Introduction

Regular readers may recall my blog, “‘Smash and grab’” adjudications: when can the paying party commence a ‘true value’ adjudication?”, published in December last year. In that blog, I considered the question as to whether – and, if so, when – a paying party is entitled to commence a true value adjudication in circumstances where it has failed to issue the required payment and/or pay less notices to the payee.

I suggested that, following the obiter comments of Stuart-Smith J in M Davenport Builders Limited v Greer [2019] EWHC 318 (TCC),clarification was required from the Court as to the circumstances (if any) in which the Court may decide not to restrain a true value adjudication commenced before the paying party has complied with its immediate payment obligation under section 111 of the Construction Act.

Fortunately, we haven’t had to wait long for that clarification – enter, Bexheat Limited v Essex Services Group Limited [2022] EWHC 936 (TCC).

Bexheat Limited v Essex Services Group Limited

Background

Essex Services Group Limited (“ESG”) was the mechanical, electrical and plumbing (“MEP”) subcontractor on a project for the construction of a residential and care facility. By a contract entered into in October 2019, ESG sub-subcontracted the plumbing aspects of its MEP works to Bexheat Limited (“Bexheat”). The contract made provision for interim payments to be made on specified dates (as detailed in the payment schedule appended to the contract).

On 19 July 2021, Bexheat submitted its interim application for payment no. 22 (“Payment Application 22”) for the period up to 31 July 2021 in the gross sum of £1,832,071.87, and seeking a net payment of £678,885.78. On 13 August 2021, ESG issued a Pay Less Notice in respect of Payment Application 22, by which it calculated a net sum due to Bexheat of £4,808.44.

Shortly thereafter, Bexheat referred the dispute to adjudication (the “First Adjudication”), seeking a determination on the true value of Payment Application 22. On 12 October 2021, the adjudicator delivered his decision in the First Adjudication, concluding that the true value of Payment Application 22 was £1,319,830.61, and that payment of the sum of £141,646.35 was due to Bexheat. ESG complied with that decision, making payment in full to Bexheat.

On 17 August 2021 – one day prior to Bexheat commencing the First Adjudication – Bexheat issued its interim application for payment no. 23 (“Payment Application 23”) for the period up to 31 August 2021 in the gross sum of £2,010,121.74, and seeking a net payment of £847,675.97. On this occasion, however, ESG served its Pay Less Notice one day late.

" Whilst Davenport may have muddied the waters somewhat, O’Farrell J’s judgment in Bexheat v ESG helpfully builds upon S&T v Grove by confirming that a paying party is precluded not only from starting a true value adjudication, but also from relying on an earlier true value adjudication before complying with its immediate payment obligation. "

ESG did not make any payment to Bexheat in respect of Payment Application 23, and so, on 18 October 2021, Bexheat commenced a further adjudication (the “Second Adjudication”), by which it sought payment of the sum of £706,029.70 as the sum applied for under Payment Application 23 (accounting for the sum paid by ESG in respect of Payment Application 22), i.e. a “smash and grab” adjudication in the absence of a valid Pay Less Notice.

On 12 November 2021, the adjudicator delivered his decision in the Second Adjudication. He decided that ESG had failed to issue a valid Pay Less Notice and that the sum claimed by Bexheat in respect of Payment Application 23 became the notified sum and was to be paid by ESG.

ESG failed to make payment of the Second Adjudication award, and so Bexheat commenced enforcement proceedings. ESG resisted enforcement on a number of grounds, the foremost of which was that the true value of Payment Application 23 had already been determined in the First Adjudication – that is, that the decision in the First Adjudication was a binding decision as to the true value of Bexheat’s entitlement under Payment Application 23.

Judgment of O’Farrell J

The key question considered by Mrs Justice O’Farrell was the impact (if any) of the decision in the First Adjudication upon the enforcement proceedings in respect of the Second Adjudication.

ESG argued that the decision in the First Adjudication was binding on the true value of Bexheat’s entitlement under Payment Application 23, and whilst ESG accepted that the case law required the paying party to make payment under the notice provisions before commencing a true value adjudication, it argued that this case could be distinguished from the existing case law on the basis that there was already a pre-existing and binding true value adjudication decision – the decision in the First Adjudication.

Bexheat argued that the dispute in the First Adjudication had concerned the true value of its Payment Application 22 and did not determine the true value of Payment Application 23. Instead, its claim in the Second Adjudication simply concerned ESG’s failure to provide the required notices in respect of Payment Application 23. At the time that it issued its Payment Application 23, it had not yet commenced the First Adjudication – so, the subsequent decision in the First Adjudication could not affect the validity of Payment Application 23 – and, in any event, ESG had not raised any jurisdictional challenge in the Second Adjudication based on the true valuation in the First Adjudication.

The starting point for O’Farrell J’s analysis was to consider the scope of the First and Second Adjudications and to determine whether the dispute in the First Adjudication was the same or substantially the same as the dispute in the Second Adjudication. The judge found that, whereas the dispute referred in the First Adjudication concerned the true valuation of Bexheat’s entitlement in respect of Payment Application 22 for the valuation period up to 31 July 2021, the dispute referred in the Second Adjudication concerned the question as to whether ESG had served a valid Pay Less Notice in respect of the subsequent Payment Application 23 (for the period up to 31 August 2021). As such, the dispute in the First Adjudication was not the same or substantially the same as the dispute in the Second Adjudication.

Thereafter, O’Farrell J considered what the two adjudicators had actually decided. The adjudicator in the First Adjudication had decided the true value of Bexheat’s Payment Application 22, whereas the adjudicator in the Second Adjudication decided that, in the absence of a valid Pay Less Notice, Bexheat was entitled to payment in full of the notified sum claimed in Payment Application 23. The dispute decided by the first adjudicator was, therefore, not the same or substantially the same as the dispute decided by the second adjudicator.

O’Farrell J also rejected ESG’s argument that it was entitled to rely upon and enforce the First Adjudication true value decision against Payment Application 23, even though it had failed to serve a valid Payment Notice or Pay Less Notice in respect of that application. The basis for ESG’s argument in this regard was that, whilst S&T v Grove prohibited a paying party from commencing a true value adjudication after it had failed to serve a valid Pay Less Notice, there was nothing in S&T v Grove or any of the subsequent authorities that prohibited the true value of an application being adjudicated upon and decided prior to the sum falling due and prior to the paying party being potentially debarred from such a course of action as a consequence of failing to issue a valid Pay Less Notice.

Whilst O’Farrell J noted that this argument had a “superficial attraction”, she rejected it for the following reasons:

  • The decision in the First Adjudication was limited to the true value of the works in respect of Payment Application 22 for the valuation period up to 31 July 2021, whereas the relevant valuation period for Payment Application 23 was up to 31 August 2021 – and that period had not been adjudicated upon;
  • Regardless of whether the true valuation would be the same for both Payment Application 22 and Payment Application 23 (and, therefore, binding on the Parties such that no further payment was due to Bexheat), ESG had not reserved its jurisdictional position in this regard in the Second Adjudication. As such, following the Court of Appeal’s judgment in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) [2019] EWCA Civ 27, it was now precluded from seeking to raise that jurisdictional ground; and
  • ESG’s argument in this regard ignored the immediate payment obligation created by s.111 of the Construction Act. If ESG had wished to rely upon the First Adjudication true value decision against any further payment sought by Bexheat in Payment Application 23, ESG could, and should, have raised that in a Pay Less Notice. However, ESG failed to do so, and the sum claimed by Bexheat in Payment Application 23 became the notified sum which – in compliance with its immediate payment obligation under s.111 – ESG was required to pay.

O’Farrell J then moved on to consider ESG’s further grounds for resisting enforcement. In summary:

  • ESG argued that it had a contractual entitlement to set off against the Second Adjudication decision any sums which may, at any time, be due or have become due from Bexheat to ESG. However, O’Farrell J confirmed that such an unqualified set-off provision is contrary to s.108 of the Construction Act (and also to paragraph 23(2) of the Scheme), which provides that the decision of an adjudicator is binding on the Parties until the dispute is finally determined. The limited exceptions set out in Thameside Construction Co Ltd v Stevens [2013] EWHC 2071 did not apply in this case, and so ESG was not entitled to set off against the Second Adjudication decision;
  • ESG submitted that it was entitled to rely upon its unilateral contractual right to “elect [that] the Adjudicator shall be entitled to adjudicate on more than one dispute at the same time” to have the same adjudicator adjudicate both the notified sum and the true value dispute at the same time, which would have enabled ESG to set off one decision against the other. ESG argued that Bexheat had refused to allow it to exercise this entitlement. However, O’Farrell J noted that this provision was inconsistent with both s.111 of the Construction Act and paragraphs 8 and 20 of the Scheme; and
  • A stay of execution of the enforcement proceedings was not necessary. Applying the principles set out in Wimbledon Construction Company 200 Ltd v Vago [2005] EWHC 1086, O’Farrell J decided that Bexheat’s accounts demonstrated that it was an ongoing concern and was not insolvent, and that its financial position was substantially the same as it was at the time the Parties entered into the contract (with any adverse movement in Bexheat’s financial position being because ESG had failed to pay the sums awarded in the Second Adjudication).

In light of the above, O’Farrell J decided that the decision in the Second Adjudication was valid and enforceable, and that Bexheat was entitled to summary judgment accordingly. Importantly, in coming to that decision, O’Farrell J analysed section 111 of the Construction Act, the Court of Appeal’s judgment in S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448, and the judgment of Stuart-Smith J (as he then was) in the TCC case of M Davenport Builders Ltd v Greer [2019] EWHC 318 (TCC), and, having done so, helpfully provided the following summary:

  • Where a valid application for payment has been issued by the payee, a paying party who fails to issue a valid Payment Notice or Pay Less Notice must pay the notified sum in accordance with s.111 of the Construction Act;
  • Section 111 creates an immediate obligation to make payment of the notified sum;
  • A paying party is entitled to exercise its right to adjudicate pursuant to s.108 of the Construction Act to establish the true value of the work and potentially requiring the repayment of the notified sum by the payee;
  • However, the entitlement to commence a true value adjudication under s.108 is subjugated to the s.111 immediate payment obligation; and
  • Therefore, unless, and until, a paying party has complied with its immediate payment obligation under s.111, it is not entitled to commence, or rely upon, a true value adjudication under s.108.

Conclusion

As our regular readers will be aware, and as I noted in my abovementioned December blog, following S&T v Grove, a paying party will generally not be permitted to commence a true value adjudication before it has complied with its immediate payment obligation under s.111 of the Construction Act.

Whilst Davenport may have muddied the waters somewhat, O’Farrell J’s judgment in Bexheat v ESG helpfully builds upon S&T v Grove by confirming that a paying party is precluded not only from starting a true value adjudication, but also from relying on an earlier true value adjudication before complying with its immediate payment obligation. Whilst we would repeat that, in our view, the point at which the paying party’s immediate payment obligation arises may be arguable from case to case, Bexheat v ESG has, therefore, provided some much-needed guidance in this area.