Out-Law Legal Update
Tribunal: no UK tax deduction as company did not carry on management activities itself
Partner, Co-head of International Arbitration
Out-Law Analysis | 22 Jan 2020 | 5:08 pm | 16 min. read
It was a year in which the court:
Smash 'n' grab payment claims, where the payee claims for the full amount set out in an application where the payer fails to serve a valid pay less notice in time, have been a hot topic in recent years. In Grove Developments v S&T (Grove) in 2018, the Court of Appeal held that the infamous ISG v Seevic case was wrongly decided and overruled the idea that a failure to serve a pay less notice was equivalent to an agreement as to the value claimed by the contractor. Faced with a smash 'n' grab, an employer could adjudicate in relation to the true value of the same payment, but not until the sum awarded in the smash 'n' grab adjudication had first been paid.
However, the legal basis for this was not clear, and the Grove case left many unanswered questions. Is it a point that went to the adjudicator's jurisdiction, so that he should resign? When can, and when should, a 'true value' adjudication be commenced? Could it even be started before payment of the smash 'n' grab, or before a smash 'n' grab adjudication is started? It was therefore doubtful that Grove would be the final case on this topic.
The decision in the Davenport case appears to leave the door open to a party to commence a true value adjudication before payment of the smash 'n' grab.
In Davenport Builders v Greer in February 2019, Mr Justice Stuart-Smith had to consider whether the employer, Greer, was entitled to commence or rely on its true value adjudication in circumstances where it had not paid the sum awarded in an earlier smash 'n' grab adjudication.
The judge reviewed the Court of Appeal decisions in Grove and in Harding v Paice, in which the Court of Appeal held that termination accounts could be the subject of a second adjudication as to true value. He concluded that these decisions established that "an employer [on the wrong end of a smash 'n' grab decision] must discharge that immediate obligation [to make payment] before he will be entitled to rely upon a subsequent decision in a true value adjudication.
Greer had not discharged its immediate obligation to pay the sums awarded and so could not rely on the subsequent true value decision. There could therefore be no set-off. The contractor, Davenport, was given summary judgment enforcing the smash 'n' grab decision, and Greer then had to seek repayment.
The judge in this case acknowledged that the decision in Grove clearly stated that a true value adjudication cannot even be commenced before payment of the notified sum. However, he appeared to consider that this may have gone too far. He referred to Harding v Paice, where the true value adjudication was commenced before the smash 'n' grab decision had been paid and yet the Court of Appeal did not in that case suggest it was invalid - just that it could not be relied on.
This means that, despite what was said in Grove, the decision in the Davenport case appears to leave the door open to a party to commence a true value adjudication before payment of the smash 'n' grab. This tends to support the view that a true value adjudicator would have jurisdiction.
It is well established that an adjudicator's decision will normally be enforced by summary judgment unless the adjudicator lacked jurisdiction or committed a material breach of natural justice. However, we still see attempts to resist enforcement on the grounds of breach of natural justice, including in two cases reported in the summer of 2019. In both cases, the adjudicator's decision was enforced.
The cases reinforce the strong warning about natural justice challenges given by the Court of Appeal in the Carillion case in 2005, in which it was made clear that the courts will enforce an adjudicator's decision "unless it is plain that the question which he has decided was not the question referred to him or the manner in which he has gone about his task is obviously unfair". In most cases, resisting enforcement on this ground will be a waste of time and money.
The first case was Rhatigan v Rosemary Lodge Developments (RDL). RDL engaged Rhatigan to construct six new houses for £6.2 million. Rhatigan contended that the final account had been agreed at £8.6m and applied for payment of that sum. RDL denied that the final account had been agreed. The following month, Rhatigan applied for payment of a much greater sum, £12.4m. RDL then referred the value of the account to an adjudicator.
RDL argued that a binding agreement had not been concluded. Its witnesses described the discussions as "without prejudice" and relied on the fact that a draft deed of variation had been tabled but not finalised or executed. It also argued that it had been made clear that funders' approval of the settlement would be required.
In his decision, the adjudicator said that he had considered all the evidence and concluded that the final account had been agreed at £8.6m. He did not specifically address RDL's defence that there was no intention to create legal relations. Instead he said that the lack of an executed deed was irrelevant as there was "a binding oral agreement". The adjudicator also did not specifically comment on one particular witness statement which described how RDL's hands were tied until it obtained sign-off from the funders.
RDL resisted enforcement on the grounds that the adjudicator had failed to deal with a potentially determinative matter and as a result the process was materially unfair and in breach of natural justice.
The second case on natural justice was RGB P&C Ltd v Victory House General Partner Ltd. Victory House engaged RGB to convert an office building in Leicester Square into a boutique hotel. Practical completion was more than 15 months late. RGB's final statement was for over £11m. Victory House's assessment was £6m. The final statement was accompanied by a report from a delay expert indicating that RGB was entitled to a full extension of time on the basis that four 'relevant events' as defined by the contract had taken place. Victory House, relying on its own delay expert, disputed this and sought to deduct liquidated damages.
Victory House referred the dispute to adjudication, including the entitlement to an extension of time. This backfired when the adjudicator awarded most of the extension of time and a balance of £1.2m in favour of RGB.
During the adjudication, the adjudicator reviewed the delay report relied on by RGB. The report took the project's baseline programme as a starting point, but RGB's expert then adjusted some of the links and added more before carrying out an impacted as-planned analysis. The adjudicator questioned both parties' delay experts and obtained a native copy of the adjusted programme. He concluded that the adjustments had not been adequately explained and lacked rigour, and reinstated the original programme logic. He then went on to carry out his own analysis of the delay caused by the relevant events.
Victory House complained that there was no notice from the adjudicator that he might determine that the critical path was different from that advanced by RGB. It argued that it didn't have the opportunity to put its own version of the critical path or to comment on the adjudicator's analysis.
The two adjudicator decisions were both enforced. In the Rhatigan case, the judge felt that although the adjudicator had overlooked one of the witness statements, he had considered in broad terms whether there was a binding final account agreement. His failure could therefore be characterised as one of failing to take into account an element of the evidence rather than a crucial defence. The possibility of this type of error is inherent in the adjudication system.
In the Victory House case, the judge said that the adjudicator's critical path analysis "might well appear to be one which the parties ought to have had an opportunity to comment on". However, it should have been clear to the parties that the adjudicator was asking his questions, and had requested the native programme, so that he could interrogate the logic links and modify the programme where necessary. This line of inquiry was within the adjudicator's jurisdiction, and natural justice considerations will not be allowed to constrain such an inquiry.
The principles relating to allegations of fraud raised in the context of an adjudication enforcement date back to the 2010 case of SG South v King's Head Cirencester LLP. They are:
There were two significant decisions in 2019 in which parties attempted to resist enforcement on the basis of fraud.
In Grandlane v Skymist, Grandlane was appointed to manage a development including engaging any necessary consultants. It appointed PTP as architects. The parties fell out and Skymist, the employer, terminated Grandlane's appointment. Grandlane claimed for fees of about £480,000 to the end of September 2017, including those of PTP. Nine months later, Grandlane made a revised claim of £1.6m, including more than £1.2m in respect of PTP's fees. A significant part of these fees were based on a percentage of estimated construction costs.
An adjudicator found that just over £1m was due. However, on enforcement, Skymist alleged that the decision was tainted by fraud. Alongside the enforcement proceedings, Skymist had applied to the commercial court for pre-action disclosure of documents. It took the view, on the basis of those documents, that Grandlane had colluded with PTP to inflate the claim. The disclosed documents showed that PTP would contribute to Grandlane's legal costs and the adjudicator's fees and there was a suggestion, although not evidenced, of a secret commission.
One difficulty for Skymist was that it did not raise any suspicions about possible fraud during the course of the adjudication, even though its owner had suspicions and Grandlane was asked to provide its correspondence with PTP.
The judge reviewed the evidence obtained in the pre-action disclosure in considerable detail. She concluded that it did not indicate either that Grandlane and PTP colluded to inflate PTP's claim or that Grandlane was to benefit financially from it. The judge held there was no clear and unambiguous evidence of fraud. Regardless, the alleged fraud, as a defence to the claim in the adjudication, could and should have been raised in the adjudication. It was too late to do so at enforcement.
The second case on fraud was PBS Energo v Bester Generacion, which concerned a biomass fired energy plant in Wrexham where all the parties fell out and the project stalled.
PBS referred a dispute about the value of its work to adjudication. The adjudicator assessed that Bester was liable to pay PBS £1.7m. During the course of the adjudication, PBS informed the adjudicator that equipment it had manufactured for the project was stored in its factory in the Czech Republic and held to Bester's order, available for collection upon payment of the sums found due. On that basis, the adjudicator rejected an argument by Bester that PBS could mitigate its losses by selling the equipment, holding instead that the equipment belonged to Bester and should be collected by it.
Bester found out after the adjudication that certain pieces of equipment had been sold by PBS and installed in a plant in Poland.
On enforcement, the judge held that the representations to the adjudicator that all the equipment was still available were false and there was good evidence that PBS knew they were false. PBS had obtained the decision by fraud. The judge was also satisfied that Bester could not have raised the fraud allegations during the adjudication, as disclosure of the relevant documents in the underlying litigation had not been given to Bester in time for the fraud to be identified in the adjudication.
PBS argued that, even if credit was given for the equipment sold, there were still valuable items of equipment stored in good condition on Bester's order. Those parts of the decision should therefore be severed and enforced. The judge refused. The adjudication award had been procured by fraud and as such none of it would be enforced.
In January 2019, in two appeals heard together, the Court of Appeal had to decide whether an adjudicator has jurisdiction to decide disputes where the referring party is in insolvent liquidation or the subject of a company voluntary arrangement (CVA), and whether such decisions would be enforced by the courts.
The first appeal was in the case of Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited. The judge at first instance had decided that an adjudicator did not have jurisdiction to decide a dispute referred by Bresco, a company in insolvent liquidation, and granted an injunction restraining the adjudication from continuing. The judge's reasoning was that, on the insolvency of Bresco, the disputes under the construction contract had "ceased to exist and had become disputes in the insolvency, which the adjudicator did not have the power to decide.
The second appeal was in the case of Cannon Corporate Limited v Primus Build Limited. The judge at first instance had granted summary judgment in favour of the referring party, Primus, a company subject to a CVA, and had refused to stay enforcement. Cannon had not challenged the adjudicator's jurisdiction on the basis of Primus being subject to a CVA, but sought to do so on appeal.
Giving the lead judgment in both appeals, Lord Justice Coulson decided that, technically, an adjudicator has "theoretical jurisdiction" where a dispute is referred to adjudication by a company in insolvent liquidation or subject to a CVA. However, his decision gave rise to different outcomes on the enforcement issue.
In the Bresco appeal, Lord Justice Coulson maintained the injunction granted by the trial judge but on grounds of lack of utility, rather than jurisdiction. In reaching this decision he identified a fundamental incompatibility between adjudication and insolvency. Looking at earlier case law, he said that it was only in "exceptional circumstances" that a company in insolvent liquidation, and facing a cross-claim, could refer a claim to adjudication, succeed in that adjudication, obtain summary judgment and avoid a stay of execution of enforcement. He concluded that an adjudication held in circumstances in which it would never be enforced was an "exercise in futility" which the court should restrain by way of injunction.
In the Cannon appeal, he agreed with the trial judge that there was no general rule preventing enforcement when the enforcing party is in a CVA, even if it had a cross-claim. This is because a CVA is designed to try to allow a company to trade its way out of trouble and, in those circumstances, adjudication may be "an extremely useful tool". He therefore confirmed the trial judge's decision to grant summary judgment to Primus and to refuse a stay of enforcement.
Later in 2019, in Meadowside Building Developments Ltd (In Liquidation) v 12-18 Hill Street Management Company Ltd, the High Court decided that the 'exceptional circumstances' in which the court would enforce in favour of an insolvent company included an adjudicator's decision determining the final net position between the parties under the relevant contract, provided that adequate security was in place so that money paid on enforcement to the insolvent company would be returned in full if it was later found not to be due.
This is a developing, and therefore uncertain, area of law. The Bresco part of the Court of Appeal decision is being appealed to the Supreme Court and will be decided in April 2020.
It is well-established that if jurisdictional objections are not made at the outset of an adjudication the responding party will, by continuing to participate in the adjudication, usually be taken to have waived its right to object to the adjudicator's jurisdiction.
This was underlined in the case of ICCT Limited v Sylvein Pinto, decided in spring 2019. The judge held that a residential occupier had waived the right to raise any jurisdictional objection on enforcement where, in ignorance of the statutory exception under the Construction Act, he had participated in an adjudication without reserving his rights.
The danger of participation without an effective reservation of rights has led to responding parties making general reservations which purport to reserve the right to raise jurisdictional objections in the future. The effectiveness of these general reservations was considered by the Court of Appeal in the Cannon v Primus case, above, where Cannon wished to argue that the adjudicator had no jurisdiction because Primus was the subject of a CVA.
Cannon had not raised the CVA point specifically during the adjudication, although it had raised other jurisdictional points which the adjudicator had rejected. It had, however, made a general reservation of rights at the outset of the adjudication in which it "reserve[s] its right to raise any jurisdictional and/or other issues, in due course, whether previously raised or not and whether within the forum of adjudication or in other proceedings".
Lord Justice Coulson reviewed the adjudication case law on waiver and general reservations. He described general reservations as "undesirable" and said they may not be effective if a specific objection could and should have been raised earlier, or the general reservation is worded to try to ensure that all options - including ones not yet even thought of - could be kept open. He described Cannon's reservation as "so vague ... as to be ineffective" and "the sort of approach to adjudication which ... the courts should be vigilant as to discourage". He held that by not raising the objection earlier, when it was or at least should have been known to it, Cannon had waived the right to raise it on appeal.
Later in the year, the High Court applied these principles to dismiss a jurisdictional objection raised for the first time at the enforcement stage on the faith of a general reservation, in Ove Arup v Coleman Bennett.
In February 2019, the High Court decided the first ever case on the statutory 'slip rule' as reflected in the amended Scheme at Regulation 22A.
The slip rule requires construction contracts to include provision in writing to permit an adjudicator to remove clerical or typographical errors arising by accident or omission from their decision.
Axis was engaged by Multiplex as an M&E subcontractor for a residential development in Kensington, London. Axis referred a dispute to adjudication concerning Multiplex's valuation of a number of variations and its entitlement to make, and valuations of, a number of contra-charges. An adjudicator was appointed under the Scheme and issued a decision in which he decided that there was a net balance in Multiplex's favour and therefore no sum was due to Axis. On that basis, he ordered Axis to pay his fees.
Unfortunately there was a mistake in his decision. In calculating the sums due, the adjudicator had erroneously deducted his valuation of the contra-charges, roughly a quarter of a million pounds, from the sum certified by Multiplex, which already included a deduction for contra-charges of over £750,000. The calculation in the original decision therefore deducted a total sum for contra-charges of over £1m, rather than the adjudicator's valuation of less than a quarter of that amount.
Adjudication in insolvency is a developing, and therefore uncertain, area of law.
Once made aware of his mistake, the adjudicator issued a corrected decision which removed the error, resulting in a net balance due in Axis' favour. The adjudicator also made consequential changes to his decision, including ordering Multiplex to pay his fees and adding interest to the sum now ordered to be paid to Axis. Axis sought to enforce the amended decision and Multiplex resisted, saying that the changes made by the adjudicator were invalid under the slip rule.
In the High Court, the judge said that the starting point was to consider the dispute which had been referred to the adjudicator. He said that the referral notice made it clear that the principal issues the adjudicator had to decide were:
The judge said that once these issues had been determined the amount, if any, payable by Multiplex to Axis would follow as a matter of arithmetic.
There was no suggestion, on the facts of the case, that the adjudicator had made an error in determining these issues. The judge held that the error had therefore arisen in the maths carried out to give effect to his decision on those issues. As such, the correction was not a reconsideration of his decision, and fell within the statutory slip rule.
The judge then went on to consider what he described as "the novel point", namely whether the adjudicator was right to go further and correct his decision by awarding interest and reversing his decision on the payment of his fees. Guided by arbitration case law, the judge decided that the adjudicator was right to do so. He said that, once an adjudicator decides to correct an initial error then the adjudicator is not just permitted, but required by the interests of justice, to make any corrections consequent upon the correction.
20 Jun 2019
27 Feb 2019
Out-Law Legal Update
Tribunal: no UK tax deduction as company did not carry on management activities itself
Partner, Co-head of International Arbitration