Case Nos: HT-2024-CDF-000004 - [2024] EWHC 933 (TCC)

On 31 August 2023 Birkemp issued the August Application.

On 8 September 2023 Morganstone issued a pay less notice in respect of the August Application, though without prejudice to its primary contention that Birkemp had no entitlement to further interim payments. Birkemp did not accept the figure in the pay less notice but contended that some of the deductions made by Morganstone were inappropriate. Birkemp valued those “Inappropriate Deductions” at £246,471.68.

On 4 December 2023 Birkemp gave written notice of its intention to refer a dispute to adjudication (the “Notice of Adjudication”). The Notice of Adjudication contained the following passages:

“9.

This dispute, the background to which is set out below, centres upon the inappropriate deductions and valuation of certain items set out in ML’s Pay Less Notice dated 8 September 2023, which was sent in response to BL’s August 2023 payment application issued on 31 August 2023 (the August Application), and the Adjudicator is hereby requested to value the specific items (the Inappropriate Deductions) set out below.

10.

BL’s description of the deductions set out below as ‘inappropriate’ is no admission that other deductions in the Pay Less Notice were in any way ‘appropriate’, and BL accordingly reserves its rights to pursue the other items within the August Application outside of this adjudication.

…

13.

The August Application was in the sum of £4,056,700.19 which, if certified, would have resulted in a sum due to BL of £1,193,361.69.

14.

ML’s Pay Less Notice certified a sum of £2,784,133.30 which, after retention, resulted in a sum due to BL of £50,318.57.

15.

No payment was made to BL in respect of ML’s certified sum. That non-payment is not the subject of this adjudication but is mentioned for background purposes.

16.

As set out above, it is with ML’s Inappropriate Deductions that BL takes issue, and believes to be incorrect and unlawful, and it is the Inappropriate Deductions that the adjudicator is requested to value.

17.

The dispute therefore arose at Gorwydd Road, Gowerton, Swansea on or by 8 September 2023 when ML unlawfully withheld the Inappropriate Deductions from BL. A dispute then crystallised between the parties in relation to the value of the Inappropriate Deductions.

…

The redress sought

21.

BL seeks the appointment of an Adjudicator to make the following decisions:

21.1

That by virtue of the value of the Inappropriate Deductions within the August Application, BL is entitled to payment by ML of the sums set out above (£246,471.68) or such other greater or lesser sum as the Adjudicator may decide is due.

21.2

That BL is entitled to interest at the Sub-Contract’s interest rate of 2% above the bank rate of the Bank of England as set out below: …

21.3

That ML pays

(a)

the fees and expenses of the Adjudicator; and

(b)

the nominating body's fees.

given that it is as a result of ML’s failings that it has been necessary to proceed with this adjudication.

21.4

That any sum BL is entitled to be paid by ML shall be paid forthwith.”

On 11 December 2023 Birkemp issued the Referral Notice (headed “Referral Notice [:] True Value Adjudication”). It repeated, more or less verbatim, the text of paragraphs 9, 10, 13, 14, 15, 16 and 17 of the Notice of Adjudication. It said:

“45.

Again, the Adjudicator is requested to value the Inappropriate Deductions set out below.”

The Notice of Adjudication and the Referral Notice thus formulated the dispute narrowly (the valuation of the Inappropriate Deductions in the pay less notice) but also claimed payment of the money to which Morganstone was entitled.

On 22 December 2023 Morganstone issued its Response. The Response set out Morganstone’s case as to the deductions in its pay less notice; no issue arises in that regard. However, the Response, together with the Scott Schedule, also relied on two cross-claims that were not included in the pay less notice, as follows:

Relevant passages in the Response include the following:

“104.3

ML is entitled to deduct its liability as a result of BKL’s failure to properly execute the Subcontract work. As explained by Mr Prothero, that equates to a cost across the manholes and foul of … £162,460.54 for the drainage runs and £24,310.98 for the clearance of the drainage runs by Redwood. There (sic) are the lowest tender price ML has been supplied with.

104.4

This sum should be deducted from BKL, whether as a reduction in the true value of its work and/or pursuant to clause 6 of the Subcontract and/or pursuant to ML’s general right to damages for BKL’s breach of contract.”

“129

Pursuant to clause 10.1 of the Subcontract, BKL’s entitlement to be paid arises only in respect of work properly executed to the satisfaction of ML. The work must also have been completed with due diligence and with due skill and care in a proper and workmanlike manner and in compliance with the Subcontract. The work has not been properly executed, it is not to the satisfaction of ML and it has not been carried out with due skill and care. For these reasons, BKL has no payment entitlement.

130

Further and/or in the alternative, pursuant to clause 6 of the Subcontract, ML is entitled to deduct or set off any expense, liability or loss which is attributable to BKL’s failure to perform or complete the Subcontract works, or to recover such sums as a debt. BKL’s breach(es) of the Subcontract have led to ML incurring a loss and liability for the resolution of the matters identified within the foul drainage runs.”

“202

In addition to the above issues, ML has identified a defect within the groundwork to the slabs in the vicinity of the shower areas installed by BKL within various dwellings. This is defect which ML is required to (and has) remedied in order to comply with its obligations under the Main Contract.

…

218

Pursuant to clause 6.1 of the Subcontract BKL agreed [clause was set out; see above].

219

ML holds the entitlement to deduct sums from any sum which may be payable to BKL. ML had been forced to undertake remedial work due for handover to its employer, but which have been rejected. ML is required to complete the remedial work to the remaining plots.

220

In terms of the loss/damage to ML, the damage/loss associated with this has been identified within the witness statement of Mr Prothero and added into the Response Scott Schedule.

221

ML respectfully submits that the Adjudicator determine that BKL are responsible for this defect and that accordingly any sum for which BKL is liable be set off against any sum deemed payable to BKL and/or that it is recoverable from BKL as a debt.”

In its Reply dated 15 January 2024 Birkemp made this basic response to the cross-claims:

“6.

It’s BL’s position that ML’s cross-claims take the discussion beyond the bounds of the dispute referred and into territory which the Adjudicator does not have jurisdiction to decide. The Adjudicator has been asked to value the Inappropriate Deductions within the August Application, that being their value as at the end of August 2023. Any other deductions do not form part of this dispute.”

That was the argument that the adjudicator accepted. In essence he decided that the adjudication was limited to a valuation of the deductions in the pay less notice and that any cross-claims raised by Morganstone were outside the proper scope of the adjudication and would have to be considered, if at all, in another forum. I shall set out below the most relevant passages in the Decision.

It is important to note how the adjudicator identified the issues before him, as well as the substance of his ultimate award. In section 2 of the Decision he identified the dispute by reference to paragraph 9 of the Notice of Adjudication and the redress sought by reference to the relief claimed in the Referral Notice (which was the same as the relief claimed in the Notice of Adjudication). In paragraph 6.1 of the Decision he identified the issues as:

The adjudicator dealt with the cross-claims in the following passages. In respect of the foul drainage:

“6.53

It is clear that the works were incomplete, as admitted by the Referring Party, and did contain defective works … and as such a deduction was valid. To the matter of the value of the deduction I have reviewed the Response Scott schedule and the Responding Party’s basis of calculation appears cogent. I therefore agree with the Responding Party the value of the deduction is £ 8,103.63. The Responding Party’s costs of engaging others is a new basis of calculation of a new deduction not included in the Pay Less Notice and as such it does not assist me in this adjudication.”