Case report: Downs Road Development LLP v Laxmanbhai Construction (UK) Ltd [2021] EWHC 2441 (TCC)
September 2021In this Part 8 claim challenging the decision of an Adjudicator, the Court determined that a holding payment notice that did not set out a sum the paying party genuinely considered to be due was invalid.
In addition, the Court refused to sever the Adjudicator’s decision following a finding that the rules of natural justice had been breached by the failure to consider a defence arising from a crossclaim for defective works, and so the whole decision was unenforceable.
Background
Downs Road Development LLP (“the Employer”) employed Laxmanbhai Construction (UK) Ltd (“the Contractor”) to demolish existing buildings and erect new buildings containing 79 residential units. The form of contract was the JCT Design and Build Contract (2011 edition), clause 4 of which stated that the Contractor was entitled to receive interim payments from the Employer by way of periodic payments.
On 26th February 2021 the Contractor sent Interim Application 34 which stated the sum considered due totalled £1,888,660.70. Five days later the Employer responded, sending Payment Notice 34 as a holding measure which stated that the net amount for payment was £0.97. The covering email which was sent with Payment Notice 34 asserted that “we confirm a further payment notice will be issued to you in due course and will not affect your payment date.” The email from the Employer explained that they had been having difficulty “assessing the valuations in a timely manner” due to the valuations being sent close to the due date coupled with the vast amount of information contained within the supporting documents.
On 9th March 2021 the Employer sent to the Contractor Payment Notice 34a, containing the assessment that they had alluded to in their email dated 26th February. Payment Notice 34a stated that the sum payable was much less than the Contractor had originally notified, being £657,218.50. However, although the Employer later accepted that Payment Notice 34a was invalid for being out of time the made a payment in respect of it.
In April 2021, the Contractor referred to adjudication the question of “the correct sum due to the Referring Party in Interim Payment 34”. As part of its Response, the Employer advanced a cross claim stating that the Contractor had failed to build a capping beam in accordance with the contract documents, causing loss which it estimated at £149,000.
The Adjudicator declined to take this cross claim into account. He interpreted his jurisdiction in a narrow sense, concluding that at issue was the valuation of Interim Application 34 only, meaning the cross claim fell outside of his jurisdiction, and would therefore not be considered.
The Adjudicator gave his decision on 16th June 2021. Having carried out a ‘true value’ assessment of what was due under Interim Application 34, he held that the Contractor was due a further £103,880 after the payment made following Payment Notice 34a was taken into account.
Facts of current case
On 28th June 2021 the Employer issued a Part 8 claim seeking a declaration that the decision was unenforceable due to the Adjudicator misinterpreting his jurisdiction by failing to consider the capping beam cross claim.
Proceedings were brought before the TCC, with three main points at issue:
- The validity or otherwise of Payment Notice 34.
- The enforceability of the Adjudicator’s decision given the Employer’s cross claim was not considered.
- Whether (as the Employer claimed) part of the decision (relating to the amount of Interim Application 34) could be safely severed in the event the full decision was unenforceable.
The TCC Decision
Was Payment Notice 34 valid?
Section 110A (2)(a) of the Housing Grants, Construction and Regeneration Act 1996 provides that for a payment notice to comply with the subsection it must include “(i) the sum that the payer considers to be or to have been due at the payment due date in respect of the payment; and (ii) the basis on which that sum is calculated”. Payment Notice 34 did not comply with either of these requirements and was therefore, invalid.
Firstly, the Judge found that Payment Notice 34 did not constitute a valid payment notice because it did not contain within it a sum that the Employer genuinely considered to have been due. It was not realistic to contend that upon these facts the Employer genuinely believed the sum of £0.97 to be due. This was evidenced by the cover email which stated a subsequent payment notice was to follow, the qualification given by the Employer that they had been having trouble “assessing and responding to valuations in a timely manner”, and the markedly larger figure that was included in Notice 34a only six days later. Ultimately therefore, in order for a payment notice to be valid, it must contain within it a sum genuinely believed to be due.
The Employer had adopted this method as standard practice. During previous payment cycles they had sent initial payment notices of £1 or £0.97 as a holding measure to grant them more time, which would later be followed by an accurate assessment of what was due. The TCC found this was not an appropriate course of action to adopt, and it was not necessary to find evidence that the Employer was acting in bad faith.
Secondly, Payment Notice 34 did not set out the basis on which the sum had been calculated due to an absence of accompanying material leaving it unclear as to how the Employer arrived at the end figure.
Had there been a breach of natural justice?
The Judge found that the Adjudicator took an unduly narrow view of his jurisdiction. He failed to address a material issue which constituted a breach of natural justice, rendering the decision unenforceable.
A material issue was defined for these purposes as one which is shown to have had the potential to make a significant impact on the overall outcome of the adjudication. In this case, the capping beam cross claim was a material issue as had it been successful, no sum would have in fact been due to the Contractor in the adjudication (after the payment made in respect of Payment Notice 34a was taken into account).
Had the Adjudicator considered the capping beam claim and concluded that it did not operate to reduce the amount due, his decision would have been unimpeachable. However deliberately declining to address the claim was a different matter, and one which would render the decision unenforceable.
Could part of the decision be severed?
This question rested on one key issue: was the adjudication a series of decisions independent of each other or, was it more akin to a single decision resulting from a chain of reasoning.
If the decision comprised a series of independent decisions, it is feasible that part of the decision could be severed, as this would not lead to the artificial splitting up of one continuous chain of reasoning.
However in this case the Judge held that on these facts the Adjudicator’s decision amounted to a continuous chain of reasoning leading to one overall conclusion and the elements could not be considered to be a series of separate and freestanding decisions capable of being truly independent from one another. Therefore, no severance was granted and the entire decision was unenforceable.
Case Commentary
The Court’s decision in respect of the validity of Payment Notice 34 raises the interesting possibility of a sub-genre of ‘smash and grab’ claims, based on the invalidity of a payment notice meaning that by default the sum applied for becomes the notified sum which should be paid in full (if no valid pay less notice is issued).
To succeed, any receiving party will need to show that the paying party could not have subjective genuine belief that the sums included in payment notices and pay less notices are due. That may be difficult to establish particularly in an adjudication context, however in this case the Employer did not assist their position by the email sent with Payment Notice 34.
The difficulty to prove a lack of subjective genuine belief may have been why the Contractor in this case issued a true value adjudication rather than a smash and grab adjudication.
In addition, having issued Payment Notice 34a the Contractor was aware of what would have been included in a true value adjudication issued by the Employer if the Contractor had of started a smash and grab adjudication.
One clear take-away from this decision is that paying parties should be advised against sending holding payment notices that they know they wish to revise. References to a lack of time or other circumstances leading to difficulties in making a genuine assessment in the time allowed should be avoided.
Further, it is important in any payment notice that there is detail as to how the sum has been calculated.
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