Recent adjudication cases round-up

Midland Expressway Ltd v Carillion Construction Ltd [2005] EWHC 2963 (TCC)

This is a particularly important case for those involved in PFIs and PPPs. It concerned the construction of the new M6 toll road, near Birmingham.

• The contractual arrangements for the PFI involved a special-purpose vehicle (SPV) company entering into a concession agreement with the Secretary of State for Transport, under which the SPV agreed to design, build and operate the M6 toll road.
• The SPV’s design and construct operations were subcontracted to a contractor, which was a consortium of large construction companies.
• The subcontract contained “equivalent project relief” provisions which, in effect, limited the subcontractor’s entitlement to payment for such matters as variations, and compensable delay, to the amount which the SPV was able to recover from the Secretary of State under the concession agreement. One of the mechanisms by which the subcontract purported to do this was to restrict the right of the subcontractor to adjudicate an issue until a corresponding adjudication was brought between the SPV and the Secretary of State.

During the project, the subcontractor made certain claims for additional payment due to variations. The SPV, in turn, sought to pass those claims up the line to the Secretary of State. Before there was any final resolution of those claims between the Secretary of State and the SPV, the subcontractor sought to institute an adjudication against the SPV. The SPV then brought legal proceedings, seeking orders that the subcontractor was not entitled to proceed with any adjudication until the SPV had brought an adjudication against the Secretary of State, under the concession agreement. In short, the SPV’s contention was that the “equivalent project relief” provisions and adjudication provisions of the subcontract prevented an adjudication from going ahead at that point.

In opposing this application, it was argued for the subcontractor that the “equivalent project relief” and adjudication provisions in the subcontractor were unenforceable to the extent that they cut across the subcontractor’s statutory entitlement, under the Housing Grants, Construction and Regeneration Act, to commence an adjudication “at any time” (section 108(2)(a)). It was argued that the legislation does not permit contractual schemes which postpone the point at which a party may commence an adjudication. These arguments were accepted by Jackson J in the Technology and Construction Court, who held that the adjudication provisions were either invalid, or at the very least they ought to be read in such a way as to be compliant with the legislation. Either way, the result was the same, i.e. the adjudication provisions of the contract fell away, leaving the Scheme for Construction Contracts to apply. Similarly, the “pay when paid” aspect of the “equivalent project relief” provisions was held to infringe the prohibition on such clauses (section 113 of the Act).

The repercussions of this case for PFI and PPP projects are significant. The purpose of “equivalent project relief” provisions is to ensure that SPV companies act as conduits for contractor claims, without having to bear a residual economic liability for those claims. Limiting a subcontractor’s right to bring an adjudication is a device that has been used to try to meet this objective, but in light of Midland Expressway v Carillion that will no longer be an option.

Carillion Construction Ltd v Devonport Royal Dockyard [2005] EWCA Civ 1358

The Court of Appeal has reaffirmed the approach of the courts to adjudicator’s decisions, namely that they are to be treated as enforceable, and will only be interfered with in rare situations. This is so even if the adjudicator has made obvious or highly arguable errors of fact or law.

The facts of this case were quite detailed, but in headline terms they concerned a dispute over a subcontractor’s entitlement to payment for performing works in upgrading a dock.

• The terms of payment under the subcontract, and a related “alliance agreement” between the parties, used a “target cost” mechanism, so that the pain or gain of cost overruns or savings would be shared between them.
• The project works were delayed, and there were disagreements between the main contractor and the subcontractor as to contractual responsibility for this delay.
• This, in turn, spilled over so as to give rise to a dispute as to how the “target cost” mechanism was to be applied, in determining the final account value of the subcontractor’s works. The subcontractor referred this dispute to adjudication. The amount claimed by the subcontractor was more than £10m.

The subcontractor was successful in the adjudication, and was awarded around £10.6m by the adjudicator. The subcontractor sought summary judgment to enforce the adjudicator’s decision, but this application was opposed by the main contractor, who contended that the adjudicator’s decision should be set aside on the basis that it was made in excess of jurisdiction, in breach of the rules of natural justice, and that it was not otherwise compliant with the Housing Grants, Construction and Regeneration Act nor the Scheme for Construction Contracts. It was contended that the adjudicator had disregarded evidence that he ought to have taken into account, that he made errors in calculating the amount owing to the subcontractor, and that he had reached his decision on a basis for which neither party had contended, where he had not given the parties an opportunity of making submissions on the relevant point.

It was held by the trial judge (Jackson J) and then the Court of Appeal that the adjudicator’s decision was to be enforced. The criticisms made against the adjudicator’s decision by the main contractor were mainly characterised as being attacks on findings of fact or law made by the adjudicator, which as the Court of Appeal emphasised are not open to challenge on enforcement proceedings. The adjudicator had considered the arguments made by the parties, the evidence presented, and he had decided the dispute which was referred to him. As the Court of Appeal held:

“The objective which underlies the Act and the statutory scheme requires the courts to respect and enforce the adjudicator’s decision unless it is plain that the question which he had decided was not the question referred to him or the manner in which he has gone about his task is obviously unfair. It should only be in rare circumstances that the courts will interfere with the decision of an adjudicator. The courts should give no encouragement to the approach adopted by [the main contractor] in the present case; which…may, indeed, aptly be described as ‘simply scrabbling around to find some argument, however tenuous, to resist payment’”.

Ardmore Construction Ltd v Taylor Woodrow Construction Ltd [2006] CSOH 3

In this Scottish case the decision of an adjudicator was set aside on the basis that he had not afforded natural justice to the parties to the adjudication.

The adjudication arose out of a subcontract for works at Glasgow Harbour, where the Scottish edition of the Standard Form of Sub-Contract Agreement, 1998 edition, was used.

• The underlying dispute between the parties concerned the subcontractor’s entitlement to overtime payments.
• The subcontractor contended that it had been instructed by the main contractor to accelerate its works, where the need to accelerate did not arise out of any breach of contract by the subcontractor. It was contended by the subcontractor that, in reliance on the instruction, it did accelerate its works, and was entitled to compensation for having worked overtime.
• The main contractor disputed these contentions. It said that an acceleration instruction was not given in accordance with the requirements of the contract, and accordingly the subcontractor was not entitled to compensation under the contract for acceleration. Furthermore, it said that the subcontractor had not adequately substantiated its claim for acceleration costs.

Meeting no success with the main contractor, the subcontractor commenced an adjudication. The dispute which was referred to the adjudicator was identified by the referring party as whether the main contractor had given to the subcontractor an instruction, under the subcontract, to work overtime. The subcontract provided for the making of written instructions to accelerate. But in his decision, the adjudicator found that there was either a verbal instruction given by the main contractor to the subcontractor to work overtime, or the main contractor had acquiesced or agreed to the subcontractor working overtime. The significance of this finding was that neither party in the adjudication had made any contentions to the adjudicator concerning the making or effect of any verbal instruction, or whether the main contractor had acquiesced or agreed to overtime being worked.

In short, the adjudicator’s decision was tainted because he had made his decision on a basis for which neither party had contended, and in respect of which the unsuccessful party (the main contractor) had neither notice nor the opportunity to make representations. When the decision came before the Court of Session for enforcement, Lord Clarke held that there had been a “clear and substantial breach of natural justice” by the adjudicator, and that his decision should be set aside.

Ruttle Plant Hire Ltd v Secretary of State for the Environment, Food and Rural Affairs [2004] EWHC 2152 (TCC)

Section 105(1) of the Housing, Grants, Construction and Regeneration Act 1996, so far as material, provides, “In this Part ‘construction operations’ means, subject as follows, operations of any of the following descriptions….(d) external or internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration; (e) operations which form an integral part of, or are preparatory to, or are for rendering complete, such operations as are previously described in this subsection, including site clearance, earth moving, excavation, tunnelling and boring, laying of foundations, erection, maintenance or dismantling of scaffolding, site restoration, landscaping and the provision of roadways and other access works…”

The claimant was engaged to cleanse and disinfect farms after the outbreak of foot and mouth disease to enable them to reopen for business. The actual cleaning used high pressure hoses. On most sites, the claimant’s work also consisted of the construction of temporary roads, buildings and disinfecting facilities, the provision of secure barriers, the construction of lagoons to hold the slurry created by the use of the hoses and the removal of the contaminated material. A question arose as to whether the claimant’s contract was a ‘construction operation’ within the meaning of the 1996 Act.

The court ruled that the contract, being one essentially for the provision of cleansing and disinfecting work on a farm in order to restore the farm to active use, was, as a whole, a ‘construction contract’ within the meaning of s105(1) of the Act. The purpose of the exercise was to put the farm into a state in which it could be restocked and brought back into working life, which readily fitted the description of ‘restoration’.

This article first appeared in our Construction and development legal update Spring 2006. To view this publication, please click here to open it as a pdf in a new window