The judge in Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [2021] EWHC 2441 (TCC), held that the adjudicator’s decision would not be enforced due to a breach of the rules of natural justice and highlighted the importance of the subjective requirement for a payment notice and pay less notice. The case possibly opened up a new path to “smash and grab” adjudications.

Facts

Downs Road Development LLP (“the Employer”) employed Laxmanbhai Construction (UK) Ltd (“the Contractor”) to demolish and erect new buildings containing 79 residential units. The contract was under an amended JCT Design and Build 2011 edition contract (“the Contract”). Clause 4 of the Contract provided that the Contractor was entitled to receive interim payments by way of periodic payments.

Timeline

• On 26 February 2021, the Contractor sent to the Employer Interim Application 34, which stated the sum due was £1,888,660.70.
• On 3 March 2021, the Employer sent Payment Notice 34 in which stated that the net amount for payment was £0.97 with a cover email stating “a further Payment Notice will be issued to you in due course and will not affect your payment date”. The email also noted that because the application had been issued late in the afternoon of the due date and combined with the volume of information being provided made “it a lot more difficult to get the valuations assessed in a timely manner to ensure the valuations are fairly assessed."
• It was clear that the payment notice was intended to be a holding measure.
• On 9 March 2021, the Employer sent Payment Notice 34a containing a sum payable of £657,218.50. The Employer conceded that the payment notice was out of time but made payment.

Adjudication

• A dispute arose concerning the actual sum the Contractor is entitled to under Interim Payment 24. In April, the dispute was referred to adjudication.
• The Contractor argued that the correct sum due was the amount in the Interim Application 34.
• The adjudicator was asked to assess the “correct sum due under the interim payment cycle” ¹
• The Employer issued a crossclaim in its defence alleging that the capping beam had not been designed or built in accordance with the Contract; consequently, they have suffered a loss in the sum of £149,692.30. This argument was denied by the Contractor (“the Defence”).
• The adjudicator found that the sum due at the time of Interim Application 34 was £771,045.48. After deduction of the retention and the sum already paid under Payment Notice 34a, the Employer was left to pay a sum of £103,826.98 (“the Decision”).
  • The adjudicator did not consider the crossclaim as he believed that the dispute referred related to the proper valuation of the Interim Account 34; therefore, he was required to “take a snapshot of the position between the Parties at that time… at the time this account was a live issue between the Parties, no mention was made, on behalf of [the Employer], of any counterclaim related to the design or construction of capping beams” ².

Part 8 claim

• In June 2021, the Employer issued a Part 8 claim within it the Employer sought a declaration that the Decision was unenforceable as the adjudicator failed to consider the Defence.
• The Contractor sought declarations that Payment Notices 34 and 34a were invalid and that the Decision was valid and enforceable.
• The court considered the following issues:
• The validity of Payment Notice 34;
• Whether the adjudication decision was enforceable despite not considering the crossclaim; and
• If the adjudication decision is unenforceable, can the decision be severed?

TCC Decision

1) The validity of Payment Notice 34;

The court found Payment Notice 34 failed to satisfy the requirement set out in section 110A(2) of the Housing Grants, Construction and Regeneration Act 1996 (“HGCRA 1996”), which requires a valid notice to contain:

“(i) the sum that the payer considers to be or to have been due at the payment due date in respect of the payment, and

 (ii) the basis on which that sum is calculated;³

The judge noted that it was standard practice for the Employer to send two payment notices in each payment cycle.

The Employer did not show a sum “genuinely considered” to have been due together with the basis on which the sum is calculated. The sum was unrealistic, and the cover email clearly showed that Payment Notice was a holding notice to buy more time to make a fuller assessment of the Interim Application 34. Therefore, it was clear that the sum set out in Payment Notice 34 did not set out the amount the Employer actually considered to be due.

For the reasons above, the judge found that Payment Notice 34 was not valid.

2) Whether the adjudication decision was enforceable despite the adjudicator failing to consider the crossclaim

The judge found the capping beam crossclaim was material to the dispute. He clarified material information is information that could potentially “make a significant impact on the overall outcome of the adjudication” ⁴

“Where the adjudication is concerned with a party's entitlement to be paid money, then a defence which would if successful remove that entitlement or diminish the sum to be paid will potentially be an issue in the adjudication.” ⁵

The crossclaim had the potential to reduce the sum payable to the Contractor. The adjudicator took a narrow view of his jurisdiction in thinking that it was to “take a snapshot of the position between the Parties at the time”. Regardless of what the outcome would have been, the capping beam defence was a matter to be addressed in the adjudication. Had the adjudicator decided on the capping beam issue, the Decision would have been unimpeachable. 

By declining to address the Defence to which the Employer was entitled, there was a material breach of the requirements of natural justice; as such, the adjudicator’s decision could not be enforced.

3) Whether the Decision could be severed

The Employer contended that the conclusion the adjudicator reached before he found that the capping beam could not be considered, were unimpeachable as his reasons were separate decisions “not tainted by that error” ⁶; therefore, they argued that the Decision could be severed.

The court recognised that partial enforcement could be seen as compatible with the policy underlying the HGCRA 1996 and the Scheme for Construction Contracts (England and Wales) Regulations 1998 by allowing prompt payment of sums due, thereby maintaining cashflow in the industry.

The judge clarified that severance would depend on whether the decision is independent of each other or whether the adjudication contained “a series of decisions independent of each other or being a single decision resulting from a connected chain of reasoning.” ⁷  If the latter, severance is unlikely as it would involve “an artificial division of a continuous chain of reasoning” ⁸ and could result in an outcome that could not have resulted from the adjudication.

The adjudicator produced a snapshot of the position at a particular date to determine the sum payable in the payment cycle 34. The judge found that the adjudicator was not asked to make a series of separate decisions and reached a single decision. Severance of the Decision would be artificial.  

For the reasons above, the court held that the Decision could not be severed; consequently, the entire Decision would not be enforced.

What does this mean in practice?

• We are reminded again of the Bresco ⁹ case where the adjudicator wrongly dismissed the responding party’s cross claim in its defence. The adjudicator should have at least considered and made a determination on the crossclaim. Just because the claim involved an insolvent company did not mean the crossclaim simply “melt[ed] away as to render them incapable of adjudication” ¹⁰
• For adjudicators, care needs to be taken when determining their jurisdiction. Adopting a narrow view of their jurisdiction could lead to a breach of the rules of natural justice rendering the decision unenforceable.
• This case is an important reminder that paying parties should not submit a holding notice in the hope that it could buy more time.
• Payment notices or pay less notices are usually challenged on 1) timing, failing to submit on time, 2) quantum, a dispute as to the valuation of the works and 3) the notice failing to provide the basis on the sum calculated. This case has possibly opened a new path to challenging the validity of payment notices or pay less notices.
• With regard to the payment notice or pay less notice, there are subjective requirements arising from the language “considers to be or to have been due”. This language is also used in JCT and NEC standard forms contracts. The paying party must genuinely believe the sum considered to be due at the time. The more evidence supporting the sum, the more difficult to argue that the payer did not have a genuine belief in the sum. Any doubt could allow a party to instigate a “smash and grab” adjudication. This requirement equally applies to contractors’ payment applications under s110A(3) HGCRA 1996.
• It remains unclear how genuine consideration would be assessed. However, this case shows that genuine belief could be demonstrated through supporting materials detailing how the sum has been calculated.

¹ Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [2021] EWHC 2441 (TCC) Para 20
² Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [2021] EWHC 2441 (TCC) [27]
³ S110A(2)
⁴ Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [2021] EWHC 2441 (TCC) [53]
⁵ Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [2021] EWHC 2441 (TCC) [54]
⁶ Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [2021] EWHC 2441 (TCC) [90]
⁷ Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [2021] EWHC 2441 (TCC) [92]
⁸ Downs Road Development LLP v Laxmanbhai Construction (UK) Limited [2021] EWHC 2441 (TCC) [92]
⁹ Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25
¹⁰ Bresco Electrical Services Ltd (in Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25 [47]