviroflow Management v Redhill Works that the adjudicator had no power to make an award in relation to the referring party’s costs of pursuing its claim on the adjudication pursuant to section 5A(2A) absent an express agreement was entirely correct
One controversial issue which appears to have been determined definitively by Fraser J is the applicability of the general rule that the successful party in an adjudication cannot recover its costs of the process despite any award made by the adjudicator. The issue arises from what may be regarded as an ambiguity in the wording of two statutes. Section 108A of the Construction Act provides that any contractual provision concerning the allocation of costs “is ineffective unless (a) it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate its fees and expenses as between the parties or (b) it is made in writing after the giving of notice of intention to refer the dispute to adjudication.” However, section 5A(1) of the Late Payment of Commercial Debts (Interest) Act 1998 provides that “Once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to a fixed sum (in addition to the statutory interest on the debt).” Section 5A(2A) provides that “If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.”
In the face of apparently conflicting decisions, Fraser J stated that O’Farrell J Enviroflow Management v Redhill Works dealt with the point where section 5A(2A) was relied on by a party in seeking to claim its costs. The attempt to use that subsection to justify a claim of costs far in excess of the fixed sum (£100) referred to in 5A(1) as costs in the adjudication had simply failed because the reasonable costs sought under the 1998 Act were £11,800. O’Farrell J held that this was ineffective to award a party costs in an adjudication because of the meaning and terms of section 108A of the Construction Act. Her findings seem to me to be entirely correct, in particular her finding that the adjudicator had no power to make an award in relation to the referring party’s costs of pursuing its claim on the adjudication absent an express agreement.
THE FULL TEXT OF THE JUDGMENT OF FRASER J
- This is an adjudication enforcement application by the claimant relating to a decision of an adjudicator, namely Mr Judkins, that was issued by him on the 28th of July 2017. The parties to the adjudication were the claimant, PFG Design Ltd, and the defendant, Masma Ltd. Both of the parties effectively represented themselves in front of the adjudicator. A Mr Gadsden, who is a director of the claimant, represented PFG, and Mr Shephard, who is a director of Masma, represented the respondent in the adjudication, the defendant in these proceedings.
- Although the decision was issued in July of this year, the events which led to the dispute go back much further than that, into the end of 2011 and the beginning of 2012, in circumstances which I am only very briefly going to outline in due course.
- The decision was in favour of PFG. Together with interest and the adjudicator’s fees it came very approximately to a sum of about £30,000, but the main element of it was a finding that PFG were entitled to a further payment by way of fees for architectural services in the sum of £20,000. It is effectively in relation to that £20,000 that the majority of the many points of resistance to enforcement are founded by the defendant.
- It has to be said that, although I have been greatly assisted by very succinct oral submissions by both counsel, and also impeccably prepared skeletons, a great deal of the argument that goes to the enforceability of this decision has focused on the factual finding which the adjudicator has made. It is fairly well established in this court that jurisdiction of the adjudicator is a basic ground that can be relied on to resist enforcement, as also are material breaches of natural justice. Challenging factual findings is not a ground for resisting enforcement of a decision.
- The defendant has mounted a number of different grounds which it says excuses it or justifies it in not enforcing the decision.
- Looking at the costs, the adjudicator’s costs were about £8,500 and the claimant’s costs schedule for today’s hearing comes to just under £16,000. When the amount at stake or in issue between the parties is as little as £20,000 it can be seen that behaving in this way is clearly not the most cost-effective way of resolving what is a relatively modest dispute.
- But with those comments having been made, I do not propose to address proportionality or cost-effectiveness any more in this short oral judgment, and I am simply going to go through and explain the basis of the decision, the grounds of resistance and what my findings are in respect of each of them.
- The issue between the parties in the adjudication concerned the formation of a contract between them, essentially an oral contract, and the terms of what that contract were, particularly in relation to the claimant’s remuneration for providing architectural design services to the defendant for a proposed residential housing development called Oaklands, and is in Hailsham, Sussex.
- The background to this is that the parties were required to make more than one planning permission application and in 2011 there was work done by the claimant to obtain planning permission for 170 dwellings, but that did not result immediately in planning permission being given and eventually another application had to be made.
- Planning permission was in fact achieved and the summary of the dispute is that the claimant and the defendant found themselves at odds about what success fee should be payable to the claimant in respect of its work on that development.
- Mr Shephard, who gave a witness statement on these proceedings as well as representing the defendant in the adjudication, took the view that the success fee, if any, was payable only on receipt of a usable planning permission. In some of the correspondence he also took the point that the success fee was only payable when the scheme was sold on. He also took the point that there had never been any agreement between the parties as to the amount of such a success fee.
- Dealing briefly with the fundamental issue between the parties on the adjudication itself, the respondent in that adjudication - the defendant - raised a vast number of jurisdictional challenges to an adjudication happening at all. They were that there was no crystallised dispute, that multiple disputes were referred, that there was no contract between them, that there was no construction contract between them, and also that the contract, if there was one, was formed before the 1st of October 2011.
- The relevance of that date is as follows. Any contract that was formed orally before the 1st of October 2011 was not susceptible to having disputes referred to adjudication because section 107 of the Housing Grant Construction and Regeneration Act 1996 required contracts to be in writing. However, the Local Democracy, Economic Development and Construction Act 2009 deleted section 107, or deleted its applicability to all and any contracts formed after the 1st of October 2011. Therefore, Mr Shepherd found himself in the position if he could persuade the adjudicator that any contract that was agreed between the parties orally was agreed before the 1st of October 2011, he could defeat the adjudication taking place.
- The adjudicator in his decision first of all dealt with all of the different jurisdictional challenges that had been raised and he dealt with these in a large number of carefully reasoned paragraphs throughout his adjudication decision.
- When he came to deal with what is Mr Newman’s main and principal ground today, namely that there was no contract at all, he dealt with that in his decision between paragraphs 2.10 and 2.17. He made the relevant findings, the following findings, which I’m going to quote.
- In paragraph 2.11 he said, and I’m quoting: “On the evidence adduced in the parties’ submissions, I am satisfied they concluded a contract in or about January 2012 either at or closely following the meeting between Mr Gadsden and Mr Shephard on the 17th of January 2012 at which the claimant agreed to provide architectural design services for the Oaklands project on a No Win, No Fee basis subject to payment of £5,000 with a significant but unquantified sum payable on successful receipt of the planning permission”.
- He then said at paragraph 2.16, having dealt with the points made to the contrary by the defendant, and again I’m quoting:
“I preferred the claimant’s submission that the contract was formed in January 2012. I do not accept the respondent’s contention that because the claimant began some work on the project in November 2011, it necessarily follows that an agreement was in place before the 1st of October 2011. I can find no evidence to support that proposition. It is not impossible for the claimant to have begun some preparatory work before the parties agreed terms and concluded the agreement. I consider it more likely than not that the parties agreed the terms either at the meeting between Messrs Gadsden and Shephard on the 17th of January 2012 or soon thereafter. It is to be regretted that they failed to reduce the agreement to writing”.
- Paragraph 2.17:
“In circumstances where one party has carried out work and the other party has paid for that work it’s difficult to understand that the parties did not conclude the contract in terms. Based on the evidence available and on the parties’ submissions, I’m satisfied the parties concluded an oral contract during January 2012 by which the claimant would provide the necessary design plans to achieve planning consent for the entire site with greater detail provided for the eastern tranche of land for a fee of £5,000 and an unspecified success fee”.
- Later in his decision, he considered the amount of the success fee and the way in which it was agreed. If everyone can bear with me while I turn to his relevant findings.
- The first finding that he had made, which is relevant to this, the section of the decision begins at paragraph 2.42 and first of all he had to define or decide what the word “success” meant in this context. In paragraph 2.45 he said, and I’m quoting:
“I accept the claimant’s contention that success as contemplated by the parties when they entered into their oral contract is achieved when planning consent is granted. I can find nothing in the evidence adduced before me to show it was within the contemplation of parties at the time they concluded the agreement in or about January 2012 that success would be conditional upon the sale of the site. Indeed, there is no indication in the evidence to indicate the respondents intended to sell the land with planning permission rather than to develop the site itself”.
- He then turned, having analysed the different discussions and agreements, or parts of agreements that were reached by the parties throughout his decision up to paragraph 2.50.
- He dealt with a section under the heading, “The success fee” and at paragraph 2.51 said the following, and again I’m quoting:
“I’m satisfied that parties reached an understanding as to a reasonable success fee in their exchange of emails on the 6th of October and 7th of October 2016, which Mr Shephard confirmed in his email to the claimant on the 24th of January 2017 where he said…” and he then quotes from the emails. The relevant parts are the following passages: that the current pay element has amounted to £11,500 and the success fee has been agreed in correspondence to be £20,000 and then the final sentence: “As you suggested, given there’s no written agreement in place, I think that a £20,000 uplift is a reasonable amount”.
- Then at paragraph 2.52, he said:
“I’m satisfied on the evidence of the parties’ correspondence that a success fee of £20,000 was agreed and I so find”.
- He also said at paragraph 2.54, dealing with the invoice which had been raised on the 21st of April 2017 by the claimant to the defendant:
“I have found that the claimant has received payment in full for its basic fee of £11,500, such that the only amount outstanding and due to the claimant is the success fee of £20,000. I find that the claimant is entitled to further payment of £20,000”.
- I will deal with the invoice itself because it’s relevant to a challenge that’s raised in terms of natural justice.
- The invoice which appears in the bundle before me, and is given invoice no. SI94 and, as I said, is dated 21st of April 2017, against “Code” says “architectural services” and under “Description”, “Settlement of outstanding fee relating to architectural works and planning application for 170 units at Oaklands, including house-type designs, design and access, supporting documentation, layouts, 3D visualisations. Fee £60,000 minus £11,500 previously paid equals £48,500”. The amount claimed on the invoice before the application of VAT was £48,500. It will be noted that the amount that the adjudicator found the claimant was entitled to is not the amount in that invoice, but the lower amount of £20,000.
- I should say that, although dressed up as jurisdictional challenges, a great deal of what could be described as the “no contract” submissions by the defendant are in reality disputes about the adjudicator’s findings. However, the court has entertained them on this occasion because the relevance of the date of contract goes to jurisdiction, and jurisdiction is one of the bases on which a party may resist enforcement.
- However, that is not to say that this court will revisit and reconsider all of the adjudicator’s findings in this matter because, as is well known, an adjudicator’s decision is enforceable regardless of errors of fact or law on the face of the decision or, indeed, in the reasoning behind the actual decision itself. In this case it was important to allow Mr Newman to develop his submissions about the contract because simply there was an assertion that the contract was formed after the highly relevant date of the 1st October 2011. However, simply because that assertion was made does not mean that it necessarily was.
- I can deal with the point very quickly. Having been taken through the material very extensively, it is obvious to me that there was ample material before the adjudicator upon which he could properly find that the contract was formed in January 2012, as he decided, and indeed there is ample material before the court today upon which the court would come to the same conclusion.
- The appellate authority of RJT Consulting Engineers v DM Engineering (Northern Ireland) Ltd  EWCA Civ 270 was in relation to section 107 of the Act and at a time when oral contracts were not caught by the adjudication provisions. However, at  of the judgment of Ward LJ, he says, dealing with the first instance judgment which he was considering in that case:
“As I read his judgment it was common ground and the parties accepted that there was in existence a construction contract contained in a letter which accepted the tender set out in the schedule of documents which accompanied the tender. Consequently the issue was not directed to the construction of section 107 of the Act but to the construction of section 108(1) of the Act dealing with the right to refer a dispute arising under the contract for adjudication. Once jurisdiction to refer the matter to adjudication was established the judge held, and in my judgment rightly held, that it was proper within that adjudication to decide whether or not a particular term had been incorporated into the contract”.
- In my judgment exactly the same approach applies here when one is considering an oral contract and a jurisdictional challenge.
- Once jurisdiction to refer the matter to adjudication is established, and in this case a large amount of Mr Newman’s submissions depend upon there being no contract, once the court has come to the view on a summary judgment application for enforcement that there was jurisdiction to refer an oral contract to adjudication, then it was proper within that adjudication for the adjudicator to decide whether or not particular terms had been incorporated into that contract and also, if they had, what those terms were. That is the essence of what the adjudicator would need to decide in a dispute such as this.
- Turning to the further dicta of Ward LJ at  of the case above, he said:
“The adjudicator has to start with some certainty as to what the terms of the contract are.”
- That is exactly what this adjudicator did. He considered the material before him, first of all so that he could ascertain whether there was a sound basis for a jurisdictional challenge, which in that case included consideration of the point at which the contract was made. Was it before, or was it after, the relevant date of 1st October 2011? Once he decided that it was in fact formed after 1st October 2011, he decided that the contract was made a meeting in January 2012, then the precise scope of those terms, what they were and what the claiming party’s entitlement was as to fees, involved him making decisions of fact and law which are simply not challengeable on an enforcement application such as this.
- That deals, in my judgment, rather summarily with a multitude of the points put forward by Mr Newman as to why this court should be persuaded that there was no contract. In my judgment there plainly was. Its formation post-dated 1st October 2011 and that, with respect, is really the end of it so far as the “no contract” challenge is concerned.
- I am now going to deal with the other points which Mr Newman attractively developed upon which he also relies.
- The next is that there were multiple disputes referred to the adjudicator. It is said that there were two distinct disputes, namely the non-payment of an invoice which had been issued, and whether or not the claim was made on a quantum meruit. He drew my attention to Akenhead J in Witney Town Council v Beam Construction (Cheltenham) Ltd  EWHC 2332 (TCC), where at  Akenhead J drew upon the numerous authorities dealing with the meaning of “dispute” and set out at (i) to (vii) what the approach should be about whether there was more than one dispute or what the true dispute was.
- It should be said there are also two appellate decisions as well. One is called Brown v Complete Building Solutions  EWCA Civ 1, a 2016 decision of the Court of Appeal and the judgment was given by Simons LJ, the other is the appellate decision in Paice v Harding  EWCA Civ 1231, a case which has, I think, altogether six different decisions on BAILII. This one is the 2015 decision, the judgment being given by Jackson LJ, both of which deal with what is the meaning of a dispute.
- It is without doubt clear in my judgment that there was one single dispute referred to this adjudicator and that was the amount of fees to which the claimant was entitled for its work on the scheme.
- Those fees were claimed in an invoice and the reason for referring to the invoice again is because that neatly takes me into the next ground of challenge by Mr Newman, which is the adjudicator decided the adjudication on a ground that was not advanced by either party.
- The basis of this challenge is that the amount that was chosen, the £20,000, by the adjudicator as the correct amount for the success fee was not the amount stated on the invoice. The legal principles that apply to a challenge on this ground, namely breach of natural justice, are usefully summarised in Cantillon Ltd v Urvasco Ltd  EWHC 282 (TCC), again a decision of Akenhead J, who at  said:
“I conclude as follows in relation to breaches of natural justice in adjudication cases:
(a) it must firstly establish the adjudicator failed to apply the rules of natural justice;
(b) any breach of the rules must be more than peripheral, they must be material breaches;
(c) breaches of the rules will be material in cases where the adjudicator has failed to bring to the attention of the parties a point or issue which they ought to be given the opportunity to comment upon if it’s one which is either decisive or of considerable potential importance to the outcome of the resolution of a dispute and is not peripheral or irrelevant;
(d) whether the issue was decisive or of considerable potential importance or is peripheral or irrelevant obviously involves a question of degree which must be assisted by any judge in a case such as this;
(e) it’s only if the adjudicator goes off on a frolic of his own, that is wishing to decide a case upon any factual or legal basis which has not been argued or put forward by either side, without giving the parties an opportunity to comment or, where relevant put in further evidence, that the type of breach of the rules of natural justice with which the case of Balfour Beatty Construction Ltd v The Camden Borough of Lambeth was concerned with comes into play. It follows that, if either party has argued a particular point and the other party does not come back on that point, there is no breach of the rules of natural justice.”
- There is also further assistance given by a judgment Edwards-Stuart J in the case Roe Brickwork Ltd v Wates Construction Ltd  EWHC 3417 (TCC). It is not unusual for tribunals, whether adjudicators, arbitrators or judges, to be faced with two competing arguments, certainly so far as quantum is concerned, and decide that the correct answer is in fact a figure which is not directly contended for by either party. In dealing with this point, Edwards-Stuart J  said:
“If an adjudicator has it in mind to determine a point wholly or partly on the basis of material that has not been put before him by the parties, he must give them an opportunity to make submissions on it. For example, he should not arrive at a rate for particular work using a pricing guide to which no reference has been made during the course of the referral without giving the parties an opportunity to comment upon it.”
- At  he continued:
“By contrast, there is no rule that a judge, arbitrator or adjudicator must decide a case only by accepting the submissions of one party or the other. An adjudicator can reach a decision on a point of importance on the material before him on a basis for which neither party has contended provided that the parties were aware of the relevant material and that the issues to which it gave rise had been fairly canvassed before the adjudicator.”
- The success fee of £20,000 was not only referred directly to in correspondence before the adjudicator, it was specifically referred to in correspondence coming from Mr Shephard. That rather undermines the whole basis in my judgment of any challenge to enforcement on the basis of a breach of natural justice.
- Even if that were not correct, in my judgment it will be in the very rarest of cases, if ever, that an adjudicator, when dealing with quantum, is limited to the amount claimed in the specific invoice, particularly where, as here, that specific invoice is in relation to work that goes over a very long period of time.
- It is in my judgment stretching challenges of natural justice far beyond their natural bound to maintain that because this adjudicator found a success fee of £20,000 was due, rather than the amount on the face of the invoice, that was something which was so in breach of natural justice or so unfair that his decision ought not to be enforced by the court, and I reject that head of challenge as well.
- The ground of challenge with avers that there was no crystallised dispute can be dealt with exceptionally quickly. An invoice had been raised, the defendant was refusing to pay it, that in my judgment that is sufficient to define a dispute and the dispute was clearly crystallised.
- That then leads me to two ancillary matters.
- The first is in relation to the statutory payment of £100 which the adjudicator awarded under section 5A of the Late Payment of Commercial Debts Interest Act of 1998. It is an interesting legal question which has been approached in more than one case as to how that statute impacts upon or falls to be considered in respect of recovery of a party’s costs in adjudication.
- In a recent case O’Farrell J had to deal with a point where that statute was relied upon by a party in seeking to claim its costs. The case is Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd  EWHC 2159 (TCC). In that case the successful party in the adjudication sought to rely upon section 5A(2A) of the Late Payment Act which provides:
“If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum [namely the £100 in question awarded under section 5A(2)] the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.”
- The attempt to use that subsection to justify a claim of costs far in excess of the £100 as costs in the adjudication had simply failed, as O’Farrell J explained, because the reasonable costs sought under the Act were £11,800. The provision in subsection of section 5A was ineffective to award a party costs in an adjudication because of the meaning and terms of section 108(a) of the Housing Grants Act. It has been amended over the years but was originally passed in the year 1996.
- Her findings at  and  of her judgment seem to me to be entirely correct and her finding that the adjudicator had no power to make an award in relation to Enviroflow’s costs of pursuing its claim on the adjudication absent an express agreement is, again, in my judgment entirely correct.
- The difficulty, and to be fair to Mr Newman, he frankly accepted that because this was such a modest amount of money it was really not something which he was going to go to the stake on, (and he was right to take that entirely common sense course), the reason that that £100 should also be enforced as well as the remainder of the decision is really very, very simple. This is because in the decision itself under paragraph 3.7 of the findings, the adjudicator decided that the parties should bear to pay their own costs.
- In paragraph 3.6 he also came to the view that the defendant should pay, as well as the £20,000 and interest, a lump sum of £100 which he considered was due and payable because of section 5A of the Late Payment of Commercial Debts Interest Act 1998. Whether he was right or was wrong about that is really a question of law. His decision will be enforced whether he made mistakes in law or not.
- I do not therefore, based on the fact there has been limited legal argument before me about it and in view of the small amount of money, intend to address whether he was in fact mistaken in law, but in my judgment that £100 forms part of the amount to which the claimant is entitled by way of enforcement in any event.
- Although Mr Newman had some submissions in relation to the liability for the adjudicator’s fees, they do not arise in this case because they were dependent on my findings as to his challenges as to enforcement and those challenges have failed. Therefore, it is the case that the claimant is entitled to judgment in the amount sought in the claim form because the jurisdictional challenges and the complaints of breach of natural justice in respect of this particular adjudication, this decision, fail.