Is determination of a 'true value' a finding of the 'notified sum'?

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In Bexheat Limited v Essex Services Group Limited [2022 EWHC] 936 (TCC), a range of key issues were covered including severance, joinder, and setoff against an adjudicator’s decision.

However, the main argument worth noting related to whether a true value adjudication can be binding on a subsequent interim valuation.

Bexheat Limited v Essex Services Group Limited

Essex Service Group Limited (ESG) engaged Bexheat Limited (BHL) in a construction contract for MEP works worth £1,035,000 under a bespoke agreement. In seeking summary judgment of an adjudicator’s decision, Mrs Justice O’Farrell awarded BHL £724,827.88 in respect of its interim application number 23 for the gross value of £2,010,121.74.

The outcome

The decision that was enforced resulted from the second of three adjudication proceedings, where only the first two reached a decision because the adjudicator in the third adjudication resigned for lack of jurisdiction.

The first adjudication decided the true value of BHL’s interim valuation number 22 in the Gross sum of £1,319,830.61 and entitled BHL to a payment of £141,646.35. ESG paid BHL the sum decided.

Mrs Justice O’Farrell noted that in the process of deciding the true value in the first adjudication, the adjudicator necessarily worked through detailed arguments, evidence, and figures in respect of measured works, preliminaries, variations, and claims for additional costs to establish the true value (paragraph 51).

In the enforcement proceedings relating to the second adjudication decision, ESG argued that the true value determined in the first adjudication was binding on the parties in respect of subsequent valuations. For a number of reasons, this was found not to be the case and therefore the determination of the ‘true value’ of the account subsequently became effectively redundant.

Why was this decision the right one?

Being a quantity surveyor by background the effect of this decision doesn’t feel quite right. How can an adjudicator’s determination of the true value of an account not have a bearing on subsequent valuations, particularly where determinations are likely to have been made on at least some elements of entitlement and quantum?

However, on analysis of the specific details in this case I agree with Mrs Justice O’Farrell, and I have summarised below the reasons why:

  1. BHL’s interim application for payment for valuation cycle 23 was issued before the commencement of the first adjudication proceedings.  Therefore, its application when issued could not in practice have taken account of the subsequent decision of an adjudicator.
  2. Mrs Justice O’Farrell found that the first adjudicator’s decision was limited to the true value of valuation cycle 22 and so would not necessarily provide a good defence in payment cycle 23. Although counsel argued that the ‘true value’ would not change between cycles 22 and 23, whether the true value had changed had not been adjudicated upon.
  3. ESG did not raise the issue of the first adjudicator’s true value determination as a defence in the second adjudication, and therefore there was no basis on which the second adjudicator was able, or required, to consider any effect the true value determination may have.
  4. Although the first adjudicator’s decision was issued before the date by which ESG could have issued a Pay Less Notice in respect of valuation cycle 23, it failed to do so.

Jurisdictional challenges

Mrs Justice O’Farrell pointed out to ESG that the issues it was now raising in enforcement proceedings were essentially challenges to the jurisdiction of the second adjudicator, and by which it was seeking to effectively oust the adjudicator and make his decision invalid. As ESG had not raised a relevant jurisdictional challenge on the grounds described above in the second adjudication and did not reserve its position, ESG could not now seek to challenge jurisdiction at enforcement.

Should a determined true value be binding?

In the specific circumstances of this case, I agree with the judge’s analysis and reasoning. Although, I must confess to having a lingering concern about the extent to which this case may be viewed as authority for a proposition that a true value determination of an interim payment cycle is confined to that payment cycle. I do accept O’Farrell J’s important clarification in paragraph 57 that any difference in the true value between cycles 22 and 23 had not been adjudicated on. The key point being that whilst there are likely to be components of the true value determination that will not change in subsequent payment cycles, there are equally likely to be components that will change, and until the basis of those changes are properly assessed it cannot be said that the true value determined in one payment cycle is binding.

One concern that arises naturally from this situation is the extent to which the binding nature of an adjudicator’s decision may survive in subsequent payment cycles and provide assurance of predictability in the outcome of future valuations. The test in subsequent true value adjudications would follow the criteria for establishing whether the dispute is one that has already been determined (this principle and authorities are discussed in the judgment). This would involve consideration of the extent of fact and degree to which the basis for determining the value of any component of the valuation has substantially changed. This may sound to some like an opportunity to re-argue the true value of parts of the account by seeking to adduce new ‘evidence’ in a subsequent payment cycle.

In this case, the binding effect of the first adjudicator’s decision appears to have been limited, for specific factual reasons, to payment cycle 22. In this sense, for that payment cycle the value decided effectively became the notified sum to be paid and not the binding true value of all or part of the account.

Without knowing more about the specific project in this case, it is impossible to know whether the true value determination in valuation cycle 22 (or parts of it) subsequently had any further binding effect by, for example, being adopted in later valuation cycles.

The case makes an interesting read for the reasons discussed above but also provides other helpful summaries and clarifications concerning contractual terms being consistent with the Housing Grants Construction and Regeneration Act 1996 and The Scheme for Construction Contracts (England & Wales) Regulations 1998 in relation to set-off and joinder. It provides a useful reminder to parties engaged in adjudication to carefully consider jurisdiction and to raise suitable challenges at the appropriate time.

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