When may an adjudicator’s decision upholding the validity of a payment application be challenged by parallel court proceedings?

The Court of Appeal Decision in A&V Building Solutions Limited v J&B Hopkins Limited

Introduction

Since the passage of the Housing Grants, Construction and Regeneration Act 1996 and its amendment in 2009, the parties to a construction contract for construction operations have had to comply with the deadlines in each payment cycle for the issue of a payment application, a payment notice and (where appropriate) a pay less notice. When a party fails to serve such an application or a notice on time, arguments often arise as to whether the delay is fatal to the validity of the application or notice in question. Adjudicators frequently have to grapple with these issues in their decisions.

Where an adjudicator decides such issues in favour of a party claiming payment, the other party will realise that the claiming party will probably bring court proceedings to enforce the adjudicator’s decision. In such circumstances, the other party may choose to bring parallel court proceedings, to have the court rule upon the validity of the relevant application or notice. Such parallel proceedings are occasionally brought before the enforcement action has been launched, as a “pre-emptive strike”, in the hope that the court’s judgment will “trump” the adjudicator’s decision, and that the risk of being forced to pay the adjudicator’s decision will disappear.

In A&V Building Solutions Limited v J&B Hopkins Limited [2023] EWCA Civ 54, the Court of Appeal had to determine whether an interim payment application had been made on time, and whether an adjudicator’s decision giving a true valuation of it, ought to be enforced. The Court of Appeal also had to decide whether the party seeking to resist enforcement of the adjudicator’s decision could bring parallel court proceedings, and should be granted declarations that the relevant payment application was invalid and that the adjudicator’s decision giving a true valuation was a nullity, or whether such proceedings should be struck out. 

The Facts 

In the A&V Building case, J&B Hopkins Limited (“JBH”) was an M&E contractor for a University project in Sussex. On 18 December 2019, it entered into a subcontract (“the Subcontract”) for M&E subcontract works with A&V Building Solutions Limited (“AVB”). The Subcontract contained JBH’s standard payment provisions and a bespoke payment schedule. The standard provisions provided that it was a condition precedent to AVB’s entitlement to payment that that it had to make monthly applications for payment to JBH on the dates specified in the payment schedule. The payment schedule set out the dates in each payment cycle: (a) by which a payment application should be made by AVB; (b) to which AVB’s subcontract works had to be valued; (c) when the due date for payment fell; (d) by which the payment notice had to be served; (e) by which any pay less notice had to be given; and (f) when the final date for payment fell.

According to the payment schedule, AVB had to make a payment application by 21 March 2021. AVB submitted its interim payment application no.14 (“IPA14”) on 22 March 2021. On the face of it, it did so one day late. Nevertheless, at the time, JBH was prepared to entertain IPA14 and, on 1 April 2021, it issued a valuation, and on 16 April 2021, it served a payment notice. Both of those documents were given in time according to the payment schedule, and both asserted that AVB had been overpaid, and that a repayment was due to JBH. AVB denied that it had been overpaid, and a payment dispute regarding IPA14 arose.

The parties then spent approximately six months discussing the payment dispute. However, the payment dispute was not resolved and AVB then threatened to refer it to adjudication. At that stage, JBH asserted that IPA14 was not served in accordance with the Subcontract, but it did not explain why.

In November 2021, AVB commenced an adjudication against JBH to claim the amount that it contended was due to it in respect of IPA14. It was only during the adjudication that JBH took the point for the first time that IPA14 had been served a day late, and was invalid. AVB argued in reply that IPA14 was served in time, but that if was found not to be, the date in the payment schedule for its delivery had been varied or JBH had waived or was estopped from relying on the deadline for it.

The adjudicator decided that IPA14 was valid, and proceeded to value it and award AVB the amount of that valuation.

Whilst the adjudication was ongoing, JBH decided that it would try to trump the adjudicator’s decision, by commencing its own parallel court proceedings, under Part 8 of the Court’s Civil Procedural Rules (this Part is essentially for simple court claims which can be dealt with on documents only), seeking a declaration that IPA14 was invalid. JBH’s court action was apparently a “pre-emptive strike”, and when the adjudicator came to make a decision in AVB’s favour, JBH declined to pay it.

The Technology and Construction Court (“TCC”) heard JBH’s Part 8 claim. It interpreted the payment provisions in the Subcontract and decided that IPA14 was invalid. This was because it had been submitted on 22 March 2021, one day later than stipulated in the payment schedule. It noted that 21 March 2021 was a Sunday but found that JBH’s payment terms clearly made the delivery of IPA14 on time a condition precedent to AVB’s payment entitlement in relation to it. The TCC rejected AVB’s arguments that the parties had varied the deadline for IPA14 or that JBH had waived the fact that it had been served late.

AVB’s Appeal

AVB decided to appeal the TCC’s judgement. It did so on three grounds. Firstly, it denied that JBH was entitled to commence or continue its parallel Part 8 proceedings, and it asserted that they should be struck out. It contended that JBH could not bring any such proceedings in relation to IPA14 until it had paid the adjudicator’s decision. Secondly, it repeated its primary argument in the adjudication that IPA14 was served in time and was valid. Thirdly, it reiterated its secondary argument in the adjudication that (if its primary argument failed) the deadline for IPA14 had either been varied by the parties or waived by JBH, and that IPA14 was valid accordingly.

The Court of Appeal Decision

Lord Justice Coulson gave the leading judgement of the Court of Appeal. He upheld AVB’s appeal. Importantly, on the first ground, he ruled that the parallel Part 8 proceedings were not in themselves invalid or an abuse of the process of the court, and that they would not be struck out. He found that it would ordinarily be appropriate to determine whether an adjudicator’s decision should be enforced, as part of enforcement proceedings, first, but that parallel Part 8 proceedings would remain open to parties to an adjudication to bring. This was especially so where the adjudicator had made a clear error (within the scope of their jurisdiction), and the issues were self-contained, and capable of determination at a short oral hearing. 

In deciding the second ground of appeal, Coulson LJ interpreted the payment provisions in the Subcontract. He decided that the date in the payment schedule for IPA14 was not “sacrosanct”. This was because there was some flexibility in relation to the payment schedule’s dates. This flexibility arose from references in the payment provisions to payment cycle steps occurring at “intervals” rather than by particular dates. Coulson LJ also held that the provision in the Subcontract prohibiting ABV from making a payment application less than seven days before the valuation date had to be construed as allowing ABV to make a payment application 7 days or more before the valuation date. On this interpretation, ABV had until 24 March 2021 to serve IPA14 and AVB had therefore delivered it in time. Consequently, he found that IPA14 was valid.

Having decided the first two grounds of appeal in ABV’s favour, and in particular, that IPA14 was valid, Coulson LJ commented that the arguments raised in the third ground of appeal did not strictly need to be determined. Nevertheless he proceeded to address them obiter, because “such arguments regularly arise in adjudication enforcement.”

In his consideration of the third ground of appeal, Coulson LJ noted that, on one occasion prior to IPA14, JBH had administered an interim payment application from ABV which was late according to the payment schedule. However, he found that this one occasion was insufficient to vary or waive the dates in the payment schedule. In this regard, he remarked, “The making of a payment in respect of a prior application is normally equivocal conduct that does not establish a common understanding to found a variation/waiver/estoppel… Thus, one instance of paying a late application is not generally sufficient to amount to a waiver.” Further, he observed that clause 23.1 of the Subcontract contained an unequivocal agreement that an earlier waiver by JBH of a Subcontract provision could not amount to a subsequent waiver of the same provision.

That said, Coulson LJ went on to find that the necessary ingredients for an estoppel were clearly made out in relation to IPA14 itself, since JBH had consistently treated IPA14 as a valid interim payment application before ABV had commenced its adjudication. It had done so in particular by producing a valuation and a payment notice in relation to it, and ABV had relied on the common assumption as to the validity of IPA14 up to the adjudication, by making its adjudication claim. Consequently, it was too late for JBH to raise an argument for the first time in the middle of the adjudication that IPA14 was out of time and invalid. 

Commentary

The key points arising from from the Court of Appeal’s decision are these. 

The parties to a construction contract should be careful to follow the payment provisions in the contract in each payment cycle. If a party receives a payment application from the other party which it considers to be defective or to have been served out of time, it should object to its validity immediately and hold that position consistently. Otherwise, it may he found to have waived its objections to it or to be estopped from challenging it.
“One-off” behaviour in relation to a previous payment application is unlikely to vary the payment terms of a contract or to give rise to waivers or estoppels. However, more frequent conduct might do so. 

If a claiming party brings an adjudication for a payment allegedly due under a construction contract, it is open to the other party to bring parallel court proceedings, to seek declarations from the court which might thwart enforcement of the adjudicator’s decision. Such parallel proceedings will not ordinarily be heard before the hearing of the enforcement proceedings. However, they will be appropriate where the adjudicator has made a clear error, and the issues are self-contained, and capable of determination on the basis of documents at a short oral hearing.