It is often tempting when looking to resist enforcement of an adjudication to engage in every available defence. However, the danger of engaging in a number of applications in order to resist enforcement was highlighted in Morganstone Ltd v Birkemp Ltd [2024] EWHC 933 (TCC).
This judgment demonstrates that, in spreading arguments thin, you may be punished in respect of costs in due course.
The adjudication
Birkemp referred to adjudication a payment dispute with Morganstone Ltd ("Morganstone") relating to a project for which they were the civil engineering contractor. By a decision dated 24 February 2024 ("the Decision"), Birkemp was successful in the adjudication and Morganstone was ordered to pay the sum of £207,076.
Two claims joined by consent
Instead of waiting for Birkemp to commence enforcement proceedings, Morganstone elected to issue a Part 8 claim. In doing so it alleged that Birkemp had no right to issue the payment application which was the subject of the adjudication. On this basis, the Decision was wrong in law and therefore unenforceable.
In response, Birkemp did then issue a Part 7 claim to enforce the Decision. The applications were heard together, by consent.
Facts
Morganstone's Part 8 claim was made on the basis that Birkemp had not made a payment application in accordance with the sub-contract. However, it was soon apparent that the dates provided in the payment schedule were irreconcilable with the payment mechanism provided in the sub-contract conditions at Clause 10. Correspondence initially revealed that the parties would work to such a payment schedule. This even culminated in a manuscript amendment at Clause 10 of the subcontract reading “payment schedule takes precedence.”
However, problems arose when the parties recognised that the payment schedule only provided the relevant dates for interim payments up to March 2023.
In their Part 8 application, Morganstone argued that as there was a finite limit to the payment schedule, and there was no ongoing contractual right for interim payments beyond this date. In support of this submission they relied upon the judgment in Balfour Beatty Regional Construction Ltd v Grove Developments Ltd [2016] EWCA Civ 990.
Outcome
The judge rejected this argument. It was held that in a situation where a “…payment schedule takes precedence…” but there was no payment schedule (because the dates had expired), Clause 10 would become operative again. This could be the only logical outcome where there was nothing to which the payment schedule could cede precedence. For this reason, the Part 8 claim failed and it was held that Birkemp was entitled to continue to apply for interim payments.
The threshold specified by the judge can be summarised as follows:
“…The contract should be given the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed…”.
In the course of determining Morganstone's Part 8 application for declaratory relief, the Judge found that Birkemp had a right to apply for payment in accordance with Clause 10 of the sub-contract as the parties had not agreed an alternative payment schedule.
Part 7 Claim
This left Birkemp free to try and enforce the decision by way of its Part 7 claim. Morganstone sought to resist enforcement of the Decision on the basis that the adjudicator had failed to consider various responses and defences in the adjudication, amounting to a breach of natural justice.
When referring the dispute to adjudication Birkemp’s Notice of Adjudication and Referral Notice attempted to narrow the dispute. In doing so they sought to include only the valuation of what they called "…Inappropriate Deductions…" in Morganstone’s pay less notice.
Morganstone’s Response and Scott Schedule sought to include two cross-claims, although these were not included in the pay less notice. The adjudicator accepted Birkemp’s argument and limited the scope such that the cross-claims were not considered when making the Decision.
The Judge held that the adjudicator had taken an erroneously restrictive view of his jurisdiction and the cross-claims would have had a very significant impact on the overall result of the adjudication, had they been upheld. The Decision was therefore unenforceable as this amounted to a breach of natural justice.
The Part 7 application was therefore dismissed with the Judge determining that the adjudicator had deliberately failed to address cross claims raised in Morganstone's defence. The judge went further and stated that the decision arose as a result of Birkemp's "deliberate" attempt to limit the scope of the adjudication.
Costs
The Part 8 claim and Part 7 claim were heard together. Although Morganstone appeared to be the victor in as far as the adjudication had not been enforced, as they had technically failed in their Part 8 claim, the judge enforced a split costs decision.
Whilst ultimately the Part 8 application proved to be unnecessary, the threshold for beach of natural justice is high and it is easy to see the appeal in running a Part 8 application in tandem to any defence to the enforcement proceedings. However, the judgment demonstrates that unnecessary or unsuccessful Part 8 applications will have costs consequences.
