Morganstone Limited v Birkemp Limited

A contractual payment schedule that modifies an express payment mechanism takes precedence only where the two arrangements conflict. When the schedule expires without a replacement, the underlying contractual timetable remains operative unless the contract provides otherwise. A party does not lose its entitlement to interim payments merely because the parties have failed to agree a new schedule.

In an adjudication concerning payment, the responding party may rely on a genuine defence of set-off or cross-claim, even where the referring party has narrowly drafted the notice of adjudication. An adjudicator who deliberately refuses to consider such a material defence by adopting an erroneously restrictive view of jurisdiction may breach natural justice, rendering the decision unenforceable.

The parties entered into a subcontract for groundworks. Clause 10 provided for interim payments during the progress of the works. A monthly payment schedule modified the contractual timetable and was renewed for successive periods. The last agreed schedule expired in March 2023. Morganstone issued a further schedule, but Birkemp did not agree to it.

Birkemp nevertheless made a further interim payment application. An adjudicator decided that the application was valid and awarded Birkemp £207,076. Morganstone brought a Part 8 claim seeking declarations that Birkemp had no entitlement to make the application and that the adjudication decision was unenforceable. Birkemp brought a linked Part 7 claim to enforce the award.

The issues were whether clause 10 continued to operate after expiry of the agreed schedule and whether the adjudicator had wrongly excluded Morganstone’s cross-claims as outside the adjudication’s scope.

1. Part 8 claim: The contractual payment regime continued after March 2023. Clause 10 was preserved, although its timetable had been modified by the payment schedule. The manuscript words stating that the payment schedule took precedence naturally meant that the schedule prevailed only where it conflicted with clause 10. Once the schedule and any replacement schedule ended, there was nothing to displace the timetable in clause 10. Birkemp therefore retained an entitlement to interim payments.
2. Balfour Beatty: Balfour Beatty Regional Construction Ltd v Grove Developments Ltd [2016] EWCA Civ 990 turned on the precise agreement reached by those parties. It did not establish a wider rule that interim payment rights end whenever parties fail to agree a replacement schedule. The contractual interpretation principles in Dairy Containers Ltd v Tasman Orient CV [2005] 1 WLR 215 and the authorities cited at paragraph 33 supported the construction adopted.
3. The alternative argument based on Pagnan S.p.A. v Feed Products Ltd [1987] 2 Lloyd’s LR 601 failed. That authority concerned identifying whether a contract had been made, whereas an existing contract and its terms were not in dispute. The parties’ failure to agree a new schedule did not vary or revoke clause 10.
4. Part 7 claim: The adjudicator had jurisdiction to consider Morganstone’s cross-claims because Birkemp sought payment, not merely a valuation of specified deductions. A payment claim confers jurisdiction to determine everything advanced by way of defence, including a pleaded set-off or cross-claim. The adjudicator instead deliberately adopted an erroneously restrictive view of jurisdiction and failed to address the substance of the cross-claims.
5. That failure was material because the cross-claims could have significantly affected the award. The error was also connected with Birkemp’s tactical attempt to confine the adjudication so as to exclude potentially relevant defences. Applying the principles identified in Global Switch Estates Ltd v Sudlows Ltd [2020] EWHC 4796 (TCC), the decision was unenforceable for jurisdictional error and breach of natural justice.
6. Both the Part 8 claim and the Part 7 claim were dismissed. Birkemp was ordered to pay the costs of the hearing, with no other order as to costs.