Adjudication update 7

Following on from Henry Sherman's commentary in the last Bulletin, the number of adjudication decisions being referred to Court appears to have remained relatively low. The thorny issue of withholding payment has recently come before the Court of Appeal, and is considered by Rupert Choat in his article on "Withholding against adjudicator's decisions". Please click here to read a copy.

Aside from that, a number of issues relating to the jurisdiction of the adjudicator have been considered in a number of cases at first instance.

Substantially the same dispute?

The case of Skanska Construction v ERDC Group & another, which was heard by the Outer House of the Scottish Court of Session, considered the question of whether a second adjudication between the parties had dealt with the same or substantially the same dispute as had been earlier referred in a first adjudication.

Skanska and ERDC entered into a subcontract for landscaping works on the SBCC Domestic Sub-Contract Conditions. During the course of the contract, an adjudication took place relating to an application by ERDC for interim payment. The dispute specifically concerned ERDC's contention that a sum of some £260,000 should be paid by Skanska in satisfaction of a claim for direct loss and expense. The adjudicator ruled that Skanska were not obliged to pay ERDC the sum claimed or any other sum, on the basis that insufficient information and evidence had been provided to support the claim.

A second adjudication was subsequently commenced by ERDC in relation to the final account. The second referral related almost entirely to ERDC's claim in the final account for direct loss and expense, which by that time was calculated to be in the sum of approximately £244,000.

Skanska wrote to the second adjudicator at the outset of the referral asking that he resign, as the dispute which had been referred to him was the same or substantially the same as the first dispute and he therefore lacked jurisdiction. The adjudicator refused to do so stating that ERDC's claims in the two adjudications were pursuant to different clauses in the subcontract conditions, and that the first claim represented ERDC's calculation of the amount to which it claimed to be entitled at that time as opposed to the amount which they now claimed.

Skanska referred the matter to Court, and there argued that whilst the two claims fell under nominally different headings, the dispute in each was substantially the same, namely a dispute over the correct quantification of direct loss and expense. In response, ERDC submitted that the second valuation exercise, which was carried out for the purposes of the final account, had proceeded on a different basis. The previous adjudicator's decision had, to a great extent been dictated by a lack of sufficient information being available to support the claim. However, in reality, considerably more information was always likely to be available in the final stages of a contract as opposed to the interim stages in support of a claim for loss and expense.

The Judge, Lady Paton, accepted the arguments of ERDC that the dispute in the second adjudication was not substantially the same but was an entirely new position submitted by ERDC pursuant to a different clause under the contract.

Skanska had advanced an alternative argument, namely that documentation and details supporting a claim for loss and expense were required to be submitted by ERDC pursuant to the contract conditions within six months of practical completion. As the second adjudication fell outside this six month period, Skanska argued that ERDC were not entitled to submit information and evidence over and above that which had been submitted at the first adjudication. However, Lady Paton found that the contract terms could not be construed to prohibit the submission of further information, as such a stringent time-bar would need to be expressed in clear and unambiguous language. Such language was absent from the contract conditions.

Has a dispute arisen?

The case of Cowlin Construction v CFW Architects considered two interesting issues concerning jurisdiction, both of which have come before the Courts on a number of occasions previously in the context of adjudication. First, the Court looked at the issue of whether a party had waived its right to challenge the jurisdiction of an adjudicator. Secondly, and more interestingly, the Court took a rather unexpected line on the perennial question of whether a dispute has arisen.

The case concerned the appointment by Cowlin of CFW as architects in connection with a design and build contract between Cowlin and the Ministry of Defence. CFW claimed fees pursuant to its appointment. Cowlin disputed the fees, and a "battle of the forms" ensued as to which standard contract terms applied to CFW's appointment. Cowlin referred the matter to adjudication seeking a decision that the contract was in the RIBA standard form. CFW issued what was described as a "counter notice" to Cowlin's notice to refer the dispute to adjudication seeking a finding that the contract was on the terms of the SFA/99 with DB2/99.

However, in subsequent correspondence between the parties and with the adjudicator, it became apparent that CFW's position had altered in that it was seeking to contend that no contract had been concluded between the parties, with the result that the adjudicator did not have jurisdiction. The adjudicator decided that a contract had been entered into between the parties and that it was on the SFA/99 form with DB2/99.

Some months after the decision, Cowlin submitted a claim to CFW for additional costs said to have been incurred as a result of delays by CFW on the project. CFW's initial response was to state that it was unable to consider the claims made as Cowlin had failed to provide a full and detailed breakdown. Cowlin subsequently wrote to CFW submitting what they described as "full supporting documentation". In response CFW maintained that the documentation did nothing to explain CFW's alleged liability. A subsequent meeting between loss adjusters failed to resolve issues and Cowlin wrote to CFW giving a deadline by which an offer of settlement was required failing which "immediate and substantive action" would be taken. No response was received, and Cowlin referred the claim to adjudication. CFW challenged the jurisdiction of the adjudicator. The primary ground for the challenge was that there was no contract between the parties. This argument was advanced on the basis that as the first adjudicator, in CFW's submission, had no jurisdiction, his decision did not bind the parties.

CFW accepted that if the first adjudicator's decision was binding on the parties then the issue in the second adjudication as to whether there was a contract did not arise and that the second adjudicator's jurisdiction could not be challenged on that basis.

Judge Kirkham in the Technology and Construction Court concluded that by the "counter notice" document CFW had accepted that the adjudicator had jurisdiction to determine the terms of the contract. Given the "rapid nature of the adjudication process", any challenge to jurisdiction was required to be taken at the earliest possible opportunity. At the time of the "counter notice" CFW had sufficient knowledge to make an election either to accept or to challenge jurisdiction. By accepting jurisdiction at that date, CFW therefore waived a right subsequently to challenge the jurisdiction.

Accordingly, the question of whether the second adjudicator had jurisdiction did not arise. However, the Judge helpfully considered two subsequent questions, namely whether there was a contract between the parties, and whether a dispute had arisen for the purposes of the second adjudication. The question of whether a contract existed turned specifically on the facts of the case. On the issue of whether a dispute had arisen, the Judge considered the leading cases on the definition of a dispute.

In Monmouthshire County Council v Costelloe and Kemple, Lord Denning had stated that in order for a dispute or difference to arise there must be a claim which had been rejected. The Judge noted that this line had been followed in a number of adjudication cases. In particular, Judge Seymour had stated in Edmund Nuttall v RG Carter Limited that:

"In my judgment a dispute is something different from a claim….. while a dispute can be about a claim, there is more to a dispute than simply a claim which has not been accepted…….for there to be a dispute, there must have been an opportunity for the protagonists each to consider the position adopted by the other and to formulate arguments of a reasoned kind……."

However the Judge also considered the case of Halki Shipping v Sopex Oils in which Lord Justice Swinton Thomas had stated that "…there is a dispute once money is claimed unless and until the defendants admit that the sum is due and payable." Perhaps surprisingly, and apparently against the line previously taken by Judges in the Technology and Construction Court, Judge Kirkham preferred the test set down in Halki and found that, in the case before her, the absence of a reply by CFW to the deadline given by Cowlin gave rise to the inference that there was a dispute between the parties. While there had not been an express rejection of Cowlin's claim, failure to accept the claim constituted a dispute between the parties.

Independent expert assistance in adjudications

The use of an independent expert in an adjudication was considered by Judge Wilcox in the case of Try Construction v Eton Town House Group. Eton had employed Try as main contractor on the conversion of a bank headquarters into a luxury hotel. During the course of the works, disputes arose as to extensions of time and associated payment of liquidated damages. Two adjudication proceedings were commenced by Try, with the same adjudicator being appointed in each. At a preliminary meeting with parties, the adjudicator informed the parties that he wished to obtain assistance from a programming expert. The parties agreed to this and the adjudications proceeded on that basis.

The adjudicator, in his decision on the second adjudication, noted that the parties had agreed to the appointment of the programming expert and that the expert should have ability to "go beyond the strict confines of the arguments put forward by the parties relating to the delay in order to establish what event(s) caused the late completion of the project".

The adjudicator awarded an extension of time together with associated loss and expense and repayment of liquidated damages. In doing so, he had regard to the analysis prepared by the programming expert. Eton challenged the decision on two bases. First, it argued that the scope of the expert's agreed role had been exceeded. Secondly, it claimed that the adjudicator had used his own methodology on the issues in dispute in reaching a decision, without bringing those matters to the attention of Eton and giving them the opportunity to comment thereon. As a result, Eton contended that the adjudicator's decision was in breach of natural justice.

Judge Wilcox held that, on the facts, the adjudicator had not adopted a methodology which Eton had had no opportunity to consider. Also on the facts, the Judge found that Eton had consented to the appointment of the programming expert and to the extent of the role which the expert had undertaken. The adjudicator's findings were the result of the process to which the parties had agreed.

Winding-up in absence of Section 111 Notice

The importance of serving a withholding notice pursuant to Section 111 of the Construction Act has been highlighted again by the case of Guardi Shoes v Datum Contracts which came before the Companies Court. Guardi entered into a contract with Datum to carry out shop refurbishment works. Following completion of the works, Guardi became aware of a number of substantial defects. As a result, they informed Datum that they would not allow Datum to return to remedy the defective work, and that no further payments would be made.

Datum subsequently submitted claims for payments of approximately £108,000. Guardi refused to pay, but failed to issue notices pursuant to Section 111. Datum proceeded to obtain an adjudicator's decision for the said amount, and as a result of Guardi's continued refusal to pay obtained summary judgment.

Following judgment, Guardi who continued, in correspondence, to make reference to the substantive defects in the works, made some instalment payments. Datum issued a statutory demand, and subsequently a winding up petition for the outstanding balance of sums claimed. At that stage, Guardi submitted draft particulars of claim and supporting documentation, and sought to restrain advertisement of the winding-up petition on the basis that advertisement was an abuse of process, given that Datum were aware that its claim was disputed.

Mr Justice Ferris held that advertisement of the winding-up petition was not an abuse of process, as Guardi had had the opportunity to serve a withholding notice but had failed to do so. As a result, Guardi could not be placed in the same practical position as it would have otherwise been placed, had it "operated the machinery" open to it pursuant to the Construction Act. Datum could therefore proceed to advertise the petition. A cautionary tale to those who fail to heed the withholding provisions of the Act.

For further information please contact Andrew Tobin at [email protected] or on +44 (0)20 7367 3536.