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Court of Appeal upholds exception to “pay now, argue later” principle in adjudication enforcement15 April 2020

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In PBS Energo AS v Bester Generacion UK Limited,¹ where Watson Farley & Williams very recently acted for the successful respondent, the English Court of Appeal handed down an important judgment on the approach to enforcement of adjudication awards. The decision, in which Lord Justice Coulson endorsed the approach of the Technology and Construction Court (“TCC”) to applications to enforce awards where there is an arguable case of fraud which could not have been raised during the underlying adjudication, will be of interest to all parties to construction contracts.

The adjudication process

Compulsory adjudication is a speedy dispute resolution process, introduced by the Housing Grants, Construction and Regeneration Act 1996 to preserve cash flow in the construction industry in the face of the disputes that frequently arise between parties to construction contracts. The procedure results in a decision which is temporarily binding on the parties, until the underlying issues can be finally determined by a court or arbitral tribunal.

In order to support the objectives of the adjudication procedure, the TCC has developed a similarly speedy process for the enforcement of awards. Where a respondent fails to pay an award made against them, and before final determination of the underlying issues, the claimant can commence proceedings for enforcement, and seek summary judgment at the same time. This dramatically reduces the time taken to obtain a judgment and recover monies. Adopting a “pay now, argue later” approach, the court will usually not interfere with the adjudicator’s decision, unless it is plain that the adjudicator lacked jurisdiction or on the grounds of procedural unfairness.

The facts

PBS Energo A.S (“PBS”) had been engaged by Bester Generacion UK Limited (“Bester”) to act as sub-contractor in respect of the engineering, procurement, construction and commissioning of a biomass-fired energy-generating plant in Wrexham. A dispute arose between the parties and PBS purported to terminate the sub-contract.

"Mr Justice Pepperall considered that it was properly arguable that PBS had made false representations to the adjudicator knowing them to be false."

PBS commenced adjudication, obtaining a liability award in its favour and, subsequently, a quantum award for just over £1.7m. PBS sought to enforce that award through summary judgment, but in a landmark decision its application was refused on the basis that Bester had a reasonably arguable case that the award had been procured by fraud. Evidence had emerged in parallel proceedings before the TCC which indicated that, contrary to PBS’ position before the adjudicator, certain items of plant would not be available to Bester upon payment of the sums the adjudicator had found to be due.

Mr Justice Pepperall considered that it was properly arguable that PBS had made false representations to the adjudicator knowing them to be false, and that those representations were intended to – and did – influence the adjudicator when making his decision. He therefore considered that it was inappropriate to grant summary judgment. This was the first occasion on which enforcement had been refused in such circumstances, and our article on the decision can be read here. PBS appealed.

The appeal

PBS sought permission to appeal on four grounds:

  1. The judge erred in concluding that the allegations of fraud were relevant to the adjudicator’s decision;
  2. The allegations of fraud could/should have been raised in the adjudication;
  3. The judge should have found that, because the respondent had not filed a defence alleging fraud, the allegations of fraud were not open to the respondent; and
  4. The judge had failed to distinguish between granting summary judgment and enforcing judgment. He ought to have granted summary judgment, even if he had then stayed some or all of that judgment.

However, permission was only granted in respect of the third and fourth grounds of appeal.

When enforcement of an adjudication award can be resisted on the grounds of fraud

This meant it was not strictly necessary for the Court of Appeal to comment on Mr Justice Pepperall’s conclusions regarding the allegations of fraud and their effect on the application for enforcement. Nevertheless, in a helpful commentary on the law in this area, Lord Justice Coulson set out the following principles:

  • If allegations of fraud were made in the adjudication, then they were considered (or will have been deemed to have been considered) by the adjudicator in reaching their decision and cannot subsequently amount to a reason not to enforce the decision;
  • Equally, if the allegations of fraud were not made in the adjudication but could and should have been at that time, they cannot subsequently amount to a reason not to enforce; and
  • However, if an adjudicator’s decision was arguably procured by fraud, or where the evidence on which the adjudicator relied is shown to be both material and arguably fraudulent then, on the assumption that the allegations of fraud could not have been raised in the adjudication itself, such allegations can be a proper ground for resisting enforcement.

The Court of Appeal has thus confirmed that the “pay now, argue later” principle on which the process of adjudication rests is not absolute, though it remains the norm. If a reasonably arguable case of fraud can be demonstrated that was not available at the adjudication, then an application to enforce an award by way of summary judgment may well face difficulties. This confirmation will no doubt be welcomed throughout the construction industry, reinforcing as it does the importance of good behaviour in the adjudication process, notwithstanding the abridged timeframes involved.

"This confirmation will no doubt be welcomed, reinforcing as it does the importance of good behaviour in the adjudication process."

Allegations of fraud

The third ground of appeal concerned the TCC’s abridged procedure for enforcing adjudication awards. PBS contended that, because Bester had failed to plead a defence to its claim alleging fraud and had instead relied upon written evidence in this respect, those allegations should not have been considered at the summary judgment hearing.

However, as Bester contended and Lord Justice Coulson accepted, the Civil Procedure Rules specifically provide at rule 24.4(2) that, where a claimant applies for summary judgment before a defence has been filed, the defendant need not file a defence before the hearing. PBS argued that nevertheless, it was still entitled to have detailed allegations of fraud against it properly pleaded, citing the principle that the more serious the allegations of misconduct, the greater the need for particulars explaining the basis of the allegations. Noting the clear words of the rule, Lord Justice Coulson rejected this argument, ultimately concluding that, although a defendant seeking to resist summary enforcement of an adjudicator’s decision by raising an allegation of fraud may be well-advised to plead a defence, the pleading and service of such a defence is not compulsory before a defendant can rely upon such allegations. In this case there was no suggestion that PBS or the judge were in any doubt as to the complaints being made, the allegations having been clearly set out in a witness statement certified with a signed statement of truth to which PBS had responded, and the professional conduct and ethical obligations that both solicitors and barristers must comply with in this respect provided sufficient safeguard.

In reaching this decision, Lord Justice Coulson emphasised that the accelerated TCC procedure is expressly designed to assist claimants, but they are not obliged to use it. In using the procedure, claimants must accept that there is a risk that something may arise on enforcement which did not arise in the adjudication, and if they are not willing to accept that risk they should wait until a defence is pleaded before seeking summary judgment.

"Lord Justice Coulson’s judgment provides an important confirmation that the adjudication process will not provide a cover for poor behaviour."

Summary judgment or stay?

As for the fourth ground of appeal, PBS had suggested that Mr Justice Pepperall should have granted summary judgment and, if he had been concerned about the fraud allegations, he could then have stayed execution of that judgment, either in whole or in part. However, given the decision on ground three, Lord Justice Coulson observed that this ground of appeal also had to fall away. He commented that, given Mr Justice Pepperall’s conclusions on the fraud allegations, the first instance judge had been quite entitled to refuse the application for summary judgment in its entirety. As for the suggestion that there could have been a partial stay, the first instance judge had pointed out that the adjudicator’s decision could not be severed in this case and so a partial stay would not be appropriate, and PBS had not in fact sought a stay at that point.

Conclusion

The decision of the Court of Appeal was handed down just over a month after the TCC’s decision that, in fact, contrary to the findings in the so-called liability adjudication, PBS’ termination of the sub-contract was not valid.² This finding, in which Bester’s counterclaim for wrongful termination was upheld, effectively superseded the adjudication awards and rendered the appeal futile. Even if PBS had succeeded in full, the TCC’s decision meant it would no longer be appropriate to enforce the adjudicator’s decision.

Nevertheless, Lord Justice Coulson’s judgment provides an important confirmation that the adjudication process will not provide a cover for poor behaviour.

Andreas Efstathiou, a former senior associate in our London office, also contributed to this article.

[1] [2020] EWCA Civ 404

[2] See PBS Energo AS v Bester Generacion UK Ltd & Anr [2020] EWHC 223 (TCC), in which Watson Farley & Williams also acted for the successful party.

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