Adjudicator had jurisdiction because rights were re-assigned in the nick of time

This article was first published on Practical Law's Construction Blog.

In Mailbox (Birmingham) Ltd v Galliford Try Construction Ltd, the TCC confirmed the armoured quality of an adjudicator’s decision, despite a valiant jurisdictional challenge. The enforcement action was set against a zigzagging tale of assignment and re-assignment…

What was the dispute?

The claimant, Mailbox, is the SPV that contracted with Galliford Try Construction (GTC) to refurbish a city centre office and retail complex in Birmingham.

Although most of the work was carried out, due to various disputes between Mailbox and GTC, Mailbox commenced adjudication seeking (among other things) liquidated damages for delay.

While the adjudicator ordered GTC to pay Mailbox about £2.5 million, GTC alleged that Mailbox was not entitled to adjudicate at all having assigned its rights under the contract to Aareal Bank AG when securing funding.

Assignment

The parties’ construction contract incorporated the conditions of the JCT Design and Build Contract (2011 Edition), which includes (at section 7.1) that:

“… neither the Employer nor the Contractor shall without the consent of the other assign this Contract or any rights thereunder.”

However, Mailbox (as the assignor) did not claim its assignment was ineffective as result of a contractual prohibition on assignment without consent (Linden Gardens v Lenesta). Instead, Mailbox argued that the language of its assignment to secure funding had been ineffective to transfer its rights under the construction contract and, in the alternative, if assignment had occurred, that Mailbox subsequently received an equally effective re-assignment.

The order of events, as put before the court, was as follows:

• In May 2011, Mailbox executed a debenture in favour of the Bank as a condition precedent to a loan.
   
• In December 2013, Mailbox and GTC executed the construction contract.
   
• In January 2014, GTC received written notice of the assignment of Mailbox’s rights, title and interest in the construction contract to the Bank (under the 2011 debenture).
   
• In August 2016, the Bank re-assigned all rights, title and interest in the construction contract to Mailbox.
   
• Also in August 2016 (either days before or on the same day as the re-assignment), Mailbox served notice of adjudication on GTC.

As the assignment pre-dated the construction contract, the court had to consider whether, properly construed, the assignment extended to expected future rights.

The conditions for legal assignment are (of course) that the assignment must be:

• Absolute.
   
• In writing under the hand of the assignor.
   
• The subject of express notice in writing to the debtor or trustee.

(Section 136, Law of Property Act 1925 (LPA 1925).)

The principle issue between the parties was the proper construction of the express words of the debenture, which provided that:

“… each Chargor [Mailbox]… assigns absolutely… In favour of the Security Trustee [the Bank]… its right, title and interest from time to time in each of the following assets: … all rights under any agreement to which it is a party and which is not mortgaged or charged under Clause 3.1…”

However, the debenture also provided that:

“… each Chargor [Mailbox] is entitled… to exercise all rights assigned under this Clause 3.3 (Assignments)… and the Security Trustee [the Bank] will reassign any such rights to the extent necessary to enable such Chargor to do so.”

Submissions on the effectiveness of the assignment

Mailbox sought to construe the debenture narrowly, contending that it did not contain an agreement or promise to assign any future contract. Further, it claimed that any equitable assignment of its rights was effective by way of charge only (Bexhill UK Ltd v Razzaq).

By contrast, GTC argued that an agreement to assign absolutely was made by the debenture and that, accordingly, once GTC received notice of the assignment in January 2014, the requirements of section 136 of the LPA 1925 were satisfied. Hence, a legal assignment of Mailbox’s rights to the Bank was effected in January 2014.

O’Farrell J ultimately agreed with GTC on that issue, as:

• The debenture included an agreement to assign future rights.
   
• The express wording of the debenture was of an absolute assignment, rather than a conditional charge.
   
• Mailbox’s entitlement to exercise all rights assigned did not make the assignment conditional.
   
• The construction contract between Mailbox and GTC was sufficiently identifiable as a contract falling within the debenture.

Hence, in December 2013, when the construction contract was executed, Mailbox’s rights were the subject of an equitable assignment. When GTC received notice of that assignment, there was a legal assignment.

Since the assignment was held to be effective, the further question then arose: was the re-assignment effective?

Re-assignment

The deed of re-assignment was stated to have been executed on 17 August 2016 (although it was dated 19 August 2016). In addition, the notice of adjudication was also served on 19 August 2016, with written notice of the re-assignment not received by GTC until 26 August 2016.

Hence, it was common ground that any legal re-assignment back to Mailbox was not effected in time by way of the written notice. So what about equitable re-assignment (I hear you ask)?

The factual issue (as to the date the re-assignment was executed) failed to stoke much division, as O’Farrell J concluded that irrespective of the date that the re-assignment was executed (either 17 or 19 August 2016), it was sufficient that re-assignment had been effective by, or on, the date that adjudication proceedings were commenced.

O’Farrell J said:

“The contract and the scheme for adjudication specify dates by which and periods within which actions are required to be done but do not attach any significance to the time by which any particular action is required to be done. On that basis, even if the deed of re-assignment was not executed until 19 August 2016, the re-assignment was effective on the same date that the adjudication proceedings were commenced.”

In the circumstances, the court concluded that on the date the adjudication commenced, all rights and benefits under the construction contract were, or had been, re-assigned in equity to Mailbox.

The general rule is that the equitable assignee has the right to sue (Bexhill UK Ltd v Razzaq). Given there was no risk of a further claim by the Bank, there was no need for it to be joined, and Mailbox had been entitled to commence adjudication against GTC.

Know your rights

Interrogating the precise timing of the re-assignment and the notice of adjudication (if both occurred on 19 August 2016) would no doubt add a weighty gloss to the stated requirements of the Scheme for Construction Contracts 1998. Hence, the TCC’s conclusion that the Scheme stands as drafted is perhaps as welcome as it is unsurprising.

However, the TCC refused Mailbox’s invitation to award it interest at 8% over base rate in order to penalise GTC for failing to comply with the adjudicator’s decision. O’Farrell J said:

“In my judgment, it was not unreasonable for GTC to challenge the jurisdiction of the adjudicator based on the issues of assignment and re-assignment given the paucity of documentary evidence initially available.”

It remains to be seen whether the lesson to be learned from this case simply adds an item to the pre-adjudication checklist (that is, is assignment necessary: yes/no) and serves as a reminder of the value of thorough document preparation in adjudication.

However, as the issue of the timing of the notice of adjudication was so swiftly dispatched by the court, it remains unclear whether timing will ever be significant. Might the outcome be different if jurisdiction were challenged on the basis of undisputed evidence that the notice of adjudication had clearly been served much earlier on the very same day as the assignment of rights? It appears doubtful.

In a probable attempt to retain a modicum of certainty in an increasingly uncertain world, perhaps the only learning point in this case is that undermining adjudication enforcement remains the devil’s own job.