C&B in the Court of Appeal

When it doesn't matter if an adjudicator answers the right question wrongly

On 31 January 2002 the Court of Appeal handed down its second judgment on the adjudication regime under the Housing Grants, Construction and Regeneration Act 1996 ("the 1996 Act"). In C&B Concept Design Limited v Isobars Limited the Court of Appeal reversed the decision of Mr Recorder Moxon-Browne QC (given on 21 June 2001). In so doing it pretty much strangled at birth a line of attack on adjudicators' decisions based on saying that an adjudicator's error was so fundamental that he effectively answered the wrong question and thereby acted outside his jurisdiction (with the result that his decision is unenforceable). The Court of Appeal's decision confirms useful guidance in addressing – as the issue is often put - whether an adjudicator has answered the wrong question or merely answered the right question wrongly.

The Contract

The contract incorporated the JCT Standard Form of Building Contract With Contractor's Design, 1998 Edition. The payment provisions called for the parties to elect for interim payments to be made either in stages or periodically. The parties did not make an election. Clauses 30.3.3 to 30.3.5 of the Form provide that if the Employer does not propose to pay the interim payment claimed, he should promptly serve certain written notices and that if he does not do so, then he is bound to pay the amount claimed. These clauses reflect the requirements of sections 110(2) and 111 of the 1996 Act (with which readers are presumably familiar), with one exception which is worth mentioning for the sake of users of the Form. The 1996 Act makes no provision for a sanction if a party fails to serve a section 110(2) notice (unlike it does for a section 111 withholding notice). It is generally accepted that failure to serve a section 110(2) notice does not in any way preclude disputing the sum claimed. In Scotland, Lord MacFadyen sitting in the Outer House of Session, has confirmed this to be correct (SL Timber Systems Ltd v Carillion Construction Ltd, 27 June 2001). However, this is not the case where the contract provides otherwise. The JCT Standard Form of Building Contract With Contractor's Design, 1998 Edition does just that by requiring the Employer to pay the amount claimed in an interim application if he fails to serve what amounts to a section 110(2) notice.

The Applications for Payment and the Adjudication

The Contractor commenced an adjudication when the Employer did not pay his interim payment applications. The adjudicator awarded the Contractor the sums applied for, because the Employer had failed to serve any notices.

First Instance Decision

At first instance, Mr Recorder Moxon-Browne QC held that the adjudicator had wrongly based his decision on contractual provisions (clauses 30.3.3 to 30.3.5) which did not apply. He held that the election between staged and periodic payments was "fundamental to the proper operation of the entire machinery for making of interim payments (sic)". Since no election was made the whole of clause 30 fell away, including clauses 30.3.3 to 30.3.5, even though the Contractor contended (on the face of it, quite plausibly) that they could workably apply in the absence of the election. The Scheme applied instead (pursuant to section 109 of the 1996 Act). On this basis the Recorder held that the adjudicator answered the wrong question (as opposed to the right question, wrongly) and thereby exceeded his jurisdiction. Consequently he gave the Employer leave to defend and to pursue his counterclaim.

Court of Appeal's Judgment

There were three issues on appeal:

1. The effect of the failure to serve section 110 and 111 notices on the payee's ability to raise defences against a payment claim.

2. The effect of the failure to elect between staged and periodic payments and how the Scheme should apply.

3. If the adjudicator had incorrectly answered issues 1 and/or 2, whether he had acted outside his jurisdiction.

On appeal the Employer did not appear and was not represented. Unfortunately, this meant that although the Court accepted it was a point of "some general importance in construction contracts" it considered it inappropriate, in the absence of argument from the respondent, to express a view on issue 1. This is a great (although unavoidable) shame given the array of conflicting first instance case law on this issue – particularly as to whether in the absence of a section 111 notice an abatement can be raised against the sum claimed. Consequently, paying parties under construction contracts would continue to be well-advised to serve section 111 notices in response to payment applications, even if only relying upon an abatement as grounds for withholding payment.

The Court also did not decide issue 2 and thus Sir Murray Stuart-Smith (with whom the other two members of the Court agreed) confined himself to issue 3. He proceeded on the assumption – without deciding them – that the adjudicator wrongly decided issues 1 and 2, as the Recorder found.

Sir Murray Stuart-Smith held that:

"The whole purpose of s.108 of the Act, which imports into constructions contracts the right to refer disputes to adjudication, is that it provides a swift and effective means of resolution of disputes which is binding during the currency of the contract and until final determination by litigation or arbitration s.108(3). The provisions of s. 109-111 are designed to enable the contractor to obtain payment of interim payments. Any dispute can be quickly resolved by the Adjudicator and enforced through the courts. If he is wrong, the matter can be corrected in subsequent litigation or arbitration."

The following principals stated by His Honour Judge Thornton QC in Sherwood v Casson were approved:

"(i) a decision of an adjudicator whose validity is challenged as to its factual or legal conclusions or as to procedural error remains a decision that is both enforceable and should be enforced;

(ii) a decision that is erroneous, even if the error is disclosed by the reasons, will still not ordinarily be capable of being challenged and should, ordinarily, still be enforced;

(iii) a decision may be challenged on the ground that the adjudicator was not empowered by the Act to make the decision, because there was no underlying construction contract between the parties or because he had gone outside his terms of reference;

(iv) the adjudication is intended to be a speedy process in which mistakes will inevitably occur. Thus, the Court should guard against characterising a mistaken answer to an issue, which is within an adjudicator's jurisdiction, as being an excess of jurisdiction;

(v) an issue as to whether a construction contract ever came into existence, which is one challenging the jurisdiction of the adjudicator, so long as it is reasonably and clearly raised, must be determined by the Court on the balance of probabilities with, if necessary, oral and documentary evidence."

Sir Murray Stuart-Smith held that "Errors of procedure, fact or law are not sufficient to prevent enforcement of an adjudicator's decision by summary judgment". He referred to the Court of Appeal's other judgment on the adjudication regime in Bouygues (UK) Limited v Dahl-Jensen (UK) Limited (given on 31 July 2000) as a striking example of this. There the adjudicator had not exceeded his jurisdiction, even though he had made an obvious and fundamental error, which resulted in a sum being owed to the contractor, whereas in truth it had been overpaid. The adjudicator had merely incorrectly answered the question referred to him.

The question to be answered by the adjudicator in C&B was clear: namely the Employer's obligation to make payment. Sir Murray Stuart-Smith said:

"In order to determine this dispute the Adjudicator had to resolve as a matter of law whether Clauses 30.3.3-6 applied or not, and if they did, what was the effect of a failure to serve a timeous notice by the Employer. Even if he was wrong on both these points that did not affect his jurisdiction (my emphasis).

It is important that the enforcement of an adjudicator's decision by summary judgment should not be prevented by arguments that the adjudicator has made errors of law in reaching his decision, unless the adjudicator has purported to decide matters that are not referred to him."

Conclusion

The Court of Appeal's decision is welcome for confirming that an adjudicator does not exceed his jurisdiction simply because he makes a procedural, factual or legal error. It is unfortunate that this was not an appropriate opportunity for the Court to resolve the uncertainty surrounding the effect of the failure to serve a section 111 notice and the application of the Scheme. It is ironic that the Court of Appeal bolsters adjudicator's decisions at the same time as (quite justifiably) leaving adjudicators to grapple with two key areas of uncertainty in the payment regime.