ENVIROFLOW MANAGEMENT LTD v REDHILL WORKS (NOTTINGHAM) LTD

 

Technology and Construction Court

O’Farrell J

16 August 2017

ENVIROFLOW MANAGEMENT LTD v REDHILL WORKS (NOTTINGHAM) LTD

The adjudicator did not have jurisdiction to award the successful sub-contractor its reasonable costs of the adjudication pursuant to sections 5A, 2A and 3 of the Late Payment of Commercial Debts (Interest) Act 1998

 

The sub-contractor in its enforcement proceedings (i) submitted that its claim for reasonable recoverable costs was a substantive claim put before the adjudicator in respect of which he clearly had jurisdiction to make a decision and (ii) relied on the express words of the Late Payment of Commercial Debts (Interest) Act 1998 in support of its claim that it was entitled to recover such costs.

 

O’Farrell J in holding that the adjudicator did not have jurisdiction to award the successful sub-contractor its reasonable costs of the adjudication pursuant to the Late Payment of Commercial Debts (Interest) Act 1998 stated that section 5A provides for there to be an implied term in the contract between the parties, the effect of which is that (i) A fixed sum shall be paid in respect of the costs of recovering the debt of £100 and (ii) If that fixed sum is not sufficient to meet the reasonable costs of the party recovering the debt, that party shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs. Section 108A of the Construction Act 1996 as amended (i) makes express provision in relation to the costs of the parties relating to adjudication and (ii) provides that such costs will only be recoverable where an agreement to that effect is made in writing after the giving of the notice of intention to refer the dispute to adjudication (unless it is a contractual provision relating to the adjudicator's fees and expenses).

 

Whilst the sub-contractor was entitled to seek its reasonable costs in recovering the sums due in respect of interim payment applications under the term implied by section 5A(3) of the Late Payment of Commercial Debts (Interest) Act 1998, that implied term (i) falls within the definition of “any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract” under section 108A(1) and (ii) is therefore caught by section 108A(2) and is ineffective unless the subject of an agreement made in writing after the notice of adjudication. It was common ground that there was no such agreement in writing post the notice of adjudication with the result that the adjudicator had no power to make an award in relation to the sub-contractor’s costs of pursuing its claim in adjudication.

 

THE FULL TEXT OF THE JUDGMENT OF O’FARRELL J

 

  1. This is an application by the claimant, Enviroflow Management Limited (“Enviroflow”), against the defendant, Redhill Works Nottingham Limited (“Redhill”), to enforce the decision of an adjudicator, Mr Daniel Atkinson, dated 5 June 2017 in the total sum of £134,179.84 inclusive of costs and interest.

 

  1. This matter concerns works carried out in respect of Virgin Media installation works. Redhill was awarded a contract in about January 2016 to carry out Virgin Media installation works, the installation of telecommunications infrastructure works in the Rotherham area of South Yorkshire, by Comex 2000 UK Limited.

 

  1. Redhill wished to engage a subcontractor to carry out some of those works. In February / March 2016 either Enviroflow or Cherbind was engaged by Redhill for the purpose of carrying out such works. Works were undertaken throughout 2016, but towards the end of that year a dispute arose between the parties as to alleged outstanding applications for payment.

 

  1. On 10 May 2017, Enviroflow issued a notice of adjudication and Mr Atkinson was appointed as the adjudicator. On 5 June 2017 Mr Atkinson published his adjudication decision, in which he awarded Enviroflow:

 

  1. i) The principal sum of £81,030.64 plus VAT,

 

  1. ii) interest under the Late Payment of Commercial Debts (Interest) Act 1998 (“the Late Payment Act”) of £3,240.87 and continuing at £18.31 per day,

 

iii) £11,818.20 in respect of Enviroflow's reasonable costs of recovering the debt under the Late Payments Act plus VAT of £2,275, and

 

  1. iv) £19,509 including VAT in respect of the adjudicator's fees and expenses initially to be paid by Enviroflow and then recovered from Redhill.

 

  1. Those sums remain unpaid and therefore Enviroflow commenced these proceedings and issued this application for summary judgment.

 

  1. The application is made under CPR part 24 and the relevant test is set out at CPR 24.2:

 

"The court may give summary judgment against… a defendant on the whole of a claim or on a particular issue if (a) it considers that… (ii) the defendant has no real prospect of successfully defending the claim or issue."

 

The reference to no "real prospect of successfully defending the claim" requires the claimant to satisfy the court that there is no chance of success on the evidence in respect of the defendant’s case. The defence that is raised must be established as being real rather than fanciful, but it is not for the defendant to establish that it is more probable than not to succeed.  

 

  1. In this case the main issue is whether the court can determine the contractual dispute on the documents or whether, because of disputed oral evidence, there needs to be either a short hearing to determine that issue or whether there needs to be a trial.

 

  1. The issues that arise are:

 

  1. i) Firstly the correct contracting parties to the subcontract. It is common ground between the parties that Redhill engaged one of the claimant group entities to carry out the subcontract works. However there is a dispute as to whether the sub-subcontract was with Enviroflow, such as to give Enviroflow jurisdiction to submit its dispute to adjudication, or whether the subcontract was with Cherbind, not a party to the adjudication, in which case the adjudicator's decision would be a nullity through lack of jurisdiction.

 

  1. ii) Secondly, there is an issue as to recoverability of Enviroflow's legal costs in the adjudication and whether or not the adjudicator had jurisdiction to make such an award.

 

  1. Turning first to the dispute regarding the formation of the subcontract, the relevant events and documents are as follows.

 

  1. A meeting took place between John McGrath of both Enviroflow and Cherbind and Richard Breffitt of Redhill on 19 February 2016. Mr Breffitt deals with this meeting in his witness statement starting at paragraph 17. He states that he agreed to meet with Mr McGrath at Redhill's offices on Friday 19 February 2016 at 10am in Nottingham.  He states at paragraph 19 that Mr McGrath was the managing director of Cherbind and:

 

"As far as I was concerned the meeting took place between my business and Cherbind."

 

  1. At paragraph 22 he states:

 

"I told John [Mr McGrath] that James Ward would be in contact with him that day and would send him over details of our rates and the contract pack for completion, which included a copy of our terms and conditions. There was no doubt in my mind, because of what was discussed that day but also what we had previously discussed by telephone, that we had agreed a deal which meant that John would supply gangs on behalf of Cherbind on our standard terms.  All that John needed to know was rates and how much labour was required."

 

  1. Mr McGrath in his witness statement states that his understanding was that any subcontract would be between Enviroflow rather than Cherbind, in particular because Enviroflow was already an approved Virgin Media installer and had men and resources available to start the works in Rotherham.

 

  1. On 24 February 2016 Mr Ward of Redhill sent to Mr McGrath an email enclosing the proposed rates for the Virgin Media installation works in Rotherham. He stated that:

 

"Payment terms will be back to back with ours at 30 days from approval. We will be requiring four dig gangs from 7 March 2016, including re-instatement teams to suit your output.  Please feel free to give me a call if they are of interest and can meet the date and we can meet up to discuss any further issues you may have."

 

  1. It is common ground that there was a further meeting between Mr McGrath and a Mr Andy Sedman, both of Enviroflow and Cherbind, with Mr James Ward and Mr Wayne Simms of Redhill. At that meeting it was agreed that works would start on 1 March 2016.

 

  1. Works did indeed start at the beginning of March 2016.

 

  1. On 15 March 2016 there was a phone call between Mr Ward of Redhill and Mr McGrath. There is a dispute as to exactly what was said during that telephone conversation. Mr Ward's evidence is that during the phone call Mr McGrath asked whether he could use Enviroflow to invoice the works, being a connected sister company to Cherbind.  That is disputed by Mr McGrath, who says that the phone call was simply to establish an agreement that Enviroflow could invoice and be paid an on account payment.

 

  1. On 15 March 2016 Mr Ian Bowness (of both Enviroflow and Cherbind) attached, in an email to Mr Ward of Redhill, an application for an interim payment on account in respect of the works in the sum of £10,000 plus VAT. The email reads:

 

"Hello James. Further to your conversation with John McGrath I have attached application 1 for £10,000 plus VAT as agreed."

 

  1. The response from Mr Ward later that day states that Mr Bowness had referred to incorrect payment terms, namely seven days rather than 30.

 

  1. In response to that, Mr Bowness sent a further email stating:

 

"Apologies. I had left our standard terms on the paperwork.  I have now amended this.  I have also attached our bank details, et cetera."

 

The attached invoice was entitled "Invoice number 1, Enviroflow Management Limited", with Enviroflow's address. The invoice was addressed to Redhill Works and it stated, "Payment on account as agreed with James Ward, £10,000 plus VAT".  The bank details that were provided were the bank details for Enviroflow Management Limited.

 

  1. On 29 March 2016 Mr Ward of Redhill sent an email with attachments to Mr Nicholls (of both Enviroflow and Cherbind). The email was addressed to Mr Nicholls at his Cherbind email address and stated:

 

"Hi Graham, please find attached your subcontract order that I would like to you fill in the blanks, sign and get back to me, together with a new subcontractor start-up form that we need filling in and sending back before any payment can be made."

 

  1. The subcontract order that was attached to the email provided the following details. It stated: "Name: Enviroflow Management Limited." The works were described as "Virgin Media civil works and other associated activities". The client was identified as Comex 2000 UK Limited.  The site was identified as "The Rotherham works".  Then in the box beneath those details it stated:

 

"Redhill Works Nottingham Limited hereby instructs the subcontractor to carry out and complete the subcontract works as set out in the subcontract details below in accordance with the terms of this order and all documents referred to herein, including the terms and conditions. For the avoidance of doubt the terms of this order, the documents referred to in this order and the terms and conditions shall govern the subcontract to the exclusion of any terms and conditions proposed by the subcontractor save only to the extent that Redhill Works Nottingham Limited expressly agrees in writing any quotation received from the subcontractor shall not form part of this subcontract."  

 

The subcontract works description is stated as starting on 7 March 2016 with an anticipated completion date of 31 December 2016. The documents that were identified as forming part of the subcontract were the subcontract order, the terms and conditions attached, the subcontract schedules and mutual NDA. The relevant documents that were attached required various details to be provided by the subcontractor.  

 

  1. On 31 March 2016 Mr Nicholls sent an email to Mr Ward, stating:

 

"Please find attached our subcontractor start-up form together with scanned copies of documents as listed in order that we may be paid as agreed. Also is discussed if we can meet up next week to finalise the queries that we have with the T&Cs and reconcile gang values."

 

  1. The documents that were attached included the subcontractor start-up form into which Enviroflow had inserted "Enviroflow Management Limited" against the subcontractor name. The subcontractor start-up form gave as the subcontractor details "Enviroflow Management Limited" and the company details identified Mr McGrath and Mrs McGrath as company directors. The subcontractor bank details were identified as the Enviroflow Management Limited bank account.

 

  1. There was a subcontract non-competition agreement into which had been inserted as the subcontractor "Enviroflow Management Limited". The company was identified as Redhill Works Nottingham limited and that had been signed by Mr McGrath at the bottom of the page.

 

  1. There was also a certificate of incorporation of a private limited company which gave details of the incorporation of Enviroflow Management Limited.

 

  1. There was an insurance document identifying the group insurance which covered Cherbind Limited, Enviroflow Management Limited and other companies. In the insurance document, the occupation of Cherbind Limited was identified as "groundwork, utility installation, maintenance and renewals". The occupation of Enviroflow Management Limited was identified as "drainage investigation and associated works, including high-pressure water jetting and wet blasting".

 

  1. Enviroflow's VAT registration certificate was enclosed.

 

  1. Enviroflow Management Limited's goods vehicle operator's licence was attached. There was a certificate of motor insurance covering Enviroflow Management Limited and another company. There was a certificate of registration under the WASTE England and Wales Regulations 2011 in respect of

Enviroflow Management Limited and its health and safety policy.

 

  1. Following the exchange of the subcontract documents, the works continued until, as I have indicated earlier, a dispute arose in about October 2016.

 

  1. The claimant's case is that a contract was formed at some stage between 19 February 2016 and 1 March between Redhill and Enviroflow. That was subsequently reinforced by the exchange of the subcontract order documents identifying Enviroflow as the subcontractor. Redhill's case is that the contract was made in those early meetings between Redhill and Cherbind. Even if the court is not persuaded today of its case, it should at the very least accept that there is a real prospect of success because oral evidence would be needed to enable the court to form a view as to whose evidence to prefer.

 

  1. In my judgment it is possible for this court to determine the issue of subcontract formation based on the documentary evidence that is before the court read against the background of the witness evidence that has been placed before it.

 

  1. Starting with the meeting of 19 February 2016, it is clear based on the witness statements both of Mr McGrath and Mr Breffitt that in principle the parties agreed that Mr McGrath would be able to provide labour in respect of the Rotherham works and that Redhill would wish to engage them in respect of those works. However, it is also clear based on the witness statements of both Mr McGrath and Mr Breffitt that there was not a binding concluded subcontract as a result of that meeting.

 

  1. Mr Breffitt's witness statement at paragraph 22 states that at the end of the meeting there were outstanding matters. He agreed to send over to Mr McGrath details of Redhill's rates and the contract pack for completion, which included a copy of Redhill's terms and conditions. Therefore it is quite clear that at the end of that meeting the parties had not agreed either a contract price or rates, or the terms and conditions that would be applicable to what was intended to be a future subcontract arrangement.

 

  1. On 24 February 2016 a list of the rates was sent by Redhill to Mr McGrath, but the terms and conditions on which the works were going to be carried out were not sent by Redhill to anyone at Enviroflow or Cherbind until 29 March 2016. As is quite common in cases of this kind, the works started at the beginning of March 2016 without there being a contract in place. The parties agreed that an initial payment on account would be made, hence the agreement on 15 March 2016, but the parties had not reached agreement on all of the essential terms so as to give rise to a binding enforceable subcontract.

 

  1. The documents that were exchanged by the parties on 29 March 2016 and 31 March 2016 show that the parties to the subcontract were Redhill and Enviroflow. There were some minor references to Cherbind, such as the email address of Mr McGrath and references to the group insurance document referring to Cherbind as well as to Enviroflow. I accept, as has been pointed out by Mr Jinadu, that when one looks at the description of the occupation of the group companies, for the purposes of insurance, that Cherbind Limited more neatly fits the description for the works that were to be carried out. However, read as a composite, it is clear from the documents that the intention of the parties was that the subcontractor would be Enviroflow Management Limited and not Cherbind Limited.

 

  1. That conclusion is reinforced by reference to the subsequent conduct of, and documents exchanged between, the parties. The invoices that were submitted during the course of the works were all submitted by Enviroflow to Redhill and at no point was any objection raised by Redhill to that process. Variations on the project were issued by Redhill to Enviroflow, not to Cherbind. On-site instructions were recorded on Enviroflow headed paper and signed off by Redhill without objection.  The pay less notices that Redhill purported to issue from 26 October 2016 onwards were addressed to Enviroflow Management Limited and referred to the "Subcontract Works package, Rotherham/Enviroflow Management Limited".

 

  1. Mr Jinadu relies upon the telephone conversation held on 15 March 2016 in respect of which Mr Ward's evidence is that it was simply a request by Mr McGrath for all invoicing to be issued by Enviroflow and payments made to Enviroflow. That might raise a triable issue and provide a real prospect of success on a defence for the purposes of CPR 24 if there had not been an overwhelming weight of contrary evidence in the other documents. The problem for Redhill is that the telephone conversation of 15 March is at best ambiguous when looked at in the context of the email exchanges that immediately followed it in relation to the on account payment. More importantly, it is at odds with the exchange of the subcontract documents, including the subcontract documents prepared by Redhill, which clearly referred to Enviroflow as the subcontractor. 

 

  1. It is also contradicted by the fact that not only were the invoices made by, and payments made to, Enviroflow, but also the variations and on-site instructions were issued to Enviroflow. There has been some attempt at an explanation by Mr Breffitt and Mr Ward in their witness statements to suggest that that was merely to maintain consistency with the invoicing, but that is not a persuasive explanation. Even if payments were going to be made to Enviroflow, it would not explain the issue of all other subcontract documents to Enviroflow rather than to Cherbind.

 

  1. Finally, the letter of claim that was issued by Redhill's claims consultant on 20 December 2016 referred to a subcontract as between Redhill and Enviroflow and referred to the subcontract order dated 7 March 2016 and the other documents to which I have already referred. Although there has been an attempt to retract the contents of that letter, it is clearly admissible evidence against Redhill on this application as to what the parties must have intended back in 2016.

 

  1. For all those reasons, in my judgment it is clear that the subcontract was entered into between Enviroflow Management Limited and Redhill Works Nottingham Limited. Therefore the adjudicator had jurisdiction to determine the payment dispute that was referred to him. The adjudication award in terms of the principal payment and interest is enforceable and it is appropriate to enforce it by way of

these summary judgment proceedings.

 

  1. I then turn to the second issue between the parties which is in relation to the costs incurred by Enviroflow in pursuing the adjudication.

 

  1. In the Notice of Adjudication, Enviroflow sought its reasonable costs of recovering the debt claimed, namely that in respect of the interim payments less the fixed sum of £100 pursuant to section 5A, 2A and 3 of the Late Payment Act as amended. That claim for costs was disputed by Redhill, but in his decision the adjudicator awarded Enviroflow its costs in the sum of £14,093.20 including VAT. The issue before this court is whether the adjudicator had jurisdiction to make such an award.

 

  1. On behalf of Enviroflow, Mr Webb submits that the claim for reasonable recoverable costs was a substantive claim put before the adjudicator in respect of which he clearly had jurisdiction to make a decision. He relies on the express words of the Late Payment Act in support of his claim that he was entitled to recover such costs.

 

  1. Mr Jinadu on behalf of Redhill submits that there was no power for the adjudicator to award costs. The adjudication took place in accordance with the statutory scheme, the scheme does not expressly provide for the adjudicator to award either party's costs and there was no other agreement between the parties for the adjudicator to have jurisdiction to award such costs. He contends that the provision in section 5A of the Late Payment Act is contrary to the provision of section 108A of the Housing Grants Construction and Regeneration Act 1996 as amended by the 2009 Act.

 

  1. Section 5A of the Late Payment Act provides as follows:

 

“(1) Once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to a fixed sum (in addition to the statutory interest on the debt).

 

(2) That sum shall be… (c) for a debt of £10,000 or more, the sum of £100.

 

2A If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.

 

(3) The obligation to pay a sum under this section in respect of a qualifying debt shall be treated as part of the term implied by section 1(1) in the contract creating the debt."

 

  1. The starting point is that section 5A of the Late Payment Act provides for there to be an implied term in the contract between the parties, the effect of which is that a fixed sum shall be paid in respect of the costs of recovering the debt of £100 and, if that is not sufficient to meet the reasonable costs of the party recovering the debt, that party shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.

 

  1. Section 108A of the Housing Grants Construction and Regeneration Act 1996 as amended provides at subsection (1):

 

"This section applies in relation to any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract."

 

  1. Subsection (2) states:

 

"The contractual provision referred to in subsection (1) is ineffective unless

 

(a) it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate its fees and expenses as between the parties or

 

(b) it is made in writing after the giving of notice of intention to refer the dispute to adjudication."

 

  1. In my judgment section 108A makes express provision in relation to the costs of the parties relating to adjudication. It provides that such costs incurred by the parties in the adjudication process will only be recoverable where an agreement to that effect is made in writing after the giving of the notice of intention to refer the dispute to adjudication (unless it is a contractual provision relating to the adjudicator's fees and expenses).

 

  1. In this case, by reason of the Late Payment Act, Enviroflow was entitled to seek its reasonable costs in recovering the sums due in respect of interim applications for payment by reason of an implied term. That implied term falls within the definition of “any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract.” Therefore, it is caught by section 108A, subsection (2), and is ineffective unless the subject of an agreement made in writing after the notice of adjudication.

 

  1. It is common ground before me that there is no such agreement in writing post the notice of adjudication. Therefore the adjudicator had no power to make an award in relation to Enviroflow's costs of pursuing its claim in adjudication. I accept the submission of Mr Jinadu that in this case there was no jurisdiction to award the reasonable costs of recovery. To that extent Enviroflow's application for summary judgment must fail.

 

  1. In summary, judgment is granted in respect of the sums claimed less the sum in relation to the reasonable recovery costs.