Works finalised on letter of intent leads to unenforceable decision.
We often read that the grounds for objecting to the enforcement of an adjudicator’s decision are limited. Rather the losing party is expected to start its own claim in the courts which, in all likelihood, will not be heard until sometime after enforcement has taken place.
One of the few ways for a party to overturn a decision which it believes the adjudicator has gotten wrong, is to commence a Part 8 claim. Generally speaking these are given much earlier hearing dates. However, as the courts have gone to great lengths to emphasise, Part 8 claims should only be used where points of law are in question and not issues of fact.
It is therefore of interest to consider the case of OD Developments v Oak Dry Lining  EWHC 2854 (TCC) where the technology and construction court (the TCC) under a Part 8 claim declined enforcement of a decision on the grounds that the adjudicator had taken the wrong approach as to the valuation of the final payment. At first instance, and without knowledge of the background facts, you would be forgiven for perhaps thinking that provided the adjudicator had jurisdiction to decide on the value, it shouldn’t matter too much what conclusion they come to provided it is not so outlandish as to be an affront to natural justice. However, this case reminds us that an adjudicator is not free to make whatever decision they please simply because they have been correctly appointed. The decision must also be made on the correct contractual basis.
The parties had contracted under a letter of intent with the intention that this would eventually be superseded by a JCT subcontract. As is all too common, the subsequent JCT subcontract was not entered into and the works were completed under the letter of intent. When a dispute arose as to the final payment notice Oak Dry Lining (Oak) referred the matter to adjudication. OD Developments (OD) had claimed in its final payment notice that it was due £625,000. Oak submitted that in fact it was OD who owed Oak £765,000 as stated in Oak’s default payment notice.
OD disputed the adjudicator’s jurisdiction but was ultimately unsuccessful. It did however persuade the adjudicator that the JCT terms had been incorporated into the letter of intent. Despite this the adjudicator found in favour of Oak and OD were ordered to pay just over 80% of the sum claimed by Oak plus the adjudicator’s fees. OD challenged this outcome by commencing Part 8 proceedings. It argued that because its notice had been issued in accordance with the JCT terms, while Oak’s notice had not, OD’s notice should be treated as conclusive. Consequently there was no dispute to refer to adjudication.
Oak’s defence was twofold: first that the JCT terms had not been incorporated; and second that even if the relevant JCT terms had been incorporated into the contract, OD’s notice was not a valid document.
The TCC found that:
- The JCT terms had not been incorporated. The drafting of the letter of intent made it clear it was a self-contained document and no external terms were to be adopted unless and until a new contract was entered into, which had not happened and was in part the cause of the dispute.
- The adjudicator’s appointment had been compatible with the provisions in the letter of intent and not been dependent on whether or not JCT terms had been incorporated. The adjudicator therefore had jurisdiction.
- Even if a notice did have conclusive effect this does not mean there can be no dispute to refer to adjudication, only that no evidence contrary to the notice could be adduced. More importantly the dispute was in part whether or not the notice should be treated as conclusive so it would be absurd for the adjudicator not to have jurisdiction.
- Because the JCT terms had not been incorporated the valuation should have been on a “fair and reasonable” basis and not based on the JCT terms which is how the adjudicator had stated in his decision he had reached his figure.
The decision of the TCC could be described as an example of the mixed bag that is sometimes the result of litigation. Technically, OD was unsuccessful in its claim for £625,000 but in the course of its deliberations the TCC also determined that neither would it enforce the adjudicator’s decision in favour of Oak.
The TCC effectively left the parties back where they started, with neither having any sums awarded to it. However, in reality having tested the arguments the parties likely realised that a resolution would only be achieved by a fair and reasonable valuation. The only question was whether the parties could achieve this by themselves or have to go back to the courts to do so. The strong indication of the TCC was that neither was going to obtain a commercial advantage through the use of contractual notices and a resolution through ADR was therefore recommended.
Points to consider
- It has been said by others before but reliance on a letter of intent throughout the entire lifespan of construction works is always fraught with danger.
- Given the adjudicator’s decision was handed down on 19 December, OD commenced its Part 8 claim very soon afterwards (9 January) and before Oak had commenced enforcement proceedings. In fact enforcement became a cross application to OD’s Part 8 claim ensuring OD would not have to pay anything in advance of obtaining a decision on its case. So by getting in first OD greatly improved its position. It would have been much harder for OD if the positions had been reversed and Oak had commenced enforcement before the Part 8 claim.
- Despite Oak’s argument that the adjudicator would have come to the same decision if the “fair and reasonable” approach had been applied to the valuation, a view which the TCC expressed some sympathy with, the TCC was not prepared to make that assumption. However, if the adjudicator had stated in his decision that he would have come to the same valuation whether or not the JCT terms applied, which could have been achieved with a short addition to the decision, would the TCC have then been prepared to enforce his decision?