REUTERS | Tom Brenner

TCC throws a lifeline to paying parties: “manifest injustice” trumps the statutory payment machinery

In 2015, one of the hot topics of the day (at least in construction circles) was the case of Galliford Try Building Ltd v Estura Ltd, where the TCC unusually ordered a partial stay of an adjudicator’s decision on the basis that to enforce the decision in full would result in “manifest injustice” to the paying party. There was a concern that the case would encourage a flurry of cases seeking to test the boundaries of that principle.

Indeed, since Estura, various attempts have been made to seek a stay on grounds of manifest injustice, but rarely have these cases been successful. This was not to be unexpected; the failure to secure a stay on the basis of “manifest injustice” simply emphasised the exceptional nature of the decision in Estura.

However, the recent case of JRT Developments Ltd v TW Dixon (Developments) Ltd is an example of where the TCC decided to buck the trend and follow Estura. In that case, the court ordered a stay of enforcement of a £1.15 million smash and grab adjudication decision obtained by JRT Developments Ltd (JRT) on the basis that in the “exceptional circumstances” of the case, there would be manifest injustice to TW Dixon (Developments) Ltd (TWD) if the judgment was not stayed.

In reaching that conclusion, the court considered “all of the circumstances of the case” and therefore took into account factors beyond those that had been identified in Estura as relevant. These factors included, significantly, the factual context in which JRT had submitted its payment application, which resulted in an adjudicator’s decision in its favour, and the nature of the sums claimed in that application.

JRT Developments Ltd v TW Dixon (Developments) Ltd

TWD was a company formed for the purposes of carrying out a development of 14 houses on a site in Shropshire. It was agreed that JRT would contract with TWD to construct the properties, infrastructure works and associated work, and that the project would be funded by a loan from the Homes and Communities Agency (HCA). JRT was engaged under a JCT Minor Works Contract with contractor’s design, 2011 Edition (the JCT contract).

During the three-year project, the parties did not operate the JCT contract’s payment procedure. Instead, Mr Woodcock of JRT engaged directly with HCA’s valuer, WYG, including by submitting details of JRT’s costs to WYG and attending site visits to enable them to value the work carried out. WYG carried out periodic valuations of the work pursuant to which HCA made payments and JRT issued invoices to TWD for the amounts approved by WYG for HCA. Those invoices were paid using the funding from HCA. At no time during the contract did JRT issue any payment application or raise an invoice for any sum exceeding the amount paid by HCA.

The relationship between the parties soured and on 13 June 2019, the JCT contract was terminated by JRT. At the date of termination, JRT has already been paid in full the amount of WYG’s valuation of its work. Post termination:

  • Mr Woodcock and Mr Neville of TWD engaged in a dialogue with a view to resolving financial matters.
  • On 28 June 2019, JRT sent to TWD an application for payment, identifying the amount due as at 1 June 2019 as £952,578.97. The application did not mention the JCT contract and JRT argued that this document was not a payment notice.
  • On 19 September 2019, JRT sent TWD a letter headed “Notice – default payment notice” reiterating JRT’s position and suggesting mediation.
  • There were then further exchanges between the parties but no agreement was reached.

The disputed payment notice

On 4 November 2019 JRT issued what it argued, and the adjudicator found, was a payment notice under clause 4.5.2 of the JCT contract (the “disputed payment notice”). It took the form of a letter headed “Payment notice in default” and read as follows:

“We therefore give you notice that as you have not issued a payment notice we issue our payment notice which identifies the amount we consider to have been due on 20 May 2019 and the basis on which that sum is calculated. For the avoidance of doubt the sum due on 20 May 2019 was £952,579 as attached.”

The disputed payment notice did not make reference to the JCT contract or its payment provisions. It also enclosed the same breakdown of the claim as had supported the June application. TWD did not appreciate the significance of this document and did not serve a pay less notice. Instead, TWD responded with a number of queries on the contents of the document.

Referral to adjudication

On 14 November 2019, being the first day on which it could do so, JRT referred the matter to adjudication, relying on the JCT contract’s payment provisions.

The adjudicator decided that the disputed payment notice was a valid payment notice pursuant to clause 4.5.2 of the JCT contract. Therefore, TWD owed JRT the amount demanded in it, having failed to serve a pay less notice.

Enforcement proceedings

On 10 March 2020, JRT issued proceedings and sought summary judgment to enforce the adjudicator’s decision.

On 22 April 2020, TWD issued Part 8 proceedings seeking a declaration that the disputed payment notice was not a valid payment notice. However, at a hearing in May 2020, the court determined that there was a substantial dispute of fact between the parties as to the terms of the contract, so that the claim was not suitable to proceed as a Part 8 claim. Because the claim was proceeding as a Part 7 claim, and to avoid a proliferation of proceedings, TWD amended the claim to include its claim for a true valuation of the sums due.

In the enforcement proceedings, TWD sought a stay of enforcement pursuant to CPR 83.7 (4) on the basis, inter alia, of the risk of manifest injustice if no stay was granted as a result of TWD’s inability to pay and all the circumstances of the case. TWD relied upon the decisions in Hillview Industrial Development (UK) Ltd v Botes Building Ltd and Estura.

Judgment

The court granted the stay on the basis that the facts of the case were “very unusual”. There were four factors that were fundamental to the court reaching this decision:

  • The manner in which JRT had received payments during the project was material. The dealings were informal in a way consistent with a joint venture arrangement. The court found that it was clear that TWD relied on JRT to manage the project, raise the funding required, and obtain payment from the funder during the course of the project. In fact, as at the date of termination, no demand or payment application had been made for TWD to pay any sum exceeding funding received from the HCA. The disputed payment notice was the first payment notice issued by JRT under the JCT contract, and it was issued several months after the contract had been terminated.
  • The circumstances in which the payment application had been submitted were relevant. While the court confirmed that the question of the validity of the disputed payment notice was a matter for separate proceedings, it nevertheless found that it was clear that TWD did not understand the effect of it or the need to serve a pay less notice, and was considering JRT’s claim with a view to seeking to resolve financial matters between the parties (and possibly through the mediation JRT had proposed). Conversely, the court considered it material that JRT was clearly setting TWD up for a smash and grab adjudication.
  • The sums claimed in the payment application itself were relevant. The court found that it was likely that at least substantial elements of JRT’s claim for payment in the disputed payment notice were not properly due to it at the time it issued the disputed payment notice. For example, it had claimed over £218,000 to which it had no entitlement as it had not paid Shropshire Council the sums included. Furthermore, the court appeared to accept the likelihood that sums were in fact repayable to TWD on a true assessment of the account.
  • The parties’ financial position was relevant. The judge found that TWD could not pay the judgment sum and would be forced into liquidation if it were required to do so. Also, if the claim was not stayed, TWD would be deprived of the opportunity to seek redress through the final account proceedings. TWD had issued its Part 8 claim promptly and did all it could to seek early determination of the issue of the validity of the disputed payment notice, hoping to avoid judgment being entered. The judge held that it was also clear that, if the judgment was not stayed, TWD would recover little, if any, of the judgment sum following trial due to the financial situation of JRT (the test in Wimbledon v Vago was satisfied). The court therefore concluded:

“In the exceptional circumstances of this case, there would be manifest injustice to TWD if the judgment were not stayed.”

Discussion

Whilst the decision again emphasises that each case will turn on its own facts, there are two important points that arise from the judgment:

  • While TWD expressly conceded that a technical adjudicator’s decision based on the failure to serve a pay less notice was as every bit as enforceable as a decision in which the adjudicator has adjudicated on the value of a payment notice, the court was prepared to take into account the way that JRT obtained the adjudicator’s decision in awarding a stay.
  • While TWD also expressly conceded that it was not appropriate to ask the court on the application for a stay of enforcement to consider in any detail the merits of the arguments as to the amount that would be payable on a true value adjudication, the court was prepared to take into account, as part of the context to TWD’s application, that certain sums included in the disputed payment application were sums that were clearly not payable to JRT and for which there was no explanation as to why they have been included.

Accordingly, this judgment confirms that parties in a similar position to TWD should look to explore “all the circumstances of the case” to see if there are grounds for a stay on the basis that it would be manifestly unjust to enforce the adjudicator’s decision. In doing so, they should not automatically rule out as irrelevant arguments based on factual context in a smash and grab dispute, nor those relating to the true value of works carried out. However, it is still the case that the emphasis is on the “unusual” and it remains to be seen whether other cases can overcome this hurdle based on their own facts.

Brenna Conroy was instructed on behalf of the defendant, TWD, by Tris Tucker at Foot Anstey LLP.

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