Pilon Ltd v Breyer Group Plc

Since January 2009, the Claimant (“Pilon”), a specialist refurbishment contractor, has been the subject of a Company Voluntary Arrangement (“CVA”). Before that, they had carried out extensive work for the Defendant (“Breyer”) on a number of different projects, including what was known as the Ealing Project. This work was divided into two separate batches, batches 1-25 and batches 26-62. In the summer of 2008, disputes arose between the parties and Pilon left the Ealing site in October 2008. On 8th September 2009, nine months after the CVA, they issued an interim application for payment in respect of batches 26-62. This application was not paid, and the dispute went to adjudication. The adjudicator awarded Pilon £206,617.74, together with VAT and interest. Those sums have not been paid by Breyer, and are now the subject of this disputed enforcement application.

THE ISSUES

A variety of matters were raised by the parties in the witness statements and the skeleton arguments. At the outset of the hearing, I identified a total of five principal issues. They were:

Issue 1: Was the adjudicator’s decision as to jurisdiction binding on the parties? I deal with this in Section 4 below.

Issue 2: Did the adjudicator take an erroneously restrictive view of his own jurisdiction and, if so, what are the consequences? I deal with this in Section 5 below.

Issue 3: Were Breyer entitled to raise a defence or cross-claim based upon an alleged overpayment on batches 1-25? I deal with this in Section 6 below.

Issue 4: To the extent that it is relevant, is the adjudicator’s decision severable? I deal with this in Section 7 below.

Issue 5: If Pilon are entitled to judgment, should there be a stay of execution pursuant to RSC Order 47? I deal with this in Section 8 below.

Before coming on to deal with those individual issues, I set out briefly the chronology and the material documents in the adjudication.

THE ADJUDICATION

As already noted, Pilon left the Ealing site in October 2008. The CVA took effect in January 2009. It was not until nine months later, in September 2009, that Pilon made an application for interim payment in respect of batches 26-62. The application was in the net sum of £337,000.67. It was not paid and Pilon referred the dispute to adjudication.

The adjudication notice, served on 19^th November 2009, made plain that it was limited to the interim application in respect of batches 26-62. Moreover, it was Pilon’s primary case in the adjudication that they were entitled to that sum without any deduction whatsoever, because Breyer had failed to serve either a payment or a withholding notice.

It was Breyer’s case that, pursuant to the terms of the contract, they were not obliged to serve such notices. In addition, beyond the disputes about valuation, Breyer’s principal defence was to the effect that they were entitled to set off the sum of £147,774 which, they claimed, constituted an earlier over-payment to Pilon in relation to batches 1-25.

The adjudicator was Mr Mark Entwhistle. His decision was dated 5^th February 2010. It ran to 240 paragraphs and 45 pages. It also included some appendices. In short, he concluded that:

Pilon was not automatically entitled to the sum which they had applied for in September 2009. The interim application was challenged by Breyer, and the absence of payment notices and/or withholding notices did not mean that the detailed valuation exercise could be bypassed.

He did not have the jurisdiction to consider Breyer’s argument in relation to the alleged over-payment on batches 1-25 because, he said, the notice of adjudication made plain that the dispute was limited to batches 26-62. He therefore did not consider that overpayment defence at all.

Having performed the detailed valuation exercise, the adjudicator identified the sum of £207,617.74, plus VAT, as due from Breyer to Pilon.

On the jurisdictional issue (namely, whether or not he could even consider the alleged overpayment on batches 1-25) the adjudicator said this:

“86.

It is trite to state that my jurisdiction in this matter is governed by a number of factors. These include the terms of the parties’ contract and the details of the Notice of Intention and the Referral. I am, thus, constrained by the matters referred to me and to stray outside those matters would constitute dereliction of my jurisdiction.

87.

The Referral is, as it must be for validity, consistent with the Notice of Intention served on 19^th 2009. The redress sought in the Referral (later revised in the Reply) is for payment of the sum of £337,000.67, which sum is derived from a gross payment entitlement said to be £1,712,665.83.

88.

The extent of my jurisdiction is limited by the matters referred by Pilon. Those matters are, as it seems to me, the matters that led to the gross valuation of £1,712,665.83.

89.

Put another way, my jurisdiction does not extend to any matter that arises outside of the determination of that particular gross figure and the sums that make it up, since Pilon who, as the referring party, has deliberately formulated its Notice and Referral to limit my jurisdiction.”

Subsequently, at paragraphs 101-103 of his decision, the adjudicator expressly rejected Breyer’s case that he was obliged to consider their defence based upon over-payment on batches 1-25, and he referred to both Cantillon v Urvasco [2008] BLR 250 and Quartzelec Limited v Honeywell Control Systems Limited [2009] BLR 328. I deal with those authorities in greater detail below.

As to the necessity for a valuation, and his conclusion that the absence of payment notices and/or withholding notices did not automatically entitle Pilon to the sum applied for, the adjudicator said this:

“65.

I find that the failure of Breyer to issue a notice of payment pursuant to the September 2009 application did not mean that the full sum applied for was due to be paid. I further find that the absence of a withholding notice issued under clause 7(i) of the contract similarly did not mean that Pilon was entitled to be paid the full sum applied for.

66.

The parties are disagreed about the need for a withholding notice to be served before Breyer can make deductions from monies due to Pilon, or before any reduction in value, by way of abatement, could occur.

67.

I am not persuaded that this issue is of particular relevance to the matters I have to decide.

68.

Firstly, no monies were either certified or notified to Pilon as being due. As such there was no entitlement to payment from which monies might have been sought to be withheld.

69.

Secondly, the contract terms themselves provide the means by which Breyer might seek to make claims or deductions from Pilon’s account….

75.

I further consider that the wording of the clause [clause 8(b)] entitled Breyer to deduct the costs incurred from sums otherwise due to Pilon and in such circumstances no withholding notice would be required as the deduction would be being made pursuant to this term of the contract, rendering it a valuation matter.”

Following the provision of the adjudicator’s decision, on 16^th February 2010, Breyer’s solicitors wrote to Pilon’s solicitors, referring to the adjudicator’s failure even to consider the defence based upon the over-payment on batches 1-25, and saying that “in refusing to consider this defence that was open to Breyer, the adjudicator committed a breach of natural justice. We therefore write to inform you that the adjudicator’s decision is not binding on our client and it will not be paying the sums directed by him in his decision.”

WAS THE ADJUDICATOR’S DECISION ON HIS OWN JURISDCTION BINDING ON THE PARTIES?

On behalf of Pilon, Ms Gough contended that the adjudicator’s decision, to the effect that he did not have the jurisdiction to consider the alleged overpayment on batches 1-25, was temporarily binding on the parties. She submitted that the parties had debated the question of jurisdiction before the adjudicator, and he had reached a decision on it, so that, whether he was right or wrong, that decision was at least temporarily binding on the parties and therefore the court. Thus, she argued, the jurisdiction point now taken by Breyer was simply not open to them on this application for summary judgment.

I am unable to accept that submission. The law on this topic is clear. Jurisdictional issues often arise during the course of an adjudication, and it is usually sensible for the parties to ask the adjudicator to investigate the issue and state his conclusion. But, unless the parties have also agreed to be bound by the result of the adjudicator’s investigation into his own jurisdiction, his ruling on that issue will not be determinative, and the challenger can defeat any subsequent enforcement proceedings by showing a respectable case that the adjudicator had reached an erroneous conclusion as to jurisdiction: see, in particular, paragraph 10 of the judgment of May LJ in Pegram Shopfitters Limited v Tally Weijl (Uk) Limited [2003] EWCA Civ 1750.

Accordingly, there needs to be either an express agreement between the parties that the adjudicator’s decision on jurisdiction is to be binding or, at the very least, an implied agreement to the same effect, which may arise where the objecting party fails to reserve its position, or there has been a unilateral waiver of any jurisdictional objection. In both JW Hughes Building Contractors Limited v GB Metal Work Limited [2003] EWHC 2421 (TCC) and Nordot Engineering Limited v Siemens Plc [2001] CILL 1778, the court found an ad hoc agreement between the parties that they would be bound by the adjudicator’s decision as to jurisdiction, but such cases are rare. Generally speaking, as Dyson LJ put it in Amec Projects Limited v Whitefriars City Estates Limited [2004] EWCA Civ 1418, “the ‘decision’ of an adjudicator as to his jurisdiction is of no legal effect and cannot affect the rights of the parties….”

In the present case, Breyer made clear that this jurisdictional issue was in dispute at the time of the adjudication. In this regard I refer to:

Paragraph 2.04 of Breyer’s response to Pilon’s referral notice, which set out in clear terms how and why Breyer’s defence in relation to over-payment was open to them and within the adjudicator’s jurisdiction. The response refers to Pilon’s “crude device” in attempting to limit the issues to batches 26-62 only.

Paragraph 3.09 of Breyer’s rejoinder referred to both Cantillon and Quartzelec, and concluded that Breyer “was perfectly entitled to refer to the over-payments made to Pilon in relation to batches 1-25 (in previous interim payments), as a defence to the claim, and if this defence is not considered by the adjudicator, this would amount to a breach of the rules of natural justice.” In my judgement, this warning could not have been couched in clearer terms.

Furthermore, once the adjudicator had reached a contrary conclusion in his written decision, Breyer’s solicitors were quick to point out in writing that, in consequence, his decision had been reached on a fundamental misunderstanding of his jurisdiction and that they were not bound by it: see paragraph 10 above.

Thus it seems to me that, whilst the parties sensibly requested that the adjudicator investigate and rule upon this issue (indeed, it would have been impossible for the adjudicator to produce a sensible decision without reaching a conclusion on this aspect of the dispute), Breyer were not agreeing that the adjudicator’s decision on this point would be temporarily binding. In the absence of any express or implied agreement to that effect, the usual position must apply, namely that the adjudicator had no power to make a binding decision on his own jurisdiction. Thus the court is entitled and obliged to consider the merits of Breyer’s jurisdictional challenge.

ISSUE 2; DID THE ADJUDICATOR TAKE AN ERRONEOUSLY RESTRICTIVE VIEW OF HIS OWN JURISDICTION AND, IF SO, WHAT ARE THE CONSEQUENCES?

The Law

An adjudicator can make an inadvertent mistake when answering the question put to him, and that mistake will not ordinarily affect the enforcement of his decision: see Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 49. If, on the other hand, he considers and purports to decide an issue which is outside his jurisdiction, then his decision will not be enforced: see the discussion in Sindall Ltd v Solland [2001] 3 TCLR 712. But there is a third category, which is where the adjudicator takes an erroneously restrictive view of his own jurisdiction, with the result that he decides not to consider an important element of the dispute that has been referred to him. This failure is usually categorised as a breach of natural justice. Cases in this category include:

Ballast Plc v The Burrell Company (Construction Management) Limited [2001] BLR 529, where the adjudicator failed to address the valuation dispute referred to him because the parties had departed from the terms of the written contract. Lord Reid concluded that the adjudicator’s decision - to the effect that, as a matter of jurisdiction, he could not take into consideration even the possibility that the parties might depart from the written terms of the contract - was wrong in law. The adjudicator had misconstrued his powers and failed to exercise his jurisdiction to determine the dispute. His decision was therefore ruled a nullity.

Broadwell v k3D [2006] ADJ CS 04/21, in which HHJ Raynor QC refused to enforce an adjudicator’s decision because he had failed to address the responding party’s counterclaim. This was on the erroneous basis that there had been no mention of the counterclaim in the notice of adjudication, leading the adjudicator to conclude that he did not have the jurisdiction to consider it. The judge held that this fundamental error meant that the adjudicator had failed to have regard to the responding party’s legitimate defence, and had therefore not conducted the adjudication in accordance with the rules of natural justice.

Thermal Energy Construction Limited v AE and E Lentjes Uk Limited [2009] EWHC 408 (TCC), where HHJ Stephen Davies refused to enforce an adjudicator’s decision in circumstances where the adjudicator had again wholly failed to address the set-off and counterclaim raised by the defending party.

Quartzelec Limited v Honeywell Systems Limited, a case where the adjudicator had misunderstood the legal position and, as a result, had decided not to address what was referred to as the defendant’s “omissions defence”. The judge refused to enforce the adjudicator’s decision, even though the omissions defence was only worth about 25% of the sum awarded by the adjudicator. It appears that one factor of particular significance in that case was that the adjudicator did not simply make a mistake; he had been positively encouraged to make his erroneous ruling by Quatzelec, the claiming party: see paragraph 42(3) of the judgment.

On one view, there appears to be a significant difference between the first three cases cited above, and the decision in Quartzelec. In the first three cases, the adjudicator deliberately chose not to address the essence of the dispute referred to him. He had looked at the claim but had declined to consider the defence and/or legitimate counterclaim (or some critical element of it) raised against that claim; he had therefore done a calculation which only looked at one side of the balance sheet. In each case, his error was so grave that it could be said that he had not answered the question put to them in the wrong way, but had answered the wrong question altogether: see Nikko Hotels (UK) Ltd v MEPC plc [1991] 2 EGLR 103. Alternatively, his decision wrongfully to diminish or restrict his own jurisdiction amounted to a breach of natural justice, with the result that the decision should not be enforced.

But in Quartzelec, the adjudicator’s failure was in relation to just one aspect of the defence, which (as against a claim worth £135,000 odd), was at best worth £36,500. On the face of it, whether it is put as a matter of jurisdiction or a breach of natural justice, this seems to be a failure of much less significance than in the other three cases. Although the failure in that case stemmed from a deliberate decision by the adjudicator not to consider the omissions part of the defence, rather than an inadvertent error (such as occurred in Bouygues), it is perhaps rather more difficult to say that, objectively, the failure in Quartzelec amounted either to a failure to answer the question which the adjudicator had been obliged to decide, or a material breach of natural justice. I do not think that the approach noted in the cases summarised in paragraph 17 above is automatically applicable just because the adjudicator deliberately (and wrongly) chose not to have regard to a particular sub-issue, no matter how trivial. It follows from this that I am a little uneasy about the decision in Quartzelec: it does not seem to me to be obviously compatible with the general rules as to the enforcement of an adjudicator’s decision (as set out, for example, by the Court of Appeal in Carillion v Devonport Royal Dockyard [2005] EWCA Civ 1358, [2005] BLR 310).

I acknowledge that, in expressing this view, I may be influenced by the fact that the decision in Quartzelec has encouraged numerous defendants to enforcement proceedings to raise spurious complaints that the adjudicator failed to consider some aspect of the dispute referred to him, in an attempt to avoid the subsequent enforcement of his decision. In my judgment, it is wholly illegitimate for a defendant in these circumstances to comb through the decision to try and find some aspect of the dispute which the adjudicator did not expressly address, and then argue on jurisdictional or natural justice grounds that it should not be enforced. I have recently rejected that approach in Amec Group Limited v TWUL [2010] EWHC 419 (TCC).

I also note that the learned editors of the Building Law Reports describe the result in Quartzelec as “very surprising”, which “can probably only be explained by its peculiar facts”. For the reasons which I have outlined, I am inclined to agree with that latter observation: I consider that, for the reasons which I have given, it should be treated as something of a special case.

As a matter of principle, therefore, it seems to me that the law on this topic can be summarised as follows:

The adjudicator must attempt to answer the question referred to him. The question may consist of a number of separate sub-issues. If the adjudicator has endeavoured generally to address those issues in order to answer the question then, whether right or wrong, his decision is enforceable: see Carillion v Devonport.

If the adjudicator fails to address the question referred to him because he has taken an erroneously restrictive view of his jurisdiction (and has, for example, failed even to consider the defence to the claim or some fundamental element of it), then that may make his decision unenforceable, either on grounds of jurisdiction or natural justice: see Ballast, Broadwell, and Thermal Energy.

However, for that result to obtain, the adjudicator’s failure must be deliberate. If there has simply been an inadvertent failure to consider one of a number of issues embraced by the single dispute that the adjudicator has to decide, then such a failure will not ordinarily render the decision unenforceable: see Bouygues and Amec v TWUL.

It goes without saying that any such failure must also be material: see Cantillon v Urvasco and CJP Builders Limited v William Verry Limited [2008] EWHC 2025 (TCC). In other words, the error must be shown to have had a potentially significant effect on the overall result of the adjudication: see Keir Regional Ltd v City and General (Holborn) Ltd [2006] EWHC 848 (TCC).

A factor which may be relevant to the court’s consideration of this topic in any given case is whether or not the claiming party has brought about the adjudicator’s error by a misguided attempt to seek a tactical advantage. That was plainly a factor which, in my view rightly, Judge Davies took into account in Quartzelec when finding against the claiming party.

I should add this. I note that, in any application under section 68 of the Arbitration Act 1996, a party who is alleging a serious irregularity, because the arbitrator failed to have regard to a particular issue, has an uphill task in demonstrating to the court that the issue went to the root of the arbitration and that the failure to deal with it has caused a substantial injustice: see Checkpoint Ltd v Strathclyde Pension Fund [2003] EWCA Civ 84 and Weldon Plant v The Commission for New Towns [2000] BLR 496. These and other cases repeatedly stress that the losing party cannot utilise this provision to scrabble around in the award to find a point, no matter how obscure, with which the arbitrator failed to deal. It seems to me that it would be wholly contrary to the Housing Grants (Construction and Regeneration) Act 1996, and all the subsequent decisions of the TCC and the Court of Appeal emphasising the temporarily binding nature of the adjudicator’s decision, if a disgruntled party to an adjudication was in a better position than he would have been after a full-blown arbitration, to comb through the adjudicator’s decision and find some aspect of the dispute which it is said that the adjudicator failed to address, whether deliberately or otherwise, in order to defeat the summary enforcement of the decision.

Analysis

It seems to me clear beyond doubt that the adjudicator erred in failing to take into account Breyer’s defence by reference to the over-payment on batches 1-25. Whilst he was quite correct to regard the notice of adjudication as setting out the boundaries of his jurisdiction, he failed to appreciate that what Pilon were seeking by that notice was not only an interim valuation of batches 26-62, but also an interim payment of any sum considered owing to them. Whilst the valuation required him to have regard to batches 26-62 only, the concomitant claim for payment meant that the adjudicator was obliged to consider whether Breyer were right to say that a much smaller net payment was due than that contended for by Pilon, because Pilon had already been overpaid on batches 1-25. In other words, the notice of adjudication gave the adjudicator the jurisdiction to consider what, if any, further sum should be paid by way of interim payment from Breyer to Pilon and that issue, of necessity, involved a consideration of Breyer’s defence based on the alleged over-payment on batches 1-25.

It is not uncommon for adjudicators to decide the scope of their jurisdiction solely by reference to the words used in the notice of adjudication, without having regard to the necessary implications of those words: that was, for example, what went wrong in Broadwell. Adjudicators should be aware that the notice of adjudication will ordinarily be confined to the claim being advanced; it will rarely refer to the points that might be raised by way of a defence to that claim. But, subject to questions of withholding notices and the like, a responding party is entitled to defend himself against a claim for money due by reference to any legitimate available defence (including set-off), and thus such defences will ordinarily be encompassed within the notice of adjudication.

As a result, an adjudicator should think very carefully before ruling out a defence merely because there was no mention of it in the claiming party’s notice of adjudication. That is only common sense: it would be absurd if the claiming party could, through some devious bit of drafting, put beyond the scope of the adjudication the defending party’s otherwise legitimate defence to the claim.

I understand that it may be tempting for a claiming party in an adjudication to seek to limit the adjudicator’s jurisdiction in a way in which that party believes to be to its advantage. I am in no doubt that is what happened here: Pilon did not wish the adjudicator to have any regard to batches 1-25, and therefore deliberately limited the scope of the adjudication notice to batches 26-62. It was their case that the over-payment claim was outside the adjudicator’s jurisdiction, and that is what they (successfully) urged on the adjudicator. Thus, this is a case where Pilon sought a tactical advantage by putting forward an erroneous statement of the adjudicator’s jurisdiction and, as the decision in Quartzelec shows, that can be a dangerous tactic to adopt.

In the result therefore, I consider that the adjudicator deliberately placed an erroneous restriction on his own jurisdiction, which amounted to a breach of natural justice. However, for the reasons set out above, that is not sufficient for Breyer’s purposes. Can they show that the error was material? In all the circumstances, I have concluded that the failure was highly material. In a number of ways, I regard this as a stronger case than Quartzelec and one which is properly within what I consider to be the principal line of authority, from Ballast to Thermal Energy, referred to in paragraph 17 above. My reasons for this conclusion are as follows:

The overpayment defence was worth £147,774, or 71% of the sum eventually awarded. On any view, it was therefore of fundamental importance to the dispute as a whole. The adjudicator expressly failed to have any regard to it at all.

The adjudicator’s wrongful refusal to consider this part of the defence may well have affected his approach to some of the other issues where there were disputes of fact. For example, there were agreed cross-contract set-offs, but there was a dispute as to what they were worth. If the adjudicator had appreciated that Pilon were seeking to take an erroneous jurisdictional point for their own ends in relation to one aspect of set-off, and had investigated the cross-contract balance sheet between the parties more carefully, he may have concluded that Breyer’s case on those figures, at £98,000, was more likely to be right than Pilon’s case, at just £20,000. If that dispute had been resolved in Pilon’s favour then, taking into account the over-payment on batches 26-62, it would have meant that Pilon were not entitled to any payment at all.

As noted above, what I have found to be the adjudicator’s error was the result of Pilon’s attempt to misuse the adjudication process for its own ends. To that extent at least, this case is on all fours with Quartzelec.

Pilon’s willingness to advance this erroneous case in the adjudication also provides an answer to Miss Gough’s submission that, if Breyer were entitled to raise the overpayment defence, Pilon should be entitled to answer it by relying on their alternative case, to the effect that the overpayment on batches 1-25 was the subject of a binding agreement reached between the parties at the time. I can see that, on one view, if the over-payment defence is open to Breyer and casts doubt over the adjudicator’s decision, then Pilon may feel that they are now being doubly disadvantaged, because their alternative response to the over-payment defence was not considered by the adjudicator and cannot be considered by the court at this enforcement hearing.

However, I have concluded that Pilon are wholly to blame for that result. Pilon had a choice: they could either run a jurisdictional defence which they knew or should have known was erroneous, or they could have dealt with their response to the over-payment defence on its merits. Because they chose the former course, the adjudicator never considered that defence, and it seems to me that it is now too late for Pilon to complain about that. It is a direct result of their own deliberate strategy.

Accordingly, I find that the adjudicator made a material jurisdictional error in deliberately declining to consider the over-payment defence. In the alternative, that deliberate decision amounted to a breach of natural justice. That renders the decision (or at least the decision up to £147,774) unenforceable.

ISSUE 3; WAS THE OVER-PAYMENT DEFENCE OPEN TO BREYER IN ANY EVENT?

The Relevance of this Issue

Ms Gough properly appreciated that Pilon might be in difficulties in relation to the overpayment defence, either as a matter of jurisdiction or natural justice. Accordingly, she pursued an alternative argument to the effect that, if the adjudicator had considered the overpayment defence on batches 1-25, he would or should have dismissed it, because there were no payment and/or withholding notices served in connection with the application of September 2009 in which it was advanced. In order to avoid the rather obvious difficulty with this submission, namely that the adjudicator had expressly decided that no such payment and/or withholding notices were necessary, Ms Gough argued that the court could, and should, give a binding declaration under CPR Part 8 to the effect that the adjudicator was wrong on this point, and could rule that the contact required such a notice before the over-payment claim could even be considered. She argued that this approach was consistent with the decision of Edwards-Stuart J in Geoffrey Osborne Limited v Atkins Rail Limited [2009] EWHC 2425 (TCC).

Osborne is, so it seems to me, a case on its own particular facts. First, the parties were expressly agreed that the issue that was the subject of the application under CPR Part 8 was a plain error by the adjudicator. Furthermore, in that case, there was no arbitration clause, and therefore the parties had agreed that the court could, if appropriate, give a final and binding decision on the matter that was the subject of the adjudicator’s error. In those circumstances, the only dispute in Osborne was whether, in the light of the decision in Bouygues (UK), this was a course that was open to the court. Edwards- Stuart J decided that it was.

The present case is far from being on all fours with Osborne. For a start, whilst that case involved an agreed error, this case does not. On the contrary, the point on which this purported declaration is now sought, namely that a payment or withholding notice was in fact necessary under the contract, is the subject of heated debate. Secondly, as Edwards-Stuart J pointed out in his judgment in Osborne, it was only open to the court to grant a declaration because there was no arbitration clause, and the parties were therefore agreed that the court was the appropriate forum for the granting of a binding declaration. In the present case, as I pointed out to Ms Gough in the course of argument, there was an arbitration clause in the contract, and therefore, on the face of it, only an arbitrator could decide finally that a withholding notice was or was not necessary.

There is a further fundamental difficulty in the way of this part of Pilon’s case. This is Pilon’s application to enforce the adjudicator’s decision. It is therefore inherent in Pilon’s application that the adjudicator was right. However, on this particular point, they wish to argue that the adjudicator was wrong, and that the court should substitute its own view for that of the adjudicator. Not only was that not the position in Osborne (where the criticism was made by the defending party, not the party seeking to enforce), but such an approach would, in my judgment, amount to the clearest possible case of approbation and reprobation. There is clear authority that such an approach is simply impermissible on an application to enforce an adjudicator’s decision: see R Durtnell and Sons Limited v Kaduna Limited [2003] EWHC 517 (TCC).

Accordingly, it seems to me that, even if Pilon had issued a separate Part 8 claim for a declaration, such an approach would not be open to them. The adjudicator has decided that no payment and/or withholding notices were necessary and that decision is at least temporarily binding on Pilon, until a final determination on the point is provided by the arbitrator. This is not an admitted error but, on the contrary, an important debate between the parties. Thus what I might call the Osborne approach is simply not available to Pilon. In addition, for the reasons that I have noted, Pilon cannot approbate and reprobate the adjudicator’s decision.

Furthermore, I should also say that I accept Mr Bowling’s submission that, far from being a small or peripheral point, the argument as to the requirement for payment and/or withholding notices was fundamental to the disputes between the parties. If the adjudicator had concluded that a withholding notice or a payment notice was required, then the absence of such notices would have entitled Pilon to the sum that they applied for in September 2009. In such circumstances, he would not have needed to do the valuation exercise which forms the bulk of his decision, and he would instead have accepted Pilon’s primary case as to automatic entitlement. Thus, on analysis, the effect of this alternative argument is to seek to rewrite the entire basis of the adjudicator’s decision.

For all these reasons, therefore, I conclude that the overpayment point, which the adjudicator wrongly failed to address, was open to Breyer and is available to them in defence of this enforcement application. The argument about the payment or withholding notices has been temporarily decided against Pilon and that decision is binding on them until finally determined in arbitration.

ISSUE 4; IS THE DECISION SEVERABLE?

The next issue is whether the decision is severable (ie whether, even if Pilon are not entitled to the full sum, they are entitled to the balance of £60,000 odd). The starting point is the decision of Akenhead J in Cantillon v Urvasco. As to severability he said:

“65….

a)

The first step must be to ascertain what dispute or disputes has or have been referred to adjudication. One needs to see whether in fact or in effect there is in substance only one dispute or two and what any such dispute comprises.

b)

It is open to a party to an adjudication as here to seek to refer more than one dispute to an adjudicator. If there is no objection to that by the other party or if the contract permits it, the adjudicator will have to resolve all referred disputes or differences. If there is objection, the adjudicator can only proceed with resolving more than one dispute or difference if the contract permits him to do so.

c)

If the decision properly addresses more than one dispute or difference, a successful jurisdictional challenge on that part of the decision that deals with one such dispute or difference will not undermine the validity and enforceability of that part of the decision which deals with the other(s)

d)

The same in logic must apply to the case where there is a non-compliance with the rules of natural justice which only affects the disposal of one dispute or difference.

e)

There is a proviso to c) and d) above which is that, if the decision as drafted is simply not severable in practice, for instance on the wording, or if the breach of the rules of natural justice is so severe or all providing that the remainder of the decision is tainted, the decision will not be enforced.

f)

In all cases where there is a decision on one dispute or difference and the adjudicator acts, materially, in excess of jurisdiction or in breach of the rules of natural justice the decision will not be enforced by the courts.”

This is a case where there was said to be one dispute: namely what, if anything, was due as a result of the interim application of September 2009. Therefore, on the basis of the approach in Cantillon, it is difficult to see how the decision could sensibly be regarded as severable. On the contrary, in accordance with paragraph 65 of the judgment of Akenhead J in Cantillon, it seems to me that the adjudicator’s decision is not severable. I acknowledge that it may soon be time for the TCC to review whether, where there is a single dispute, if it can be shown that a jurisdiction/natural justice point is worth a fixed amount which is significantly less than the overall sum awarded by the adjudicator, severance could properly be considered. That was, after all, the basis on which summary judgment applications were routinely decided before the HGCRA. However, as a result of my other findings, this is not the place to consider that issue further.

In part, this is because I have already accepted that there is some force in Mr Bowling’s suggestion that the adjudicator’s failure to address the over-payment point may well have affected other aspects of his decision, such as his acceptance of Pilon’s case as to the value of the cross-contract set-off. Thus, even if the decision was severable in principle, there is the risk that the decision as a whole was tainted by the material error (see paragraph 65(e) of Akenhead J’s judgment) which would be another reason not to sever in practice.

If I was wrong as to severance, then the overpayment defence, worth £147,774, would be stripped out of the claim to enforce the adjudicator’s decision, leaving some £60,000 odd, together with VAT and interest, due and payable to Pilon.

ISSUE 5; SHOULD THERE BE A STAY OF EXECUTION?

Relevance of the Issue

Of course, on the basis of my primary findings, that there was a failure of jurisdiction/breach of natural justice which was material and which went to the heart of the dispute, the adjudicator’s decision is not enforceable at all. However, let us now assume that I am wrong about that, and that either the decision is enforceable in full, or at least up to the £60,000 referred to in paragraph 42 above. In those circumstances, I must go on to consider whether or not a stay of execution should be granted. For the reasons set out in some detail below, I have concluded that, on the particular facts of this case, even if I had been minded to enforce the adjudicator’s decision, either in whole or in part, I would have granted the stay of execution sought by Breyer.

The Law

Perhaps the convenient starting point is the judgment in Wimbledon Construction Company 2000 Limited v Derek Vago [2005] BLR 374 which summarised the relevant principles as follows:

“26…

d)

The probable inability of the claimant to repay the judgment sum (awarded by the adjudicator and enforced by way of summary judgment) at the end of the substantive trial or arbitration hearing, may constitute special circumstances within the meaning of Order 47 Rule 1 (1)(a) rendering it appropriate to grant a stay (see Herschell Engineering Ltd v Breen Proprty Ltd (unreported) 28th July 2000, TCC).

e)

If the claimant is in insolvent liquidation or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted (see Bouygues and Rainford House Ltd v Cadogan Ltd (unreported) 13^th February 2001, TCC).

f)

Even if the evidence of the claimant’s present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:

i)

The claimant’s financial position is the same or similar to its financial position at the time that the relevant contract was made (see Herschell); or

ii)

The claimant’s financial position is due, either wholly, or in significant part, to the defendant’s failure to pay those sums which were awarded by the adjudicator (see Absolute Rentals v Glencor Enterprises Ltd (unreported) 16^th January 2000, TCC).”

In Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC), the claimant was the subject of a CVA which was relied on by the defendant in support of an application for a stay. I said at paragraph 12 of my judgment in that case:

“a)

The fact that a claimant is the subject of a CVA will be a relevant factor for the court to take into account when deciding whether or not to grant a stay under RSC Order 47.

b)

However, the mere fact of the CVA will not of itself mean that the court should automatically infer that the claimant would be unable to repay any sums paid out in accordance with the judgment, such that a stay of execution should be ordered.

c)

The circumstances of both the CVA and the claimant’s current trading position will be relevant to any consideration of a stay of execution...”

There was a dispute between the parties as to which of them had the burden of demonstrating, on the balance of probabilities, that any sums awarded would/would not be paid back, if and when the issues were finally determined by the arbitrator. Although I do not consider that, on the facts of the present case, the issue is of any ultimate significance, I do not accept Mr Bowling’s submission that, in essence, the burden is on the claiming party, in this case Pilon, to demonstrate from their accounts that any judgment sum could be repaid. He argued that the position was directly analogous to the burden upon a party resisting an order for security for costs, whose arguments will often depend on a detailed analysis of its own financial accounts. In Keary Developments Ltd v Tarmac Construction Limited [1995] 3 All ER 534, which was just such a case, Peter Gibson LJ said this:

“However, the court should consider not only whether the plaintiff company could provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders, or other backers or interested persons. As it is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation (see Flender Werft AG v Agean Maritime Ltd [199] 2 Lloyds Rep 27.”

However, at issue here is a different point, unconnected with information to which only the claimant is privy. Here the issue as to whether or not the money could be repaid lies at the heart of Breyer’s application for a stay under RSC Order 47, and therefore the burden, ultimately, is on them to show, on the balance of probabilities, that the money is unlikely to be repaid.

On the facts of this case, the following particular issues arise:

Is Pilon’s financial position significantly different to its position at the time when the contract was made?

Is Pilon’s financial position due to Breyer’s non-payment of the sum awarded by the adjudicator?

On the evidence, is there a significant risk that any sums paid now by Breyer to Pilon would not be repaid if or when there is a final determination in Breyer’s favour?

Pilon’s Financial Position

There is no dispute that, at the time that the contract was made, Pilon’s financial position was good. The accounts at the time that the contract was agreed show net assets in excess of £500,000. It is doubtless for this reason that Mr Stuart-Davies, Pilon’s chief financial officer, expressly states at paragraph 3 of his witness statement that Pilon “was in strong financial health when it first contracted with the defendant on the Ealing Phase 1 project.”

Accordingly, this is not a case in which the claimant’s financial position was always parlous. At the time when the relevant contract was made, Pilon were in a strong financial position.

Is Pilon’s Financial Position Due to Breyer’s Non-Payment of the Sum Awarded?

The adjudicator awarded Pilon £207,000 odd, together with VAT and interest. But at the time when the CVA was agreed, the total owed to Pilon’s creditors was in excess of £2.7 million. In other words, on the face of the evidence, the sum owed by Breyer to Pilon was less than 10% of the sums Pilon owed to others. It is therefore not possible on those figures for Pilon to demonstrate that their financial plight, and in particular their entry into the CVA, was caused in any way by Breyer’s non-payment of the sum found due by the adjudicator.

It seems to me that this point can be easily demonstrated in another way. At the time of the CVA, Pilon’s principal creditor was HMRC. It seems that Pilon owed some £841,000 by way of unpaid income tax and a further £687,000 by way of unpaid VAT. There is no evidence in the papers which could begin to suggest that these large debts to HMRC were in any way connected to Breyer’s non-payment of £207,000.

In their statements, Pilon’s witnesses have sought to muddy the waters by suggesting that their financial plight is due to Breyer’s non-payment of around £820,000 arising under other contracts between the parties. This has led to a good deal of evidence about these contracts and whether or not the sums (which are all disputed by Breyer) can be said to be due or not.

In my judgment, these disputed claims are irrelevant to the issues before me. What matters is whether Breyer’s non-payment of the sum found due by the adjudicator, a sum which is (subject of course to my primary findings) temporarily due and binding on Breyer, has caused Pilon’s poor financial position. The existence of other debts as between the parties is irrelevant if, as here, those debts are disputed. The court simply cannot say whether or not those sums are due to Pilon or not.

Moreover, even if it was legitimate to take into account the full sum of £820,000 said by Pilon to be owed by Breyer on the other contracts, this could not explain the £2.7 million owed to creditors at the start of last year. Even if the disputed £820,000 had been paid in full, that would still have left Pilon with debts of £1.7 million, and there is nothing to say that the CVA would not have been inevitable in such circumstances.

Accordingly, this is not a case in which it can be said that Pilon’s financial deterioration has been caused by Breyer’s failure to pay the sums awarded by the adjudicator. On the contrary, the evidence seems clearly to indicate that Pilon’s debts were both serious and substantial, and were not linked to Breyer in any meaningful way. Thus the only remaining issue is the likelihood of repayment.

Likelihood of Repayment

The evidence concerning the likelihood of repayment arises from the financial information, some of which has only been made available as a result of this application. Taking that evidence as a whole, I am in no doubt that, on the balance of probabilities, it has been shown that Pilon would be unlikely to repay any judgment sum.

The starting point must be the CVA. The evidence demonstrates that Pilon were in serious financial difficulties and owed large sums of money to HMRC. Accordingly, at the time that the CVA was entered into, Pilon could not possibly have been in a position to argue that the repayment of £207,000 was a probability, or even a remote possibility. The question then becomes: what is the evidence as to their financial position since then?

Pilon’s current credit rating is very bad. The recent D&B risk assessment, carried out shortly before the hearing on 30.3.10, identifies their tangible net worth as £147,600 and gives them the lowest rating for financial strength and the highest risk indicator. They are said to represent “a high risk of business failure”. It advises that personal guarantees be obtained for those thinking of doing business with Pilon. A similarly gloomy picture is painted by the Graydon Credit rating report of 26.3.10, which concludes that “credit is not recommended”.

Ms Gough argued that Breyer were relying on outdated information and that the more up-to-date information in relation to Pilon showed a much healthier picture. Whilst I accept that there was further financial information in the statements of Mr Stuart-Davies and Mr Eric Walls, the CVA supervisor, both of the two credit reports to which I have referred in the previous paragraph are bang up-to-date, and cannot fairly be described as otherwise.

The further information from Mr Stuart-Davies and Mr Wall does indicate some improvement in Pilon’s financial position since the CVA. But there is precious little in documentary terms to back up these assertions. The highest it can be put is that the draft management accounts indicate that Pilon has recently made a profit of about £600,000. But as Mr Bowling has correctly pointed out, according to the terms of the CVA, half of that will immediately go to the CVA creditors, which leaves, even on these figures, a maximum of £300,000 to cover all of the eventualities that may arise between now and the likely final determination of the arbitration. It is also noteworthy that there is nothing in either statement about the large debts still owed to HMRC.

Accordingly, it seems to me, taking all the evidence into account, that it has been demonstrated that Pilon would probably not be in a position to repay in a year’s time any sums now paid to them pursuant to the adjudicator’s decision. Pilon’s financial position and its credit-rating remain parlous, and Mr Walls must ensure that the interests of the creditors who agreed to the CVA must inevitably come before the interests of later creditors, like Breyer. That unhappy position is not due in any way to Breyer. For all these reasons, had I given judgment for Pilon, I would have considered it appropriate to grant a stay of execution.

SUMMARY OF CONCLUSIONS

For the reasons set out in Sections 4, 5, 6 and 7 above, I have concluded that the adjudicator wrongly declined to deal with one of the most significant issues referred to him as part of the dispute that he had to decide and that, as a consequence of this jurisdictional error and resulting breach of natural justice, his decision should not be enforced.

If I was wrong about that, such that Pilon were entitled to judgment for the full amount of £207,000 (or for the £60,000 odd that represents the balance between the sum awarded and the over-payment set-off), I would have granted a stay of execution for the reasons set out in Section 8 above.

It is relatively unusual for the TCC not to enforce the decision of an adjudicator and/or to stay any judgment, and I hope that this reserved Judgment has fully explained why, in the relatively unusual circumstances of this case, I have concluded that that is the only appropriate course for me to take.

I should add that I am confirmed in this conclusion by reference to the underlying merits of the dispute. It seems to me that Pilon took a deliberate and risky strategic decision, to try and exclude an important part of Breyer’s defence, and to use the adjudication to obtain a quick payment at minimum cost by reference to batches 26-62 only. Perhaps that strategy is itself explained by Pilon’s difficult financial position. For the reasons that I have given, that deliberate tactic has backfired, as Pilon must have known that it might. In such circumstances, it seems to me appropriate that their summary judgment application should fail.