Adjudication and legal proceedings during lockdown

05 June 2020

Author: John Dugdale
Practice Area: Construction Law, COVID-19

Builder

QMAC Construction v Northern Ireland Housing Executive

A recent judgment of the High Court in Northern Ireland has provided a valuable insight into the enforcement of adjudicator’s decisions, and the conduct of court business generally, during the Covid-19 lockdown.

Background

The case arose out of two contracts between the Northern Ireland Housing Executive (NIHE) and QMAC Construction (QMAC). Both contracts concerned improvement works to the NIHE’s housing stock and incorporated the NEC3 Engineering & Construction Short Contract.

QMAC, a building contractor, issued an interim application under each contract by which it claimed £143,454 for works at Springhill, and £65,995 for works at Ardoyne. No valid pay less notices were served by the NIHE.

The NIHE did not pay up, and QMAC obtained adjudicator’s decisions for the amounts stated in each interim application plus interest.

The NIHE disputed that QMAC was entitled to be paid the amounts stated in the interim applications, and commenced its own “true value” adjudications. The decisions in those “true value” adjudications were awaited at the time of the judgment.

Smash and grab?

A “smash & grab” adjudication is a commonly-used phrase in the construction industry in Northern Ireland and Great Britain. It enables a contractor to claim payment for the amount stated in an interim application (whether or not it represents the “true” valuation of the work) due to a failure by the paying party to serve either a payment notice or a pay less notice.

Payers faced with a smash & grab adjudication decision often seek to start a second adjudication, seeking a decision on the “true” value of the amount due to the contractor.

The best way for paying parties to mitigate against the risk of a smash & grab is to ensure that payment and pay less notices are served properly and in good time.

The law

The Construction Contracts (Northern Ireland) Order 1997 is the legislation that governs adjudication and payment in construction contracts in Northern Ireland.

If a payer does not serve a payment notice or pay less notice, the payee will be entitled to the amount claimed in an interim application for payment.

There is no escaping the statutory rules on payment. If a construction contract does not comply with the rules then the relevant provisions of the Scheme for Construction Contracts in Northern Ireland will take effect as an implied term.

Under the 1997 Order a party to a construction contract also has a statutory right to refer a dispute to adjudication at any time. An adjudicator’s decision is binding on an interim basis—that is until the dispute is finally determined by arbitration, litigation or agreement.

The courts in Northern Ireland ordinarily take a robust approach to enforcement of adjudicator’s decisions. However, as an adjudicator’s decision is only intended to be temporarily binding, the courts will consider a stay of execution on enforcement in certain circumstances.

The key question for the court in this case was whether there should be a stay of execution on the basis that QMAC would probably be unable to repay sums if ordered to do so.

Probable inability to repay

Both parties relied on expert evidence from accountants.

QMAC was not said to be insolvent, and had reported profits in each of the last 3 years. Against that, the evidence was that QMAC’s turnover had dropped and its borrowings and overdraft had increased since the contracts were entered into.

On balance, influenced by apparent cash flow pressures and relatively high gearing, the Judge decided that QMAC would struggle to pay back the full amounts of the adjudicator’s decisions if ordered to do so.

Taking a “broad brush approach”, judgment was given to QMAC for the full amounts of the adjudicator’s decisions but a stay of execution for 14 days was granted. Based on the timescales described in the judgment, that may well allow sufficient time for the “true value” adjudications to be concluded.

The Judge granted a further stay in respect of £120,000 of the amounts claimed by QMAC. In other words, the NIHE would not have to pay that £120,000 to QMAC unless and until the Judge gave a further order requiring it to do so. QMAC would have to make another application to the Judge to provoke such an order.

The judgment is an example of the Judge using his discretion to order a stay to balance QMAC’s right to rely on adjudication as a speedy cash flow remedy against the risk that the NIHE may be unable to recover amounts if it transpired that QMAC was not entitled to the amounts claimed.

The adjudicator got it wrong

In addition to the amounts claimed in its interim application, the adjudicator also decided that QMAC was entitled to significant sums in respect of interest - £121,501 on the Springhill project and £54,116 on the Ardoyne project.

It was clear to the Judge that the adjudicator had calculated these interest sums in error — an incorrect and overstated rate of interest had been used by the adjudicator.

However, that was not a reason to deprive QMAC of judgment in its favour. The Judge confirmed what has been long established in adjudication enforcement cases — an error of fact or law by an adjudicator is no defence to enforcement of a decision.

Flexible approach

This case was decided “on the papers” — with the Judge considering only written evidence and arguments in lieu of a hearing.

The Judge considered that this process “worked successfully”, and the flexible approach allowed the case to progress at a time when there is a difficulty in accommodating oral hearings due to the Covid-19 lockdown.

Following on from this success, Mr Justice Horner has encouraged all parties and their legal representatives to be “innovative, imaginative and collaborative” in relation to how hearings should be shaped so that cases can continued to be heard.

Carson McDowell view

The adjudication process — intended to be speedy, cost-effective and to keep cash flowing — will likely be a useful tool as the consequences of the Covid-19 lockdown bite.

The clear message from the courts in Northern Ireland is that they are “open for business”, and that adjudicator’s decisions will continue to be enforced.

At a time when all businesses will be concerned to ensure cash flow, it will be comforting to know that the courts are dedicated to working with parties and their legal representatives to ensure that the court can hear and determine disputes.

Remote hearings are likely in the near future, with the possibility of teething troubles. Parties may have to be sympathetic to any technological and other difficulties experienced by others.

If you have any queries the Construction team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

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