William Verry Ltd v London Borough of Camden

On this application for summary judgment, William Verry Limited, ("Verry") seeks to enforce the decision of the adjudicator, Dr. Francesco Mastrandrea, made on the 23rd January 2006, as amended on the 31st January 2006, in which he decided that the Defendant, the Mayor and Burgesses of the London Borough of Camden, ("Camden") should pay Verry £532,351.61 plus certain other sums.

Camden entered into a contract with Verry ("the Contract") on or about the 5th February 2001, for the refurbishment of a Victorian housing scheme known as the Bourne Estate, Holborn, London EC1. The work consisted of external redecoration and repair to 13 blocks of flats, typically 5 stories high. Those flats were either owned by Camden or had been sold and were in private ownership. That represented "the Works". A formal contract was not entered into, but it is common ground that the Contract is a valid construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996.

The Contract was in the JCT Intermediate Form of Contract 1998 Edition, incorporating amendment 1 and TC/94/IFC. The contract sum was £6,478,522.19. The completion date was the 14th April 2003, as found by the adjudicator in decision number 3 at paragraph 25. Liquidated and ascertained damages were specified at a rate of £14,113.84 per week, or part thereof. The contract administrator (CA) was Capita Symonds Limited. Initially, Capita Symonds Limited were also the Quantity Surveyor, but in May 2003 Barry Maltz Associates Limited was nominated to act as Quantity Surveyor in place of Capita Symonds.

Practical Completion of the Works was achieved on the 19th December 2003. On the 25th July 2005 the contract administrator granted Verry an extension of time of 27 weeks plus 5 days for bank holidays, which the adjudicator upheld an adjudication number 3. When applied to the date of the 14th April 2003, this gives a revised completion date of the 27th October 2003, as found by the adjudicator in adjudication number 3. Prior to the adjudication before Dr. Mastrandrea, there had been two other adjudications. The first, adjudication number 1, was in relation to a dispute referred by Verry concerning Verry's application for payment dated June 2003. It was the subject of a decision by Mr. Mason dated the 25th August 2003. The second adjudication, adjudication number 2, was in relation to a dispute referred by Camden concerning the valuation of certain specific elements of Verry's account at the material time. It was the subject of a decision by Mr. Dight, dated the 18th November 2003. It is therefore convenient to refer to the adjudication before Dr. Mastrandrea, as adjudication number 3, as I have done.

The decision of the adjudicator in adjudication number 3, leading up to the financial award was in the following terms:

Prior to the adjudication notice served by Verry on the 10th October 2005 the quantity surveyor, Mr. Barry Maltz, had submitted a draft final account to Verry on the 12th September 2005. That final account was in the gross value of £5,755,655.51 compared to Verry's claim in the adjudication of £6,997,800.71.

On the 13th January 2006, before the adjudicator made his decision in adjudication number 3, the contract administrator wrote to Verry enclosing a certificate for payment, number 22 (final certificate) and stated:

That final certificate showed a gross valuation of £5,764,459.16, which after deduction of sums previously paid, left a balance due to Verry of £46,020.11.

On the 9th February 2006 Verry gave an adjudication notice in respect of the final certificate and those proceedings have been stayed by consent. I shall refer to that adjudication as adjudication number 4.

The decision in adjudication number 3 was issued on the 23rd January 2006 and amended on the 31st January 2006.

On the 30th January 2006 Camden wrote to Verry in these terms:

On the 9th February 2006 Camden served on Verry a notice of adjudication and a further adjudication, adjudication number 5, in which it sought a decision on a claim for defects in the works. It claimed that it was entitled to £2,438,128.05 as damages for breach of contract.

On the 9th March 2006 Verry submitted its response to the referral notice in adjudication number 5 in which it contends that the adjudicator, Mr. Eamon Malone, should dismiss the claim. It is expected that the adjudication decision under adjudication number 5 will be given on the 5th May 2006.

In these proceedings Camden sought to resist summary judgment and immediate payment to Verry of the sum due on adjudication decision number 3 on the following grounds:

Mr. David Matthias, who appears for Camden, submits that Verry's entitlement to an interim payment on practical completion on the 19th December 2003 under clause 4.3 of the contract, as subsequently determined in adjudication decision number 3, is superseded by the final certificate issued under clause 4.6.1.1 of the Contract on the 11th January 2006. He submits that the obligations of the parties are now regulated by the final certificate issued under clause 4.6. The Contract states that the final date for payment of the amount due under the final certificate is 28 days from the issue of the certificate, and under clause 9A.7.2 the parties' obligations to comply with the decision of an adjudicator is without prejudice to their other rights under this contract which must include the rights under clause 4.6.

Mr. Matthias relies on the decision of His Honour Judge LLoyd QC in KNS Industrial Services (Birmingham) Limited -v- Sindall Limited [2001] 75 Const. L. R. 71, in particular, paragraphs 14 and 28; the decision of His Honour Judge Thornton QC in Bovis Lend Lease --v- Triangle Development [2003] B.L.R. 31, para. 37;and the decision of the Court of Appeal in Parsons Plastics Limited -v- Purac Limited [2002] B.L. R. 334. He submits that in every case it is a matter of construing the contract in question and the circumstances of the particular case in order to determine whether a countervailing contractual obligation should override the contractual obligation to comply with an adjudicator's decision. This, he submits, follows from the fact that whilst section 108 of the Housing Grants Act requires construction contracts to include a term that a adjudicator's decision is binding, it does not provide for the enforcement of such decisions, still less does it purport to give the contractual obligation to accept an adjudicator's decision as binding, a status that overrides all other contractual rights and obligation.

In the present case he submits that Camden's contractual rights in respect of the final certificate issued on the 11th January 2006 and the withholding notice served by Camden in respect thereof on the 31st January 2006 should be viewed as superseding Verry's entitlement to enforce the adjudicator's decision in adjudication number 3 in spite of that final certificate and withholding letter.

Ms Dominique Rawley, who appears for Verry, submits that section 108(3) of the 1996 Act, as implemented in clauses 9A.7.1 to 9A.7.3 leads to the conclusion that Parliament has provided that adjudicator's decisions are enforceable unless set aside and should be enforced. She refers to the decision of the Court of Appeal in Ferson Contractors Limited -v- Levolux AT Limited [2003] B.L.R. 118and the decision of His Honour Judge Gilliland QC in David Maclean Contractors Limited -v- The Albany Building Limited (unreported 10th November 2005). She submits that the final certificate in this case is not conclusive under clause 4.7.1, and is no more than a statement of the valuation by the quantity surveyor and contract administrator, which is contested by Verry. That valuation, she contends, cannot supersede the adjudicator's decision in adjudication number 3. She also submits that the final certificate is not valid, on its face, as the subsequent letter of the 31st January 2006 shows that the contract administrator had not given effect to all the terms of the contract, as required in clause 4.7.1.

Mr. Matthias submits that the defects counterclaim, a claim for unliquidated damages for breach of contract, is a right under the contract and therefore under clause 9A.7.2, the obligation to comply with the decision of the adjudicator is without prejudice to that right. He submits that this should be accorded the status of an effective defence by way of set-off to Verry’s claim.

Mr. Matthias accepted that in the light of the evidence served by Verry in the form of the witness statement of Mr. Greg Healey, financial director at Verry, Camden’s submissions as to Verry's financial position were weakened. He therefore emphasised the aspect of timing in this case, and submitted that the court should, in any event, exercise its discretion to stay any judgment, given the fact that there was now a final certificate and that the defects counterclaim was currently the subject of an adjudication in which the adjudicator was to give his decision on the 5th May 2006. He relies on the principles set out by His Honour Judge Toulmin CMG QC in AWG Construction Services -v- Rockingham Motor Speedway [2004] EWHC 888, para. 108-190; the decision of His Honour Judge Thornton QC in William VerryLimited -v- North West London Communal Mikvah [2004] B.L.R. 308, para. 59-60; and His Honour Judge LLoyd QC in Jarvis Facilities Limited -v- Alstom Signalling Limited [2004] EWHC 1285, para. 19-20 .

Ms Rawley, emphasises the evidence of Mr. Healey, and submits that there are no grounds for granting a stay. She relies on the decision of His Honour Judge Wilcox in Absolute Rentals Limited -v- Gencor Enterprises Limited (2000) CILL 1637 and the decision of His Honour Judge Coulson QC in Wimbledon Construction Co 2000 Limted -v- Derek Vago [2005] B.L.R. 374. She submits that the intention of Parliament is that an adjudicator's decision should be enforced and the timing of matters such as the adjudication on the defects counterclaim should not deprive Verry of the benefit of a judgment on sums due at practical completion.

I first consider the extent to which Camden can resist payment on the basis of the final certificate or defects counterclaim. It is to be noted that no challenge is made to the adjudicator's decision in itself on this application. The questions raised in this case relate to the ability of a party to resist payment of sums in an adjudicator's decisions on the grounds that:

An adjudicator's decision is the outcome of an adjudication which, in the case of construction contracts, is imposed by statue in the form of section 108 of the Housing Grants Act. Whilst the means by which Parliament decided to impose the obligations is by implying contractual terms, the contractual terms must be construed in the light of that statute and the statutory intention. The statutory intention was set out in what has now become a classic statement on this aspect by Mr. Justice Dyson in Macob Civil Engineering Limited -v- Morrison Construction Limited [1999] B.L.R. 93, para. 24:

That statement has formed the basis on which the Court of Appeal has proceeded in Bouygues -v- Dahl-Jensen [2000] B.L.R. 522 and Ferson Contractors -v- Levolux AT Limited [2003] B.L.R. 118. The reference by Mr. Justice Dyson to the intention of Parliament being to require the decisions of adjudicators to be enforced pending the final determination of disputes, must be understood as a reference to the word "binding" in section 108(3) of the Act. That word is used in a number of different contexts. For instance, in section 58(1) of the Arbitration Act 1996 it is provided that an award by the tribunal pursuant to an arbitration agreement is final and binding.

Where there are potentially competing disputed rights and obligations those disputes must give way to the enforcement of the decision of an adjudicator, otherwise it is evident that such claimed rights and obligations would defeat the binding nature of the adjudicator's decision and the intention of Parliament that such adjudicator's decisions should be complied with in the interim.

Prior to the decision of the Court of Appeal in Ferson -v- Levolux, there had been decisions which appeared to contemplate that a contractual right might allow a party to avoid in whole or in part the obligation to comply with the adjudicator's decision. In Bovis Lend Lease --v- Triangle Developments Limited His Honour Judge Thornton QC, considered a number of previous decisions and summarised four general conclusions, which he derived from those decisions. His third conclusion was in these terms:

In considering the correctness of that conclusion by His Honour Judge Thornton QC, Lord Justice Mantell at paragraph 30 of Ferson -v- Levoluxstated that, if that conclusion were right then the intended purpose of section 108 of the Housing Grants Act would be defeated. Instead he said that the contract must be construed so as to give effect to the intention of Parliament rather than to defect it. He added that if that cannot be achieved by way of construction of the contract then the offending clause must be struck down.

Whilst on the facts of Ferson -v- Levolux paragraph 30 might be argued to be obiter, the Court of Appeal set out in clear terms the principle which applies to the implementation of the intention of Parliament. It is that principle which I intend to follow in approaching the two issues which arise in this case. In my judgment, the effect of those statutory provisions and of the passages in Levoluxis generally to exclude a right of set-off from an adjudicator's decision.

The particular issue of whether liquidated damages can be deducted when the adjudicator’s decision deals with extensions of time but does not deal with the consequential effect on an undisputed or indisputable claim for liquidated damages raises, I consider, a distinct question of the manner and extent of compliance with the adjudicator's decision. It does not, in my judgment, raise a question as to the ability to set-off sums generally against an adjudicator's decision.

Finally, Mr. Matthias relies on the Court of Appeal decision in Parsons Plastics –v- Purac [2002] B.L.R. 334. However, as is clear from the facts of that decision, that was a case where section 108 of the Act did not apply and where there was a provision at clause 31 as follows:

That case was considered in Levoluxand Lord Justice Mantell stated that it was important to note that inParsons Plastics the Court of Appeal did not have to consider the impact of section 108, which was clearly of central importance in Levolux. Equally, it is evident that the decision in Parsons Plasticswas made on the particular wording of clause 31, which, as it can be seen, expressly permitted set-off in respect of matters which were “claims” from the adjudicator's decision.

The decision of His Honour Judge Hicks QC to which reference is made is the decision in VHE Construction plc –v- RBSTB Trust Co Limited [2000] B.L.R. 187 where Judge Hicks had regards to the overall purpose of Part II of the Housing Grants, Construction and Regeneration Act 1996 and concluded that the employer’s obligation to comply with the adjudicator’s decision meant: “…comply, without recourse to defences or cross claims not raised in the adjudication.”

Those provisions, in my judgment, amply reflect the intention of Parliament. I deal below with an argument which arises from the reservation in clause 9A.7.2.

I now turn first to consider the final certificate. Adjudication number 3 related to a dispute arising from the certificate issued by the Contract Administrator under clause 4.3 of the contract. This provides:

The certificate under clause 4.3 was based on an interim valuation produced by the quantity surveyor on the 5th January 2004, Practical completion having been certified on the 19th December 2003. Verry disputed the quantity surveyor's valuation on two bases as set out by Dr. Mastrandrea at paragraph 75 of his decision, together with the submission of Camden. Those were:

Dr. Mastrandrea went through each of the disputed aspects of valuation and decided whether to adopt the value placed on the item by Mr. Mason (the adjudicator in adjudication number 1) or adopt a value for the item on the basis of the further information put before him. In adjudication number 3 Verry contented for a gross valuation of £6,997,800.71; the QS's valuation was £5,851,516.67 and the adjudicator valued the works, at practical completion, in a gross value of £6,487,648.37. In coming to that valuation the adjudicator adopted the principles set out in paragraphs 34 and 35 of his decision where he sets out this:

In this way, the decision of the adjudicator was that Verry was entitled to £532,351.61 in respect of the certificate under clause 4.3, in respect of the interim payment at Practical Completion. It follows that if the Contract Administrator had issued his certificate in December 2003/January 2004, then Verry would have been entitled to the sum of £532,351.61 after allowing for liquidated and ascertained damages due to Camden, which the adjudicator had deducted in his decision to arrive at that sum. If that had happened, then there would have been no question of a final certificate impacting on that payment. The process of computation of the adjusted contract sum together with the issue of the final certificate under clauses 4.5 and 4.6 takes time to complete, particularly given the requirement for a certificate that defects have been made good under clause 2.10, prior to the issue of the final certificate. In principle therefore, the subsequent issue of a final certificate should not prevent a contractor from being paid the sum properly due at Practical Completion. In this case the fact that Verry only referred the dispute over the clause 4.3 certificate to adjudication in October 2005 after the QS had sent through his computation of the adjusted contract sum under clause 4.5 in September 2005, meant that the process of adjudication on the certificate of Practical Completion overlapped with the final certification under clause 4.6.

Mr. Matthias submitted that the adjudication of the clause 4.3 certificate was an “ambush” by Verry, and relied on statements made by Verry in the adjudication that "for the avoidance of doubt, Verry does not bring this adjudication in relation to its final account or the draft final account issued on behalf of Camden."

It is submitted by Camden that as a result, Camden did not put before the adjudicator its case on valuation as developed in the computation of the adjusted contract sum compiled by the quantity surveyor in September 2005.

I consider that the use of the word "ambush", a common term in the context of adjudication, is inappropriate in the sense that a complaint can be made as to the conduct of Verry. At any time after January 2004 Verry could have commenced an adjudication in respect of the clause 4.3 certificate. Whilst the choice of October 2005 to do so might have been tactical, Verry cannot be criticised for relying on their entitlement to adjudicate at any time. In fact, it seems to me that Camden were in a better position in October 2005 to deal with the valuation than they would have been had the adjudication taken place in early 2004, given the work carried out by the quantity surveyor leading up to the computation of the adjusted contract sum in September 2005. Whilst it is clear that Verry wished the adjudication to proceed on the basis that it considered the valuation at practical completion, that did not preclude Camden from relying on matters which were or ought to have been known in January 2004. The final certificate issued by the contract administrator valued the work at £5,764,459.16 compared to the valuation of £6,487,648.38, decided by the adjudicator in adjudication number 3. It can be seen from the table at section 6 of the witness statement of Barry Maltz, the Quantity Surveyor, that his valuation for the final certificate had been based on various contentions that Dr. Mastrandrea's valuation was incorrect or for instance, that there is no authorised instruction for various works. In principle, these matters could have been raised in adjudication number 3. The overall effect is that the final certificate represents the view of the quantity surveyor on the gross valuation of the works. That view is disputed and is subject to adjudication number 4, which is currently stayed by consent.

In such circumstances, should the sums found due in adjudication decision number 3 give way to the disputed valuation in the final certificate? In my judgment, they should not for the following reasons: First, for the reasons set out above, I consider that the binding nature of the adjudicator's decision and the agreement of the parties to comply with that decision means that, prima facie, the adjudicator's decision should be enforced.

However, whatever the position on the validity of the final certificate, this cannot affect the entitlement of Verry to payment in respect of adjudication decision number 3, either as a matter of principle arising from the intention of Parliament and the terms of the contract, or from the application of those terms to the circumstances of this case.

I now turn to the defects counterclaim. Camden contends that there are defects in the works and claims the sum of over £2 million as damages for breach of contract. It is clear from the witness statement of Mr. Andrew McDermott, the project manager for Camden, that there were various schedules of defects drawn up for the south side and the north side of the project alleging that they were defective works.

In principle, as set out in that letter, there can be a deduction from the value of the works for defects in the works. The valuation of the works consists of the "total value of the work properly executed by the contractor" (see clause 4.2.1(a)). Equally, clause 2.10 provides that an appropriate deduction shall be made from the contract sum in respect of defects, shrinkages or other faults not made good, and this is relevant to the computation of the adjusted contract sum (see clause 4.5). However, Camden have not sought to take the alleged defects into account, either in the valuation which was the subject of adjudication number 3, nor in the adjusted contract sum, which formed the basis of the final certificate.

As I have said, in my judgment, the effect of the statutory provisions is generally to exclude a right of set-off from an adjudicator's decision. In this case, the adjudicator expressly dealt with the question of extension of time and liquidated damages. These matters were raised by Camden, but issues of defects were not raised in the adjudication. If they had been raised, then evidently they could have been taken into account to the extent possible, and Camden could not now raise a set-off. By failing to raise them, I do not consider that Camden can be in a better position by setting-off a disputed, unliquidated counterclaim against the adjudicator's decision.

Accordingly, I consider that Camden cannot resist payment of sums due to Verry under adjudication decision number 3 on the basis of the unliquidated disputed counterclaim for defects.

I now turn to consider the question of a stay. In the light of the evidence of Mr Healey, the financial director of Verry, it is clear that the company has a substantial turnover of the order of £100 million with improving profitability and a significant cash reserve of the order of £10 million. In such circumstances, I do not consider that the question of the ability of Verry to repay sums or potential liquidation of that company are matters which I need to give any significant weight to in considering arguments that there should be a stay. Rather the evidence goes the other way.

Mr. Matthias places more reliance on the fact that the defects counterclaim is currently the subject of an adjudication, and the date of the adjudicator's decision is expected to be the 5th May 2006. It is clear from the documents I have seen that Verry contests the claim and has raised familiar arguments on the jurisdiction of the adjudicator. The outcome of that adjudication both in terms of the adjudicator's decision and any subsequent proceedings is uncertain, and it is not a matter on which I consider I should speculate. In such circumstances, staying enforcement of adjudicator's decision number 3 so as to await the outcome of that adjudication, is something which I consider should only have been done if strong grounds are shown for the exercise of the discretionary stay.

In the absence of a serious risk that any sum paid could not be recovered in appropriate circumstances, I consider that the principles set out by His Honour Judge Toulmin CMG QC in AWG Construction Services -v- Rockingham Motor Speedway [2004] EWHC 888, apply. That is that the intention of Parliament is that adjudication decisions should be enforced summarily and the successful party should not be prejudiced by being kept out of its money. These factors militate strongly against the grant of the stay, and accordingly, I refuse Camden's application to stay the execution of the judgement as there are no special circumstances which render it inexpedient to enforce the judgment.

As a result, Verry is entitled to judgment for the sum of £532,351.61 together with such VAT thereon as may be applicable, and £3,409.12, as set out in paragraphs 254(e) and (f) of the decisions of Dr. Mastrandrea, made on the 23rd January 2006, as corrected on the 31st January 2006.