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Has the door been left ajar for counter-adjudications following a smash and grab?

 Imperial Chemical Industries Ltd (ICI) v Merit Merrell Technology Ltd (MMT) is Fraser J’s latest 89-page opus. It was a liability-only trial covering 16 agreed issues and sub-issues arising out of the parties’ dispute following works at ICI’s new paint processing plant in Ashington, Northumberland. Those issues included the correct contractual specification for the pipework testing, the extent of the alleged defects in the pipework, termination under an NEC3 Engineering and Construction Contract (ECC) and whether ICI or MMT was in repudiatory breach of contract, to name but a few.

It is a dispute that I have looked at previously, in Clarity is key when contract drafting and picking your ANB, when Edward-Stuart J decided the adjudicator was correctly appointed and applied the right adjudication rules, and so he enforced his decision. As there is still a quantum hearing to go, it may not be the last time that I look at it either.

This post focuses on some of the money aspects: ICI’s entitlement to recover over-payments from MMT and whether it could challenge the value of MMT’s works.

Issues 10 and 11: over-payment and value

Given there was a split trial between liability and quantum, it was necessary for the parties to assume that, at the end of the day, it would be shown that MMT had been paid more than the true value of its works:

  • ICI argued that it was entitled to recover the over-payment either under the terms of the contract or in restitution.
  • MMT challenged this. It claimed the value of its account was £20.93 million (the amount paid) and maintained that those payments were “deemed to be the value of the works” because of the repudiation. This meant ICI could not recover any over-payment. It also argued that the value of its account was not in issue in the court proceedings because it had:

    “… already been determined in a finally binding adjudicator’s decision and in court proceedings in MMT’s favour.”

These two issues gave rise to a very interesting discussion, with Fraser J taking us through a number of well-known cases and well-established principles. However, before looking at that case law, Fraser J reminded us that:

  • Two adjudications were relevant. The first adjudicator decided that MMT was entitled to some £7.5 million and the fourth adjudicator decided that MMT was entitled to £816,000. It was the status of these payments that was “an important component” in ICI’s claim.
  • It is well-established law that when a contract comes to an end, the parties’ existing rights and obligations remain in existence. Thus, what was relevant here was whether ICI had a right to recover over-payments on 17 February 2015 when it repudiated the contract.

Contract route to ICI’s recovery of (assumed) over-payment to MMT

The first point that Fraser J looked at was the meaning of the relevant contract clauses. He noted that under clause 50 of the NEC3 ECC, the project manager would assess the amount due at each assessment date (clause 50.1) and could correct any “wrongly assessed amount due” in a later payment certificate (clause 50.5). Fraser J did not consider that this meant an interim assessment was a definitive or final valuation of the works for all purposes at that point in the project. He also rejected MMT’s suggestion that until the later payment certificate was issued, ICI would not have any accrued legal rights to repayment.

MMT relied on the judgment in ISG Construction Ltd v Seevic College, where Edwards-Stuart J held that the lack of a pay less notice meant the employer (Seevic) had agreed the value of the works claimed in an interim certificate and the first adjudicator had decided the question of the value of those works. This meant the second adjudicator lacked jurisdiction as he was asked to decide the same dispute.

A few months later, in Galliford Try Building Ltd v Estura Ltd, Edwards-Stuart J clarified what he was saying in ISG, namely that the employer had agreed the value of the works claimed in an interim certificate and the adjudicator had decided the question of the value of those works. However, that did not mean there was agreement as to the value of the work at some other date. It also meant the employer was prevented from starting a second adjudication to determine the value of the works at the date of the interim application, but it did not prevent the employer from challenging the value of work in the next (or later) application.

Was ISG v Seevic right?

Fraser J suggested that in light of two later Court of Appeal judgments (Harding (t/a MJ Harding Contractors) v Paice and Brown v Complete Buildings Solutions Ltd), there was “real doubt” as to whether ISG v Seevic would be decided the same way now. He also thought it was difficult to reconcile ISG v Seevic with the ratio in Harding v Paice.

Fraser J noted that Harding v Paice was really about the meaning of “the dispute” referred to adjudication, as was Brown v Complete. In both instances, the earlier adjudication had only dealt with the contractual issue (was there a valid payment or pay less notice?). That earlier adjudication had not gone on to look at the valuation issue, that was left for the later adjudication. This meant the later adjudication dealt with a different dispute and the adjudicator had jurisdiction.

However, it is important to note that in Harding v Paice, Jackson LJ confirmed that the principle that the employer was “deemed to have agreed the valuation” did not apply to final accounts (which was something that Edwards-Stuart J had also said in Galliford Try v Estura).

But what does this mean?

If ISG v Seevic is about “timing, not substantive underlying rights”, as I read it, it means that an adjudicator asked to look at whether the employer’s paperwork is in order in relation to an interim application will follow ISG v Seevic and say that unless it is in order, the sum applied for is the sum due. However, it is only the sum due on the date of the contractor’s application/default payment notice. It is not the sum due at a later date (not even a day later). While there cannot be a subsequent adjudication to look at the value of that particular sum due, the employer will not be prevented from correcting its position in a subsequent payment cycle or at the final account stage. As Fraser J said:

“… the value of the works executed is not definitely determined by the figure in the interim assessment (or an adjudicator’s decision on that interim assessment). Nor could it sensibly be argued otherwise, given the nature of adjudication.”

He referred to O’Farrell J’s findings in Kersfield Developments v Bray & Slaughter, where the employer had argued that it was entitled to refer to adjudication the proper valuation of the works included in the contractor’s interim application. O’Farrell J rejected this argument:

“…where a particular interim payment has been fixed by the default notice mechanism under the contract, there is no contractual basis on which to revise that payment by reference to a proper valuation of the works and therefore there is no relevant dispute that can be referred to adjudication.”

However, this did not prevent the employer from challenging the value in a subsequent interim payment cycle or at the final account stage. She acknowledged that:

“… the default notice mechanism under the Act might result in unfairness or hardship to an employer in circumstances where the contractor received a windfall from the employer’s procedural failure. However, it simply regulates the cash flow as between the parties and does not affect their substantive rights.”

Consequently, Fraser J held that:

  • The amount that MMT was entitled to as final payment for the works was not definitively decided as the figure in the most recent interim assessment.
  • The accrued rights that ICI had under the contract as at 17 February 2015 included the right to recover any payment already made to MMT that was an over-payment.

Recovery of payments under an adjudicator’s decision

MMT argued that it was not putting “into issue” the sums the first and fourth adjudicators decided were due to it because:

“… they have already been determined in a finally binding adjudicator’s decision and in court proceedings, in [its] favour.”

Fraser J referred to MMT’s “rather bullish… approach to the sums paid to it by this route”, before he rejected the argument, finding that there was no “finally binding adjudicator’s decision” or “judgment on the merits”. Consequently, he held that ICI had the right to have the value of the two interim applications looked at again as part of the final accounting exercise following repudiation. He gave the parties four court days to argue over what the true value of MMT’s account is. It will be interesting to see whether the parties manage to reach the agreement he suggested they should, or whether there is “further wasteful and expensive litigation”.

Interestingly, one thing the judgment does not mention is that the parties’ NEC3 ECC contract would have included a clause that said that adjudicators’ decisions would be finally binding if not challenged within four weeks (clause W2.4(2) of Option W2). As there is no mention of either party serving a notice of dissatisfaction in relation to either adjudicators’ decisions, one wonders whether they had amended their contract to remove this provision (or whether it was something that Fraser J overlooked). Such a provision would explain MMT’s “bullish” approach to this point, particularly as we know the courts will uphold this provision.

That’s that sorted then. I think it is as clear as day, a grey, cloudy sort of day, because I’m sure there will be some parties that say that Fraser J has opened the door to counter-adjudications following a “smash and grab”. I’m sure it will not take long for one to find its way into my in-box!

MCMS Ltd Matt Molloy

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