Morganstone Ltd v Birkemp Ltd [2024] EWHC 933 (TCC)

In an adjudication case, Birkemp Ltd (Birkemp) was unable to enforce an award due to the Adjudicator’s breach of natural justice, despite successfully defending Morganstone Ltd’s (Morganstone) Part 8 claim that challenged the contractual entitlement to the payment sought. This case is a reminder that when defining disputes for adjudications, fairness and ensuring that the responding party can present a full defence are essential.

Background

In December 2021, Morganstone entered into a subcontract with Birkemp to carry out groundworks for a housing development in Swansea (the “Subcontract”). This Subcontract included a payment schedule specifying the dates for each interim application, starting with the first application due on March 31, 2021, and listing twelve subsequent dates, concluding on February 28, 2022. Although the schedule was updated to include applications for 2022, the parties did not agree on interim application dates for 2023.

In December 2023, Birkemp initiated an adjudication contesting the sums certified following its application in August 2023. Morganstone responded by arguing that Birkemp was not entitled to any payment because no agreed payment schedule existed for 2023. Citing the case of Balfour Beatty v Grove Developments ([2016] EWCA Civ 990), Morganstone contended that Birkemp lost its contractual right to submit applications after the last date in the agreed schedule, rendering the August 2023 application invalid. The Adjudicator sided with Birkemp, determining that the August application was valid and that Morganstone had improperly deducted ￡207,076. Birkemp then sought to enforce the Adjudicator’s decision, while Morganstone filed a Part 8 claim for a declaration that Birkemp’s August application was not valid, and that no repayment was owed.

Court Decision

Addressing Morganstone’s Part 8 claim first, HH Judge Keyser KC ruled that, although the specific terms of the payment schedule for 2023 had not been finalized, it was evident that both parties intended for payment applications to continue during that period. This situation was distinct from Balfour Beatty v Grove, where there was clear evidence of finite payment applications. Consequently, the Judge concluded that Birkemp had the right under the Subcontract to continue submitting interim applications and to receive payment in 2023.

Morganstone’s argument against enforcement was that the Adjudicator had taken an overly narrow view of his jurisdiction, thus breaching the rules of natural justice. In its Notice of Adjudication and Referral, Birkemp defined the dispute narrowly, asking the Adjudicator to determine only the value of the Inappropriate deductions. In its Response, Morganstone introduced two crossclaims that entitled it to set off amounts due to defective work. Birkemp argued that these crossclaims exceeded the scope of the dispute, as they did not pertain to the sums labeled as “Inappropriate Deductions.” The Adjudicator ruled that Morganstone’s crossclaims attempted to expand the scope of adjudication and were therefore excluded from his overall award.

The Judge clarified the law regarding when an Adjudicator breaches the rules of natural justice by failing to consider a legitimate defense. Citing O’Farrell MJ in Global Switch Estates Ltd v Sudlows Ltd ([2020] EWHC 4796 (TCC)), the Judge noted that “if the adjudicator fails to consider whether the matters relied on by the responding party amount to a valid defence to the claim in law and on the facts, that may amount to a breach of the rules of natural justice”. HH Judge Keyser KC agreed that the Adjudicator had indeed taken an overly restrictive view of his jurisdiction by neglecting to consider Morganstone’s set-off claims, and it was irrelevant that the dispute was framed narrowly.

This point was underscored by Lord Briggs JSC in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd ([2020] UKSC 25), who stated:

“However narrowly the referring party chooses to confine the reference, a claim submitted to adjudication will nonetheless confer jurisdiction to determine everything which may be advanced against it by way of defence, and this will necessarily include every cross-claim which amounts to (or is pleaded as) a set-off”.

As a result, the enforcement of the Adjudicator’s decision was denied. Birkemp’s Part 7 claim was dismissed. The court warned that while a referring party can define the scope of a dispute, they must do so fairly and cannot restrict the responding party’s ability to present legitimate defences.

GEORGE WILLIAM GIBBS LLB (HONS) LLM

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