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“Manifest injustice” warrants partial stay of adjudication enforcement

By now, I’m sure you will have seen (or heard about) Edwards-Stuart J’s judgment in Galliford Try v Estura and will, no doubt, have formed your own view as to the implications for adjudication, both in terms of a party’s ability to start a counter adjudication following a “smash and grab” adjudication, and also with regard to issues that will be raised in enforcement proceedings.

While much may be written about the payment side of things, I rather covered that off when I wrote about  Edwards-Stuart J’s judgment in Harding v Paice and Jonathan addressed the issues  following Edwards-Stuart J’s judgment in ISG v Seevic. What I want to concentrate on are the “manifest injustice” points.

Galliford Try v Estura

This case was all about the Salcombe Harbour hotel in Devon. It all looks rather fancy now, following its multi-million pound makeover. However, things did not go smoothly.

Galliford Try (the contractor) referred to adjudication a dispute over its interim application for payment 60 (IA 60). It described this application as an “indicative final account and valuation summary”, and stated its anticipated final account would be £12.66 million (IA 60 was for a sum just £4,000 less than this). This was almost £5 million more than the contract sum.

In the adjudication, Estura (the employer) argued that the sum due under IA 60 was £147,000 (plus VAT). However, it didn’t really have a defence to the contractor’s claim because neither it nor its agent had served a payment or a pay less notice. Unsurprisingly, the adjudicator decided that without those notices, the contractor was entitled to the sum stated in IA 60 and ordered the employer to pay £3.928 million (plus VAT). A typical “smash and grab” adjudication you might think.

Shortly afterwards, the employer did what lots of paying parties have been doing over the years. It started a second adjudication, seeking a decision on the value of IA 60, arguing that it should be £9.892 million. A typical counter adjudication.

While, in the past, this counter adjudication may have resulted in a reduced amount payable to the contractor when IA 60 was valued, in light of the two judgments referred to above, the second adjudicator resigned due to a lack of jurisdiction, saying that it was not possible to:

“…open up the question of what the proper value of works actually was at the time of [IA 60].”

Estura argues “manifest injustice”

When it came to the enforcement proceedings, the employer raised some interesting arguments for why there should be a stay of enforcement, ones that I don’t recall seeing a paying party raise before. It accepted that, usually, a party that failed to serve the right notices on time could correct that situation following the next application or at final account. However, here there were several reasons why it may not be able to do this, including that:

  • IA 60 was the last interim application.
  • IA 60 was for almost the same sum as the contractor’s final account. The adjudicator’s decision meant there was no incentive for the contractor to submit a final account. Without a final account, there could be no dispute that the employer could refer to adjudication.
  • The employer lacked the funds to pay the adjudicator’s decision and also lacked the funds to finance litigation to ensure a proper valuation of the contractor’s final account.

It relied on HHJ Toulmin CMG QC’s judgment in Hillview Industrial Developments (UK) Ltd v Botes Building Ltd, where he said that the purpose of the Construction Act 1996 was to:

“…provide a statutory framework which would enable justice to be done between parties to a dispute. It was not intended to cause injustice. This can, in appropriate cases, be dealt with by the grant of a stay. I am satisfied that the jurisdiction in adjudication enforcement cases to grant a stay under the CPR must be limited to cases where there is a risk of manifest injustice.”

For reasons that caused me considerable surprise, Edwards-Stuart J was persuaded by the “manifest injustice” argument and granted a partial stay. The employer may now have to pay £1.5 million (plus VAT) to the contractor, but that must be a result considering it was looking at an adjudicator’s award of £3.9 million.

A coach and horses?

How often have commentators talked about the “rough justice” of adjudication, or referred to its “pay now, argue later” ethos? To borrow from Dyson J in Macob Civil Engineering Ltd v Morrison Construction Ltd, it seems to me that Edwards-Stuart J may have just allowed a coach and horses to be driven through the Construction Act 1996.

In granting a partial stay, he said:

“I have come to the conclusion that, in the very unusual circumstances of this case, that [refusing a stay] would not be fair to Estura. I should make it very clear that I regard the facts of this case as being exceptional, and those in the industry should take note that the course that I propose to adopt in this case will be appropriate only in rare cases.”

“appropriate only in rare cases”

I can see the arguments being written by paying parties now. I wonder how rare these exceptional cases will prove to be?

5 thoughts on ““Manifest injustice” warrants partial stay of adjudication enforcement

  1. Hi Matt – this occurred to me. What if a ‘substantial injustice’ argument is then run as a defence within an adjudication and the adjudicator decides on that? Could something already recognising an ‘injustice’ then be part-stayed for more of an ‘injustice’ than the adjudicator decided?

    In reality, presumably adjudicators really have to carry on dealing with payment on the basis of the notices, not have jurisdiction to look at opening up the valuation issues (as ISG v Seevic) and then, probably for any sum awarded over, say, £250k (or wherever the enforcement cost/benefit risk is) the parties end up having the ‘risk of substantial injustice’ day in court without much evidence as to whether there is one or not?

  2. I predict that we may well see some manifest injustice defences within adjudication, especially if the facts match and/or are similar to this case. I wonder whether the result could be that a declaration is made but no order for payment, leaving that matter for the court. Interesting times.

  3. Manifest injustice here is not a defence as such – there were no grounds for refusing summary judgment – it was merely stayed. That stay is also overturnable if evidence on the losing party’s ability to pay comes to light. This decision is not based on the contractual point, nor is it a jurisdiction challenge – as I read it, is more the Court exercising its discretion when it comes to Court procedure.

    I would worry that an adjudicator who declined to make a money award on the basis of a similar manifest injustice point might face a jurisdiction challenge if he declined to do so as I think he would struggle to find a legal basis for doing.

    The safe option would probably to make the award as normal but flag manifest injustice as an issue. Alternatively, it might be an option to make a money award but defer payment.

    In this case it might have been possible to do something like having the final date for payment for the award sum falling due some time after the final account application had been made, so that the liability for the award could be factored into the final account – in effect enabling the parties to set off the award when calculating the final account. I am not sure that this would work with the prohibition on setting off adjudicator’s awards – but worth looking at.

  4. What ever arguments the parties raise in adjudication going forwards, I think this judgment warrants a change in how parties have, to date, viewed the need to issue payment and pay less notices, and their approach to counter adjudications.I have no idea how often the party resisting payment gets it right but, in future, there seems to be little room for a cavalier attitude to these notices.

  5. My take is that the proper course of action is for the adjudicator to apply the terms of the contract. I do wonder whether the potentially draconian effect of a default payment notice should mean that strict compliance is required, as is the case with notices of termination etc.

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