Adjudication Case Update – when might an adjudicator’s award not be enforced due to ‘manifest injustice’?
In our latest Technology and Construction Court case update, the Greenwoods GRM construction team take a closer look at the recent judgment in JRT Developments Ltd v TW Dixon (Developments) Ltd (2020), where an adjudicator’s award was stayed on the grounds of ‘manifest injustice’ to the paying party.
Historically, it has always been a very high hurdle to jump to prevent enforcement of an adjudicator’s award. Ease of enforcement is built into adjudication by design – one of the main appeals of adjudication is that it allows for quick determination to restore cash flow in an industry where ‘cash flow is king’. Given that the courts are generally reluctant to interfere with adjudicator decisions, any case where that ease of enforcement is challenged is worth looking at in more detail.
— TW Dixon (Developments) Ltd (TWD) was a company formed by Mr and Mrs Dixon especially for the development of several properties on a plot in Shropshire. The Dixons had no prior involvement in the construction industry.
— JRT Developments Ltd (JRT) was the company engaged as contractor for the project. There was a family link – JRT being owned by a nephew of the Dixons.
— The parties entered into a JCT Minor Works Contract with Design 2011 Edition in June 2016, but also entered into a separate ‘Commercial Agreement’ on the side. During the lifespan of the project, neither party observed the payment provisions of the building contract itself – JRT instead issued invoices based on the valuations of the Homes and Communities Agency, who were providing funding for the project. Because they departed so broadly from a typical arms-length employer/contractor relationship, this unusual arrangement made JRT and TWD more akin to joint venture partners.
— Eventually, the contract was terminated by JRT in June 2019 after delays and costs caused a souring of the relationship between the family members behind each company. JRT then issued a payment notice for £925k which TWD failed to react to with a pay less notice (possibly owing to their inexperience and the fact that, in three years, the payment provisions had been effectively ignored).
— JRT commenced a ‘smash and grab’ adjudication against TWD and succeeded, obtaining an award for the entire payment notice sum, and promptly issued proceedings to enforce that decision. In response, TWD issued proceedings to seek a declaration that that the payment notice was invalid.
— At the enforcement hearing, TWD argued that the adjudicator’s award should be stayed until the resolution of their crossclaim. If that crossclaim succeeded, JRT would likely not be able to pay back the award, if later reversed. In any case, it would be ‘manifestly unjust’ if the stay was not granted – the payment would immediately liquidate TWD.
HHJ Watson had to consider the two points raised by TWD above in deciding whether a stay of the award was appropriate. First, applying the three-point test of Wimbledon Construction Company v Vago in respect of JRT’s inability to return any payment to TWD if it were later reversed at trial. This test includes:
— Whether JRT would be able to repay the judgment sum at the end of the trial in TWD’s claim – HHJ Watson was satisfied that it was ‘very highly probable’ JRT would not be able to, due to its liabilities;
— whether JRT’s financial position was different to its financial position at the time the JCT Contract was entered into – HHJ Watson found that JRT were in a substantially worse position than in June 2016; and
— Whether JRT’s current financial position was either wholly or in significant part due to TWD’s failure to pay the sums awarded – again, HHJ Watson found that this was not the case.
HHJ Watson went on to consider the question of whether not granting the stay would be manifestly unjust to TWD (the principle of manifest injustice being first established in Galliford Try Building Ltd v Estura Ltd). HHJ Watson agreed with TWD, finding that they would be made immediately insolvent by paying any part of the adjudicator’s award and preventing it from pursuing its crossclaim. She noted the particular circumstances that:
— The unusual funding arrangement used (with HCA involvement) moving the parties away from a typical employer/contractor relationship.
— The fact that the payment terms of the contract had been consistently ignored only until JRT sought to rely on them with the post-termination payment notice.
— It was likely that a substantial amount of the sums claimed by JRT were not properly due (true valuation being an issue for trial).
The stay of enforcement pending trial was therefore granted by the TCC.
It remains the case that a stay of an adjudicator’s award will only be granted in exceptional circumstances. Here, the facts in JRT Developments were a ‘perfect storm’ for HHJ Watson to reach the judgment that she did. Quite often where that is the case, judgments of this kind can become anomalies – interesting exceptions to the rule that do not require great analysis or declarations about their lasting impact on the area of law in question.
However, while it is too early to tell whether the JCT Developments decision is a sign of things to come as far as ‘smash and grab’ adjudications are concerned, it isn’t farfetched to say that some of the facts in play here are not especially unusual. For example, scenarios where either (a) the paying party would be made insolvent by enforcement of the award or (b) receiving parties would not be able to pay back the award if later reversed, could become more common as the economic fallout from Covid-19 continues to bite the construction industry.
This line of argument could be put to judges more regularly and, if successful like TWD, could mark a change in the adjudication landscape where the surrounding circumstances are given more weight.