Practical Law

In my view, this is an interesting question and, until earlier this month, not one we’d seen addressed in the law reports before (at least, not as far as I recall). Without cheating and looking at the judgment in Bexheat Ltd v Essex Services Group Ltd, I wonder how many of you would answer the question yes and how many would answer no. Answers on a postcard please!

Bexheat Ltd v Essex Services Group Ltd

O’Farrell J’s judgment in Bexheat is a detailed one, covering many issues (not just the answer to my question), although the facts of the parties’ dispute are relatively straightforward.

Essex Services Group Ltd was the sub-contractor providing mechanical, electrical and plumbing (MEP) services at a new-build residential and care facility. The plumbing aspects of those works were sub-sub-contracted to Bexheat Ltd. The parties’ contract was entered into in October 2019 and it was for £1.035 million.

By July 2021, the parties had reached their 22nd payment cycle. On 19 July 2021, Bexheat submitted its interim application for payment 22 (IA 22) in the gross sum of £1.83 million, and sought payment of just under £680,000. Essex served a pay less notice that calculated the sum due at just £4,800. Perhaps unsurprisingly, Bexheat referred the dispute to adjudication (the first adjudication). Mr Cope was appointed as the adjudicator and he was asked to determine the true value of IA 22, which he did, concluding that the true value was £1.3 million and a payment of £141,600 was due to Bexheat. The first adjudicator’s decision was dated 12 October 2021 and Essex paid the sums awarded in full.

The 23rd payment cycle started before the first dispute was referred to adjudication, with IA 23 being submitted on 17 August 2021. The gross sum was £2.01 million and the sum sought was £848,000. This time, Essex’s pay less notice was served one day late (we aren’t told what figure it assessed the sum due as being).

Essex failed to pay the sums due under IA 23 and, on 18 October 2021, Bexheat referred the matter to adjudication (the second adjudication). This time, Mr Silver was appointed as the adjudicator and he decided that, in the absence of a valid pay less notice, Essex should pay the sum of £706,000 odd (when starting the second adjudication, Bexheat took into account the sum awarded by the first adjudicator under IA 22, which Essex had already paid). The second adjudicator’s decision was dated 12 November 2021. You could say that it was a typical smash and grab adjudication.

Enforcement proceedings followed when Essex failed to pay the sums the second adjudicator awarded to Bexheat.

O’Farrell J’s judgment

The starting point for the judge’s analysis was section 111 of the Construction Act 1996 and the Court of Appeal’s judgment in S&T (UK) Ltd v Grove Developments Ltd, which she neatly summarised (at paragraph 76) as follows:

• 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 Construction Act 1996.
• Section 111 creates an immediate obligation to pay the notified sum.
• An employer is entitled to exercise its right to adjudicate pursuant to section 108 of the Construction Act 1996 to establish the true valuation of the work, potentially requiring repayment of the notified sum by the contractor.
• The entitlement to commence a true value adjudication under section 108 is subjugated to the immediate payment obligation in section 111.
• 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.

She also considered the importance of jurisdictional challenges, reservations and waiver, as set out in Coulson LJ’s Court of Appeal judgment in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd.

Impact of the first adjudicator’s decision

The first question was what impact, if any, did the first adjudicator’s decision have on the enforcement proceedings related to the second adjudicator’s decision.

Bexheat argued that the dispute in the first adjudication concerned the true value of IA 22; it did not determine the true value of IA 23. The first adjudication had not been started when IA 23 was issued, so the first adjudicator’s decision could not affect the validity of IA 23. Also, Essex did not raise a jurisdictional challenge in the second adjudication based on the first adjudicator’s decision, and so had waived its right to raise it now.

In turn, Essex argued that the first adjudicator’s decision was binding as to the true value of Bexheat’s entitlement under IA 23. Despite the case law requiring payment before a true value adjudication could be started (which hadn’t happened here), this case could be distinguished because there was already a pre-existing and binding adjudicator’s decision. This arose because the first adjudicator’s decision was issued on 12 October, which was before the dates for a pay less notice for IA 23 (14 October), payment of the notified sum (not sure what this date is), the second adjudicator’s decision (12 November) and the enforcement proceedings starting (23 November). Essex said the parties were bound by the first adjudicator’s true value decision and no more sums were due to Bexheat.

Judge’s step-by-step approach to the impact of the first adjudicator’s decision

The first question was to consider the scope of the two adjudications, and to determine whether the dispute in the second adjudication was the same or substantially the same as the dispute in the first adjudication. Since one was a true value adjudication about IA 22 and works up to 31 July 2021, and the other was, effectively, a smash and grab over IA 23 and works up to 31 August 2021, the judge concluded that they were not the same or substantially the same disputes. The difference in valuation periods also seems to have been an important factor here.

Next, the judge looked at what the two adjudicators had decided. The first adjudicator decided the true value of IA 22, whereas the second adjudicator did not carry out a valuation exercise, he simply decided that in the absence of a valid pay less notice, Bexheat was entitled to payment of the sum claimed in IA 23 in full (that was the notified sum). Therefore, what was decided was not the same or substantially the same.

The judge rejected an argument that Essex was entitled to enforce the first adjudicator’s true value decision (about IA 22) against a later application for payment (IA 23) without serving a valid payment or pay less notice against that later application for payment. Again, the different valuation periods was a factor in this. Even if there was significant overlap between the two applications, the period up to 31 August had not been adjudicated upon. It only formed part of IA 23.

Also, Essex had failed to reserve its jurisdictional position in the second adjudication and, even if Essex said it wasn’t making a jurisdictional point, its argument was:

“… tantamount to an attack on jurisdiction because it seeks to rely on the binding effect of the First Adjudication Decision as displacing Mr Silver’s power to direct payment of the sum awarded in the Second Adjudication Decision.”

Finally, Essex’s argument ran contrary to the provisions of section 111 of the Construction Act 1996. If Essex wished to rely on the first adjudicator’s true valuation decision, it should have raised that in a pay less notice. If not, Bexheat was entitled to adjudicate and was entitled to be paid the notified sum.

However, the judgment doesn’t end there; it considers a number of other issues worth mentioning.

Contractual right to set off against an adjudicator’s decision

I thought it was interesting that the parties’ contract included a clause allowing Essex to set off or make deductions against an adjudicator’s decision:

“… in respect of any amounts which may at any time be due or have become due from the Sub- Subcontractor to the Sub-Contractor under the Sub-Subcontract or otherwise.”

Essex sought to rely on that clause and contra charge a sum of £163,000 against the second adjudicator’s decision.

However, the judge explained that the provision was contrary to section 108 of the Construction Act 1996, which provides that an adjudicator’s decision is binding on the parties until the dispute is finally determined, and also the Scheme for Construction Contracts 1998, which also provides for the decision to be binding, and also requires the parties to comply with the adjudicator’s decision “immediately on delivery” (unless the adjudicator says otherwise). She looked at a number of judgments (Ferson Contractors Ltd v Levolux; Thameside Construction v Stephens), before concluding that the limited exceptions identified in Thameside did not apply.

Joinder of disputes

We are all familiar with the rule that an adjudicator can only decide one dispute unless the parties agree otherwise. Here, the parties’ contract gave Essex a unilateral right “to elect” that the adjudicator “shall be entitled to adjudicate on more than one dispute at the same time”.

Again, this was inconsistent with the Scheme for Construction Contracts 1998. It did not matter that the clause did not compel the adjudicator to determine more than one dispute. Also, section 111 of the Construction Act 1996 prevented Essex from referring a true value dispute over IA 23 to adjudication until it had paid the notified sum and had satisfied its payment obligation. Here, even if the second adjudicator had had both the “notified sum” dispute and the “true value” dispute before him, once he decided there was no valid pay less notice for IA 23, he could not have gone on to determine the true value because Essex had not paid the notified sum.

Interestingly, this was also the conclusion the third adjudicator, Mr Linnett, had reached, when Essex had tried to refer its true value dispute to him in October 2021. He had resigned without producing a decision.

Application for stay of enforcement

Although Essex had sought a stay of execution of the enforcement proceedings, the judge was not persuaded it was necessary. She thought the accounts showed Bexheat was a going concern and there was no indication that it was insolvent. Rather, the accounts demonstrated that its financial position was substantially the same as when it entered into the plumbing contract with Essex and any adverse movement in its financial position would be because the second adjudicator’s decision had not been paid.

What do I take from this judgment? 

This judgment is a clear reminder (if we needed one) that parties must comply with their  payment obligations and pay the notified sum before they are entitled to have a true value adjudication. Section 111 remains king (at least over section 108). As the judge said:

“… 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.”

If the Court of Appeal in Grove told us that you can’t start a true value adjudication before paying the notified sum, this judgment goes further, and says you can’t rely on an earlier true value adjudication either if you haven’t paid the notified sum. Any ambiguity left by the judgment in M Davenport Builders Ltd v Greer has gone.

This is important because of the prevalence of serial adjudications. Increasingly parties are using adjudication as part of longer term strategies and in conjunction with court proceedings, which means it can be challenging for adjudicators (even if the same adjudicator is appointed each time) to know what has already been decided, and whether previous findings are still binding. Sometimes novel arguments are run in enforcement proceedings (like in Prater Ltd v John Sisk and Son (Holdings) Ltd), other times the court may have overturned an earlier adjudicator’s decision (like in John Graham Construction Ltd v Technicas Reunidas UK Ltd). As Jonathan said at the time:

“[There is a] distinction between a subsequent adjudicator overriding the findings of a previous adjudicator or arbitrator, as opposed to applying the earlier decision or award.”

Simply put, it’s complicated.

… and now you know the answer to the question I posed, you probably don’t need those postcards after all!