The Technology and Construction Court in Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd [2021] EWHC 2441 (TCC) held that an Adjudicator’s decision not to consider a line of defence was a breach of natural justice and was not enforceable, nor could part of the decision be severed. The case also contained interesting commentary as to the ‘intent’ behind the issuing of a payment notice, and how this may affect the validity of the notice. 

Background 

Downs Road Development LLP (the Employer) employed Laxmanbhai Construction (UK) Ltd (the Contractor) in connection with the demolition of buildings and development of land under an amended form of the standard JCT Design and Build Contract (the Contract). Under the Contract, a periodic payment scheme applied requiring the Contractor to make interim applications for payment. A dispute arose concerning the correct sum due under interim application 34. In response to the Contractor’s application 34, the Employer issued a Payment Notice 34 on 3 March 2021, assessing a net payment due of £0.97. This was followed six days later by Payment Notice 34a, which assessed a net payment of £657,218.50. 

Adjudication

The Contractor referred the matter to adjudication for a determination of the correct sum due. The Employer submitted a cross-claim alleging losses suffered resulting from breaches of contract, including the non-provision of a warranty and defects in the design and build of a capping beam. 

The Adjudicator determined the sum due under interim payment application 34, but held that he did not have jurisdiction to consider the cross-claim. 

Technology and Construction Court (TCC) action 

The Employer raised a claim at the TCC seeking a declaration that the Adjudicator’s failure to address the cross-claim was a breach of natural justice and that the Adjudicator’s decision was unenforceable as a whole, resulting in there being no payment due by the Employer to the Contractor. However, unusually, the Employer also sought to sever and rely on the Adjudicator’s decision as to the gross valuation due to the Contractor, before taking account of any cross-claim. It argued that the parties should still be bound by the Adjudicator’s assessment of the gross valuation, as this was a “distinct” issue from the cross claim, and could still remain, notwithstanding the Adjudicator’s failure to consider the cross-claim.

The TCC held:

  • Payment Notice 34 was invalid because it did not accurately state the sum the Employer “considered” to be due, as required by section 110A of the Housing Grants Construction and Regeneration Act 1996; it was only a holding position, as evident by the covering email stating that a further notice would be issued, and from the issue of Payment Notice 34A only six days later, which assessed a substantially greater sum. The court therefore placed weight on what the Employer had “considered” at the time, as opposed to simply addressing whether the formalities of the notice had been complied with. 
  • A breach of natural justice had occurred and the Adjudicator’s decision was unenforceable. The Adjudicator had jurisdiction to determine the Employer’s cross-claim and should have. Following the approach in previous cases, the Adjudicator’s failure to consider and determine the cross-claim was a material failure because a decision on the cross-claim could have affected the overall outcome of the adjudication. Had the Adjudicator addressed the issues of the cross-claim, then the decision, whether right or wrong, would have been enforceable. 
  • The TCC held that a deliberate failure to address a material issue within the Adjudicator’s jurisdiction is a breach of the rules of natural justice. This contrasts with a situation where an Adjudicator has inadvertently failed to consider one of a number of issues, which will not ordinarily render the decision unenforceable (at least in England). This distinction is of questionable application in Scotland, according to recent case law, which suggests that even an inadvertent error could render a decision unenforceable, through a failure to exhaust jurisdiction.
  • Severance of an Adjudicator’s decision is possible where it leads to enforcement of part of a decision that is a stage in the process and where the remaining part is not significantly tainted by the invalid part. In this instance, however, the argument to sever the cross-claim aspect from the rest of the decision and to enforce the latter was rejected on the basis that this would lead to an artificial result that would turn a single decision with an accompanying explanation of reasoning into a series of separate decisions. 

Points to take away

Employers should ensure that Payment Notices are thorough, complete and issued on time, otherwise they may be found to be invalid, leaving them vulnerable to a future ‘smash and grab’ claim. Employers should also be careful not to give any indication that an amount stated in a payment notice is a holding response, or will be subject to change, as this may suggest that the sum in the payment notice is not what it “considers” to actually be due. 

 Adjudicators need to consider carefully what is within their jurisdiction. An unnecessarily restrictive view of their jurisdiction, such as failing to consider a material cross-claim, can lead to a breach of natural justice (and in Scotland, a failure to exhaust their jurisdiction) and an unenforceable decision. 

Severing part of an Adjudicator’s decision is only possible where the relevant part is not significantly tainted by the invalid part and can be safely enforced without producing an artificial result. In making that determination, a court will consider a number of factors within the Adjudicator’s decision, including whether it contains a series of independent decisions, and whether it is a single independent decision resulting from a connected chain of reasoning.

For further information, please contact Leigh Herd or Tara Davison of our commercial disputes team, or your usual Shepherd and Wedderburn contact.