You can smash but not always grab when manifestly unjust

Written on 2 Dec 2020

Construction dispute decision is a rare example of fairness seeming to override the statutory policy to prioritise cash flow in the industry

The Technology and Construction Court (TCC) has confirmed that the factual circumstances surrounding the issue of payment notices in relation to a "smash and grab" adjudication may justify a stay of execution of an adjudication award where enforcement would result in manifest injustice.

Adjudication enforcement

The statutory adjudication regime was introduced to facilitate cash flow in the construction industry. As such, the court will ordinarily enforce an adjudicator's award rather than stay the execution of the judgment until the outcome of the substantive trial for the true value. Nevertheless, the court ultimately retains the discretion to stay execution where it is appropriate to do so.

While this discretion is seldom used, it may be appropriate: i) in circumstances in which it is probable that the claimant would be unable to repay the judgment sum at the end of the trial (see Wimbledon Construction Company 200 Ltd v Vago [2005] EWHC 1086 (TCC)); or ii) in circumstances where the payer would suffer manifest injustice if no stay were ordered (see Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC)).

These exceptions to the norm are extremely limited in their application. However, JRT Developments Ltd (JRT) v TW Dixon (Developments) Ltd (TWD) [2020] 10 WLUK 106 is one of the very few successful attempts.

JRT v TWD background

TWD was formed for the purpose of constructing 14 new houses on a plot in Shropshire. It was set up by the sole shareholders of TWD (who had no prior construction experience), with the assistance of their nephew, a quantity surveyor, who owned and controlled JRT. This same nephew also assisted TWD with acquiring funding for the works in the form of a Homes and Communities Agency (HCA) loan.

JRT contracted with TWD to construct the properties under a JCT Minor Works Contract with contractor's design, 2011 edition and a "commercial agreement". However ,the payment mechanisms under the JCT contract were ignored by the parties during the works. Instead, JRT liaised directly with the HCA’s valuer and issued invoices to TWD for the amounts approved by the HCA. It was noted by the court that the dealings between the parties resembled a joint venture arrangement, rather than an arm's length construction contract.

After several years, the relationship between the parties soured and the contract was terminated. At the date of termination JRT had been paid the value of the HCA's assessment of the works undertaken. However, after the termination, JRT considered that it was due a further £952,578.97 and submitted what it argued was a default payment notice. TWD did not understand the significance of the default payment notice and, instead, responded to it with several queries on the contents of the document, rather than by issuing a pay less notice.

Smash and grab

JRT commenced a smash and grab adjudication on the first day it was possible to do so. The adjudicator held that JRT's notice was valid and amounted to a default payment notice, entitling JRT to payment.

JRT then sought to enforce the adjudicator's decision by issuing proceedings in March 2020. In response, TWD issued Part 8 proceedings for a declaration that the payment notice was invalid, which the court subsequently ordered be continued as a Part 7 claim due to a substantial dispute of fact between the parties.

At the enforcement hearing, TWD conceded that JRT was entitled to summary judgment on the adjudication award. However, it sought a stay of enforcement until the trial of its claim against JRT pursuant to Civil Procedure Rules 83.7(4), on the basis that there were "special circumstances" being:

(a) the probable inability of JRT to repay the judgment sum at the end of the substantive trial (Wimbledon); and

(b) the risk of manifest injustice if no stay is granted, as a result of TWD's inability to pay the sum awarded and all the circumstances of the case (Estura).

Stay of execution

The TCC granted the stay of execution on both grounds, namely:

    1. JRT would be unable to repay the judgment debt if it was ordered to do so after the substantive trial, as: JRT's assets were less than the judgment sum and it was unlikely JRT would generate sufficient profit to repay the sum if ordered to do so; JRT's financial position was substantially worse at the time of the hearing than when the JCT contract was entered into; and this difference had not been caused either wholly or in significant part by TWD’s failure to pay the sums awarded by the adjudicator. The test in Wimbledon was therefore met.
    2. Applying Estura, the court reviewed the background factual matrix and it considered that circumstances of the case meant that manifest injustice would be caused if the stay of execution was not granted until the determination of TWD's true value claim. The "exceptional" circumstances considered by the court included:
  • The familial and joint venture-type relationship between the parties and the payment arrangements during the works. In particular, the court noted that that TWD clearly relied on JRT to manage the project, raise the funding and liaise with the HCA to obtain its own payments. Further, JRT had made no applications in excess of the HCA funding during the works and in fact the disputed payment notice (issued several months after the contract had been terminated) was the first payment notice issued by JRT.
  • The manner in which JRT obtained the adjudication award, when it was obvious TWD did not appreciate the significance of the alleged payment notice in default. The court considered it material that JRT was clearly setting TWD up for a smash and grab adjudication. This is a particular departure from the court's usual approach of enforcing a party's failure to issue a valid payment or pay less notice strictly, even where it may have been an innocent mistake.
  • The fact that it was likely that TWD would be liquidated if it had to pay the adjudication award and therefore it would be deprived of the opportunity to seek redress through the final account proceedings.
  • The fact that the £952,578.97 sought by JRT included amounts not properly due to it at the time of termination (for example, it included over £218,000 for payments to the council which it had not paid) and therefore it was highly likely that sums would need to repaid to TWD once the substantive trial had taken place.

Osborne Clarke comment

Although this decision is likely to be very limited in its application (the circumstances of this case being highly unusual) a rare example of fairness seeming to override the statutory policy to prioritise cash -flow in the industry.

The court was prepared to consider the wider factual matrix to establish whether the circumstances were “exceptional” enough to justify its decision. Notably, the court considered JRT’s conduct and the manner in which it obtained the adjudication award, and was unusually prepared to review and consider the amounts claimed in the default payment notice in reaching its decision. On its face, this decision appears to expand the opportunity for parties to argue that a stay of execution should be granted in respect of otherwise enforceable adjudication decisions.

As a result, for parties looking to set up a smash and grab adjudication, this case may serve as a warning that the court may consider the circumstances surrounding the issue of the payment notices when it comes to enforcement.

However, this case goes to show just how “exceptional” circumstances need to be to amount to manifest injustice and, although this decision may have left the door ajar to resisting enforcement of technical payment notice adjudications, its application is likely to be limited.

This is especially the case where an employer is a commercial party with prior construction experience and the parties have been operating the contractual payment terms. In such circumstances, this decision is likely to be considered specific to the unusual facts of this case.

Nevertheless, employers should continue to optimise best practice to ensure payments notices are served on time.

The timing of the issue of this decision is interesting, given the additional cash-flow issues many construction businesses, both employers and contractors, will face in the wake of Covid-19 and the complex factual circumstances that are likely to be affecting construction projects.

Contractors will be increasingly reliant on maintaining cash flow, and employers similarly resistant to paying out sums that may not otherwise be due. We may, therefore, see more parties seeking to test the limits of the manifest injustice exception in these unique situations.