Cross claims in adjudication
Ryland Ash, Partner and Jonathan Clarke, Associate, Watson Farley & Williams
THE potential issues that can arise when cross-claims are raised as a set-off defence in an adjudication have been highlighted by the recent decision in Morganstone Ltd v Birkemp Ltd (2024) EWHC 933 (TCC). Parties to construction contracts will need to learn from this judgment to avoid such pitfalls themselves.
On 25 April 2024, the UK Technology and Construction Court declared that an adjudicator’s refusal to consider certain crossclaims outside the ambit of an interim payment, was a breach of natural justice. In short, HHJ Keyser KC held that wherever there is a claim for payment in adjudication any cross-claim should be considered if it is raised as a defence to that claim.
This resulted in somewhat of a stalemate, with Birkemp’s part seven claim to enforce its favourable adjudication decision for £207,076 failing, but equally, Morganstone’s part eight claim seeking a declaration that the payment application was invalid, also failed. As a result, Morganstone avoided having to make a further payment.
The dispute arose over the payment schedule in the contract. However, when the last schedule expired, the parties were unable to agree the terms of a further schedule.
The dispute arose over the payment schedule in the contract. Clause 10 of the contract contained a mechanism for regular interim payments but after the contract had been entered into, the parties agreed, from time to time, different interim payment schedules. However, when the last schedule expired, the parties were unable to agree the terms of a further schedule.
Morganstone insisted that unless Birkemp agreed to the new payment schedule it had proposed (with a later final date for payment), there would be no right to claim any further interim payments following the decision in Balfour Beatty Construction Limited v Grove Developments Limited (2016) EWCA Civ 990.
Despite this, Birkemp issued an August application and claimed an interim payment of £1,193,361.69. Morganstone then issued a pay less notice (whilst reserving its rights) stating that it only owed Birkemp £50,318.57. The dispute came before an adjudicator, Mr Shawyer, who determined that Birkemp was entitled to make the August application, but was only entitled to a sum of £207,076 (plus interest).
Morganstone expressly rejected the decision on the basis that no payment schedule covering the August application had been agreed and as such, there was no right to payment at all. It commenced a part eight claim seeking declaratory relief to this effect, in an effort to stymie the adjudicator’s decision.
The part eight claim asserted that because the parties had stated within their 2023 payment schedule that ‘this payment schedule takes precedence’, Birkemp was required to follow this payment schedule to the exclusion of the mechanism in clause 10 of the contract for regular interim payments.
The part eight claim asserted that because the parties had stated within their 2023 payment schedule that this payment schedule takes precedence.Further, Morganstone argued that Birkemp had no right to apply for the August application because the parties had agreed that once the 2022 payment schedule had expired, a new one would be issued and followed accordingly. In other words, it was argued that Birkemp’s right to continued interim payments was dependent on the agreement to the new schedule.
The judge disagreed with Morganstone’s submissions and rejected the part eight claim. He concluded that the clause 10 mechanism was operative in the absence of any agreed alternative payment schedule and the right to be paid continued.
The part seven claim issued by Birkemp was a simple claim for the enforcement of the adjudicator’s decision. However, it was open to challenge due to the restrictive approach of the adjudicator on the status of certain cross-claims raised during the adjudication. The adjudicator refused to consider two cross claims introduced by Morganstone which were not included in the original pay less notice.
Adjudicators are now likely to consider any and all crossclaims as part of a set off defence to a claim for payment in adjudication. This will undoubtedly increase the time and cost of the process.The rationale for this decision seems to have been based upon the premise that the scope of jurisdiction is limited to the issues within the crystallised dispute as defined in the notice of adjudication. On the face of it, this seems correct because the facts relied upon in support of the cross-claim occurred after the application for payment and pay less notice.
However, the judge held that, because this was a claim for payment, following a line of authorities somewhat peaking at Global Switch Estates Ltd v Sudlows Ltd (2020) EWHC 4796 (TCC), a refusal to consider cross-claims would deprive a respondent of a proper defence. The judge relied on the reasoning of Lord Briggs in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd (2020) UKSC 25, who stated:
“However narrowly the referring party chooses to confine the reference, a claim submitted to adjudication will nonetheless confer jurisdiction to determine everything which may be advanced against it by way of defence, and this will necessarily include every cross-claim which amounts to (or is pleaded as) a setoff.”
HHJ Keyser KC therefore concluded that there was a breach of natural justice and rejected Birkemp’s part seven claim to enforce the decision.
This case provides a cautionary tale of the inherent risks in the adjudication process. Although most claims will be enforced, it is not a foregone conclusion where issues of natural justice are at play. This decision is clear authority for the widening of the scope all disputes by way of crossclaims in adjudications where payment is sought.
Adjudicators are now likely to consider any and all cross-claims as part of a set off defence to a claim for payment in adjudication. This will undoubtedly increase the time and cost of the process.
One way to mitigate these risks might be to seek a declaration instead of payment; but this would rather cut across the fundamental idea that adjudication was introduced to improve cashflow, which in these uncertain economic times, is more important than ever. The safest way to navigate the increasingly tricky path of adjudication is to seek specialist construction law advice at the earliest possible opportunity.
Ryland Ash, Partner and Jonathan Clarke, Associate
Watson Farley & Williams