Morganstone Ltd v Birkemp Ltd


Payment Schedules and Breach of Natural Justice – Morganstone Ltd v Birkemp Ltd [2024] EWHC 933 (TCC)

A recent judgment in the TCC has provided a useful update and reminder of the law relating to payment schedules in construction contracts and the risk of adjudicators taking an unnecessarily restrictive view of their own jurisdiction.

The case involved two linked claims:

  • a Part 7 claim by civil engineering sub-contractor, Birkemp Ltd (“Birkemp”), to enforce an adjudicator’s decision (“the Decision”) which awarded Birkemp circa £200,000; and
  • a Part 8 claim by main contractor, Morganstone Ltd (“Morganstone”), who claimed Birkemp had no contractual right to make the August payment application. If Morganstone failed on its Part 8 claim, it sought to defend the Part 7 claim on the basis that the Decision was unenforceable for breach of natural justice due to the adjudicator failing to consider certain defences put forward by Morganstone in the adjudication.

Both the Part 7 and the Part 8 claims were dismissed.

The Judgment

Prior to the sub-contract being entered into, Morganstone issued a number of documents to Birkemp, which included a payment schedule setting out the proposed dates for the interim payment mechanism.

There were discrepancies between the dates provided in the payment schedule and the payment mechanism provided in the sub-contract conditions at Clause 10. Email correspondence between the parties confirmed that they would work to the payment schedule, and a manuscript amendment was made at Clause 10 of the sub-contract which stated “payment schedule takes precedence.” The payment schedule, however, only provided the relevant dates for interim payments up to March 2023.

Morganstone argued that, as the parties had not agreed a payment schedule beyond March 2023, there was no ongoing contractual right for interim payments beyond this date as per Balfour Beatty Regional Construction Ltd v Grove Developments Ltd [2016] EWCA Civ 990. This argument was rejected by the Judge, who held that, in applying the ordinary and natural meaning of the words “payment schedule takes precedence,” where there is no payment schedule or where the payment schedule runs out, Clause 10 becomes operative again as there is nothing to which it would cede precedence. For this reason, the Part 8 claim failed as, in the absence of an agreed payment schedule, Clause 10 prevailed, which entitled Birkemp to interim payments for the duration of the sub-contract.

In the alternative, Morganstone had sought to defend Birkemp’s Part 7 claim on the basis that the adjudicator had failed to consider all of its defences, in breach of natural justice, and so the Decision was unenforceable.

Birkemp’s Notice of Adjudication and Referral Notice narrowed the dispute to include only the valuation of what they called ‘Inappropriate Deductions’ in Morganstone’s pay less notice. In Morganstone’s Response, together with a Scott Schedule, it relied on two cross-claims which were not included in the pay less notice, due to subsequent alleged defects being discovered. The adjudicator accepted Birkemp’s argument that the cross-claims were outside the scope of the adjudication.

The Judge held that the adjudicator had taken an erroneously restrictive view of his jurisdiction and the cross-claims would have had a very significant impact on the overall result of the adjudication, had they been upheld. The Decision was therefore unenforceable as this amounted to a breach of natural justice.

Comment

This case provides a useful reminder that parties should be wary of encouraging an adjudicator to ignore defences to a claim for payment.

Further, parties should take care when drafting and amending the payment provisions in their construction contracts to avoid unintended consequences. If in doubt, we recommend legal advice is sought in order that the contract provides clarity and certainty as to the parties’ respective payment entitlements and obligations, to avoid costly and ultimately fruitless disputes such as this.

Link for judgment: Morganstone Ltd v Birkemp Ltd [2024.


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