Choosing Your Adjudicator And Recovery Of Overpayments – The Latest Guidance From The Courts

In Bellway Homes Limited v Surgo Construction Limited [2024]EWHC 269 (TCC), Bellway sought to enforce an adjudication award that required Surgo to repay an overpayment.

The two main issues in the case were: (i) whether or not a building contract could require an adjudicator to be appointed from a panel specified in the contract and (ii) the extent to which an employer can rely on a negative valuation to reclaim an overpayment from a contractor.

Background

In August 2022, Surgo succeeded in a "smash and grab" adjudication – where Bellway had not submitted a valid payment notice or pay less notice, Surgo was entitled to be paid the sum set out in its interim application for payment.

Bellway paid the amount awarded to Surgo in the "smash and grab" adjudication. Bellway did not, at that stage, seek to recoup any overpayment by way of a "true value" adjudication.

Instead, Surgo continued to submit interim applications for payment, which were paid by Bellway.

The Dispute

A dispute subsequently arose in February 2023, by which time Surgo had been paid a total of £11.3m. The contract administrator valued the next interim application from Surgo at minus £3.4m – i.e., indicating that Surgo had been significantly overpaid. Surgo disagreed.

Bellway referred a claim to adjudication – seeking repayment of £3.4m on two different bases. First, Bellway characterised its claim much like a "smash and grab" adjudication, seeking the payment on the basis of the contract administrator's valuation of Surgo's interim application. In the alternative, Bellway characterised its claim as a "true value" adjudication, relying on the contract administrator's valuation to demonstrate that Surgo had been overpaid.

Bellway selected an adjudicator from the panel of adjudicators set out in the contract.

Bellway's first attempt to adjudicate

Surgo disputed the adjudicator's jurisdiction, arguing that:

1. the contract provisions relating to the panel of adjudicators contravened various requirements of the Construction Act, including the timetable to appoint one of those adjudicators; and
2. as a result, the Scheme for Construction Contracts applied in default – requiring Bellway to apply to one of the nominating bodies under the Scheme to appoint an adjudicator.

The original adjudicator, Mr Cope, agreed with Surgo's argument and concluded that he did not have jurisdiction and resigned.

Mr Cope indicated, however, that had he been appointed under the Scheme instead, he would have had jurisdiction to hear the dispute (even though he was also one of the named panel adjudicators under the contract).

Bellway's second attempt to adjudicate

Bellway then tried again, this time stating that the referral to adjudication was being made under the Scheme and purporting to appoint Mr Cope as the adjudicator on that basis.

Surgo objected to Mr Cope's appointment, maintaining its argument that the contract provisions in relation to the appointment of an adjudicator contravened the Construction Act and, in default of that, the Scheme did not allow Bellway to select an adjudicator from its panel.

This time, Mr Cope did not resign – repeating his view that he had jurisdiction under the Scheme.

The result of the adjudication

In the adjudication, Mr Cope:

1. rejected Bellway's characterisation of its claim as a "smash and grab" adjudication, seeking payment on the basis of the contract administrator's valuation; but
2. accepted that he could and should instead undertake a "true value" assessment of Surgo's account; and
3. ultimately concluded that Surgo should repay Bellway a sum of just over £1m.

Challenging the adjudicator's decision

Surgo did not comply with the adjudicator's order for Surgo to pay Bellway. Bellway therefore issued court proceedings to enforce the decision.

Surgo challenged the jurisdiction of the adjudicator, both in relation to how he had been appointed and what he decided.

The court's decision – panel of adjudicators in the contract

In the enforcement proceedings, Surgo argued that:

1. the terms in the contract providing for a panel of adjudicators:
   
   a. effectively prevented Surgo from being able to commence an adjudication "at any time" (as required by the Construction Act); and
   
   b. did not provide for an adjudicator to be appointed within seven days (again, as required by the Construction Act); and
   
2. by obliging Surgo to use an adjudicator from a panel effectively set by Bellway, the contract did not provide for the appointment of an impartial adjudicator (again, as required by the Construction Act); and
3. if the contract does not comply with these requirements of the Construction Act, the adjudication provisions of the Scheme applied instead.

The Judge (HHJ Stephen Davies) rejected Surgo's argument for the following reasons.

1. Surgo was exaggerating the practical difficulties of appointing a panel adjudicator.
2. The Construction Act requires a contract to include the "object" of securing an adjudicator's appointment and referral of the dispute within seven days of the notice of adjudication. The Judge said that the parties are free to agree – as they did here – that so long as the contract secures that objective, it is not fatal that the contract does not expressly prohibit a period in excess of seven days.
3. The requirement to appoint an adjudicator from a specified list of adjudicators did not offend the requirements of the Construction Act – noting that the Scheme itself permits the parties to specify a person (or persons) to act as adjudicator in a contract.
4. The Judge noted that the panel adjudicators in this case were all well-respected and independent adjudicators, with no evidence (or even suggestion) that they were or could be biased. The Judge distinguished this from a situation (which arose in Sprunt Limited v London Borough of Camden [2011] EWHC 3191 (TCC)), where a contract gave a party the right to nominate a particular adjudicator after a dispute had arisen.

The Judge therefore concluded that the contract's provisions in relation to the appointment of an adjudicator were valid and had been correctly and appropriately followed by Bellway in this case.

The court's decision – recovering an overpayment

In the enforcement proceedings, Surgo argued that there was no legal basis for the adjudicator to order repayment of the alleged overpayment in this case. In particular, Surgo contended that:

1. nothing in the payment provisions of the contract or the general law conferred a right on Bellway to seek repayment of sums paid under an old/superseded interim application;
2. although the contract expressly provided that Bellway was entitled to recover any overpayments made to Surgo, properly construed this did not entitle Bellway to recover via a subsequent interim payment cycle an overpayment made under an earlier interim payment cycle; and
3. the decision of the Court of Appeal in S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448 – on which Bellway relied to support its arguments about recovering overpayments – did not permit the adjudicator to order a repayment as a "dispositive remedy", following a valuation exercise, in this case.

The Judge dismissed each of these arguments.

1. Bellway was entitled to seek repayment of overpayments at any stage, not just at the final account stage. This interpretation was supported by previous court decisions, which had repeatedly recognised that adjudicators have the power to assess the "true value" of a contractor's works and, where appropriate, order repayment of an overpayment during the course of the works.
2. The contract also expressly allowed Bellway to reclaim any overpayments – which provided powerful support for Bellway's case that it had the right to recover overpayments at any time, whether under a subsequent interim payment cycle or at final account stage (which was entirely separate from an employer's right to an adjustment of the final certificate at the end of the contract).
3. Reviewing the court authorities before Grove, the Judge concluded that they supported the propositions that:
   1. both a court and an adjudicator may undertake a "true value" assessment, whether in relation to the specific interim application for payment that led to an overpayment, or in relation to a subsequent interim application for payment; and
   2. if an adjudicator concludes that a contractor has been overpaid, the adjudicator has the power to order repayment of that overpayment – either under the terms of the contract (express or implied), or by way of restitution.
4. Reviewing the decision in Grove itself, the Judge unsurprisingly endorsed the Court of Appeal's conclusion that an adjudicator had jurisdiction to:
   1. determine the true value of the works at an interim stage; and
   2. give effect to the financial consequences of that determination (including, for example, by ordering the contractor to repay any overpayment).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.