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Adjudication Matters – October 2016

Adjudication Matters – October 2016

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In adjudication, can a party recover their legal costs?

Lulu Construction Limited v Mullaley & Co Limited [2016] EWHC 1852 (TCC) It is an […]

Lulu Construction Limited v Mullaley & Co Limited [2016] EWHC 1852 (TCC)

It is an established principle under the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) that the parties will each bear their own legal costs.

However, the Late Payment of Commercial Debts (Interest) Act 1998 as amended by the Late Payment of Commercial Debts Regulations 2013 (the Late Payment Act) implies a term into commercial contracts for the supply of goods and services for the payment of simple interest, together with compensation for late payment. Under section 5A(2A) of the Late Payment Act, the unpaid party can recover the reasonable costs of recovering the unpaid debt. This includes legal costs.

As such, if a party is seeking payment of an unpaid debt, through the adjudication process it is unclear which legislation will take precedence. If the Late Payment Act overrules the Construction Act, then reasonable legal costs will be recoverable. However if the Construction Act continues to apply, then the parties must each bear their own costs.

This recent judgment has led some commentators to suggest that the legal costs incurred by a party in respect of adjudication proceedings may be recoverable in certain circumstances.

However as we set out below, it is our view that until there is a clear court ruling on this point, if the parties choose to refer their dispute to adjudication rather than to the courts or another dispute resolution forum, then the provisions of the Construction Act will continue to apply and legal costs will not be recoverable.

In this case an adjudicator ordered that Mullaley & Co Limited (Mullaley) pay to Lulu Construction Limited (Lulu) (amongst other things) £47,666 of debt recovery costs which Lulu had claimed under the Late Payment Act. Mullaley refused to make payment, and Lulu commenced enforcement proceedings in the TCC.

It is a fundamental rule of adjudication enforcement that the court will automatically enforce an adjudicator’s decision even if the adjudicator has made an error in fact or at law. The courts can only decline to enforce an adjudicator’s decision if the adjudicator acted outside of his jurisdiction, and/or there has been a breach of natural justice.

The TCC held that it was within the scope of the Adjudicator’s jurisdiction to order that these debt recovery costs be paid, because they had been expressly requested in one of the parties’ submissions (the Rejoinder).

Having found that the question of whether or not debt recovery costs were payable had been properly referred to the Adjudicator and was within his jurisdiction, the TCC could not go on to consider whether the Adjudicator had been right in law to award those costs.

If the parties had wanted the TCC to consider whether or not there was a legal right to the debt recovery costs, then the parties would have needed to issue part 8 proceedings for a declaration dealing with this point.

There were no allegations of a breach of natural justice, and as such, the TCC proceeded to enforce the Adjudicator’s decision and Mullaley was ordered to make payment of the debt recovery costs forthwith.

As the TCC did not consider whether there was a right at law under the Late Payment Act to the recovery of legal costs in adjudication, this case does not provide an answer to the conflict between the Late Payment Act and the Construction Act.

We have recently successfully persuaded an adjudicator that debt recovery costs should not be included in an adjudication award, however a lot of time and money will no doubt be spent debating this point in future adjudications, until the legal position is clarified by the courts.

Should an adjudicator disclose if he is simultaneously acting on another adjudication involving one of the same parties?

Beumer Group UK Ltd v Vinci Construction UK Ltd [2016] EWHC 2283 (TCC) The TCC […]

Beumer Group UK Ltd v Vinci Construction UK Ltd [2016] EWHC 2283 (TCC)

The TCC held in this case that the Adjudicator should have informed Vinci Construction UK Ltd (Vinci) that he was also at the same time acting as adjudicator on a separate adjudication which also involved Beumer Group UK Ltd (Beumer). The fact that the Adjudicator had not disclosed his involvement in the simultaneous adjudication gave rise to grounds of apparent bias and the court declined to enforce his decision.

Gatwick Airport employed Vinci to carry out works. Vinci entered into a sub-contract with Beumer, who then engaged Daifuku Logan Ltd (Logan) under a sub-subcontract.

Vinci issued three instructions to Beumer which Beumer alleged were Compensation Events under the subcontract. Vinci did not agree and Beumer commenced adjudication against Vinci seeking a declaration that the instructions were Compensation Events.

Around the same time, Beumer also commenced a separate adjudication against Logan, alleging that Logan had failed to complete its works by certain dates.

The Adjudicator was named as one of three potential adjudicators in the subcontract. The same adjudicator was appointed in both of Beumer’s adjudications. Neither the Adjudicator nor Beumer informed Vinci that the Adjudicator was also appointed in the adjudication between Beumer and Logan. In fact Vinci did not know anything about the adjudication between Beumer and Logan until several weeks after the adjudications had commenced.

The Adjudicator found that the instructions were Compensation Events and made certain declarations in Beumer’s favour to that effect. The Adjudicator ordered that Beumer pay his fees, and that Vinci should then reimburse these fees back to Beumer.

Vinci did not reimburse these fees to Beumer and Beumer commenced proceedings in the TCC to enforce the Adjudicator’s decision.

Vinci resisted the enforcement of the Adjudicator’s decision by arguing that there had been a breach of natural justice. Vinci said that the Adjudicator must have acquired background knowledge concerning the dispute between Vinci and Beumer, by virtue of his also being appointed as adjudicator on the dispute between Beumer and Logan. Vinci’s position was that it had had no opportunity to consider the information provided to the Adjudicator in the Logan adjudication and that it was unfair that no disclosure of the documents from the Logan adjudication had been made by Beumer. Vinci also complained that Beumer advanced factually inconsistent cases in the two adjudications. The TCC commented after hearing Vinci’s arguments that the Adjudicator would have known that Beumer’s position in the two adjudications was different, because he was conducting both adjudications.

The TCC commented that for breaches of natural justice to be sufficient to justify the court declining to order summary judgment enforcing an adjudicator’s decision, the adjudication proceedings must have been obviously unfair.

In this case, the TCC found that there had been a breach of natural justice because Beumer had advanced two conflicting cases in the two adjudications, and the Adjudicator should have drawn this conflict to the parties’ attention and allowed Vinci the opportunity to comment in respect of the same.

The Adjudicator should also have disclosed his involvement in both adjudications because adjudicators need to be seen to act openly and fairly to avoid any appearance of potential bias. If one party does not know the other adjudication is taking place then there is a risk that a fair-minded and informed observer would conclude that there was a real possibility of bias. This could be avoided by disclosing the existence of the appointment in both adjudications at the earliest opportunity.

Do multiple grounds of objection increase the prospects of resisting enforcement of an adjudicator’s decision?

Ground Developments Ltd v FCC Construction SA and Others [2016] EWHC 1946 (TCC) Ground Developments […]

Ground Developments Ltd v FCC Construction SA and Others [2016] EWHC 1946 (TCC)

Ground Developments Ltd (GDL) sought to enforce an adjudicator’s decision against a Joint Venture known as Mersey Link Civil Contractors JV (the JV). The dispute related to the construction of a six lane toll bridge over the River Mersey between Runcorn and Widnes. The adjudication related to 3 interim applications of GDL which had not been paid by the JV. The JV had not issued any payment notices or pay less notices in respect of the applications. The JV resisted enforcement of the Adjudicator’s decision on 7 grounds.

Defence 1

The JV argued that the dispute referred to adjudication was confined to whether or not valid pay less notices had been issued, and that the Adjudicator did not have jurisdiction to value GDL’s works. The JV said that the Adjudicator had valued the works in his decision and as such had exceeded his jurisdiction.

The TCC said the starting point in determining the Adjudicator’s jurisdiction was the terms, scope and extent of the dispute referred in the Notice of Adjudication and the Referral Notice. The court must then look at the dispute in fact decided by the Adjudicator in his decision.

Here the dispute referred was the failure to pay the three interim applications. One limb of this dispute was the lack of pay less notices, however the dispute referred was not confined to the lack of pay less notices. On the facts, the court did not need to decide whether or not the Adjudicator had jurisdiction to decide the dispute on a valuation basis, because upon examination of his decision the court concluded that the Adjudicator had decided the dispute on the basis of the lack of pay less notices only, and had not carried out a valuation of the works as the JV alleged.

Accordingly this defence was rejected.

Defence 2

The JV again argued that the Adjudicator had valued the works as part of his decision and as such had adjudicated at the same time on more than one dispute without the JV’s consent, the valuation of the works being a separate dispute to the lack of pay less notices.

The TCC found that this defence was verging upon unarguable and that only one dispute had been referred to adjudication, i.e. the lack of payment in respect of the interim applications.

Defence 3

This defence related to how the Adjudicator had been appointed. There was a dispute between the parties as to whether or not the terms of the NEC3 subcontract applied to the contract. The JV said that GDL had appointed the Adjudicator under the NEC3 provisions, and that this had not been agreed between the parties.

The TCC found that upon consideration of GDL’s application for the appointment of an adjudicator, GDL had not in fact requested that the Adjudicator be appointed pursuant to the NEC3. The application made clear that there was a dispute over the nature of the parties’ contract and referred to the Scheme for Construction Contracts 1998 (the Scheme) with an ‘in the alternative’ reference to the NEC3 subcontract terms. It was clear that the Adjudicator had not been appointed in accordance with the NEC3 terms, and had instead been appointed in accordance with the Scheme.

The court therefore rejected this defence.

Defence 4

The JV said it was unclear which adjudication rules applied to the adjudication: the Scheme or the Technology and Construction Court Solicitors’ Association (TeCSA) adjudication rules (as referred to in the NEC3 subcontract).

The TCC found that GDL had maintained throughout the adjudication that GDL’s primary case was that the Scheme applied to the adjudication.

The JV did not object when the adjudicator set out his proposed procedure for the adjudication even thought this procedure did not comply with the TeCSA adjudication rules. As such, the JV knew that the Scheme was being applied. If the JV had considered that the TeCSA rules applied, then the JV should have raised this at the time.

Accordingly, this defence was also rejected.

Defence 5

In his decision, the Adjudicator set out findings as to the terms of the contract between the parties. In particular, he found that the contract had been amended or supplemented by a later letter from GDL. The JV argued that the Adjudicator lacked jurisdiction to make these findings, and that this amounted to a breach of natural justice.

The TCC also rejected this defence because it related to the substantive findings of the Adjudicator himself, rather than to there being an issue of jurisdiction or natural justice. The court held that the applicable contract terms were an issue within the Adjudicator’s jurisdiction and the Adjudicator’s decision had been made fairly. As such, there had been no breach of natural justice.

Defences 6 and 7

The JV contended in both of these defences that the question of the nature of the parties’ contract and the applicable contractual terms should be referred to a full trial rather than summary judgment being awarded by the court.

The TCC rejected these submissions and said that they were contrary to the “ethos and policy of adjudication”. The court said that for the Adjudicator’s decision to be enforced it was not necessary to conclude that all of the arguments raised by the JV had no real prospect of success in order to give summary judgment to GDL. The court need only consider:

Was the Adjudicator validly appointed?
Did he act within his jurisdiction? and
Did he act in accordance with the rules of natural justice?

Costs

The TCC commented that the parties had together spent over £55,000 in legal costs in respect of the enforcement proceedings. This was over a quarter of the £207,000 which was the subject of the Adjudicator’s decision. The court said that this was contrary to the purposes of Parliament when it introduced the adjudication regime.

The question of costs was left for another hearing, but given the court’s comments it appears that the JV may be ordered to pay GDL’s costs on the higher, indemnity basis.

Comment

As set out above, the court dismissed all 7 of the JV’s grounds for objection and ordered that the adjudicator’s decision be enforced.

This case is a reminder that in order to avoid enforcement, it is necessary to show a breach of natural justice, or that an adjudicator has exceeded his jurisdiction.

The ‘kitchen sink’ approach of raising multiple spurious grounds to resist enforcement will not be welcomed by the courts, and as a result the party resisting enforcement could be penalised by the courts in respect of costs.

Does providing a general character reference amount to apparent bias?

(1) Gary Paice and (2) Kim Springall v Matthew J Harding [2016] EWHC B22 (TCC) […]

(1) Gary Paice and (2) Kim Springall v Matthew J Harding [2016] EWHC B22 (TCC)

In this fifth adjudication between the parties, Matthew J Harding (Harding) sought to avoid enforcement of an Adjudicator’s decision on (amongst other things) the grounds of apparent bias from the Adjudicator.

In the previous fourth adjudication between the parties Mr Paice and Ms Springall (Paice) had obtained an adjudicator’s decision in their favour. Harding also challenged enforcement of this decision on the grounds of apparent bias. The TCC agreed with Harding, and declined to enforce the Fourth Adjudicator’s decision. Following the TCC’s ruling, Harding made a formal complaint to the RICS regarding the Fourth Adjudicator.

The Adjudicator in this fifth adjudication (the Fifth Adjudicator) had provided a character reference to the RICS regarding the Fourth Adjudicator following Harding’s formal complaint. The Fifth Adjudicator did not disclose to the parties that he had provided such a character reference until Harding directly asked the Fifth Adjudicator about this. Harding argued that this amounted to apparent bias and that the Fifth Adjudicator’s decision here should not be enforced.

The TCC confirmed that the test for apparent bias is whether the defendant has a real prospect of establishing that a fair minded observer would conclude that there was a real possibility that the tribunal was biased. It is irrelevant whether the parties themselves think there is a real possibility of bias. The relevant viewpoint is a fair minded observer.

The TCC concluded that the Fifth Adjudicator did not have an obligation to disclose to the parties the fact that he provided a general character reference for the Fourth Adjudicator to the RICS. The fifth adjudication was a fresh dispute and was not a review of the Fourth Adjudicator’s previous decision. Further Harding had not raised the issue of the character reference with the Fifth Adjudicator until 2 days before his decision was due. Harding’s representatives knew of the existence of this character reference from before the commencement of the fifth adjudication. The TCC considered that if the character reference was of such significant as Harding now suggested in the enforcement proceedings, then Harding would have raised this at the time of the Fifth Adjudicator being appointed.

The TCC accepted that Harding was sensitive to the issue of bias, given the outcome of the Fourth Adjudication, however a fair minded observer would not conclude that there was an appearance of bias from the provision of a general character reference.

Does commencing a trial to finally determine the dispute prevent the court from enforcing an Adjudicator’s decision?

Niken Construction Limited v Trigram Carver Street Limited [2016] EWHC 2232 (TCC) Niken Construction Ltd […]

Niken Construction Limited v Trigram Carver Street Limited [2016] EWHC 2232 (TCC)

Niken Construction Ltd (Niken) sought to enforce the decision of an Adjudicator against Trigram Carvel Street Limited (Trigram). Trigram had also commenced separate proceedings seeking a final determination of the issues which formed the subject matter of the adjudication, as well as various other issues which had arisen between the parties.

The adjudication in question was the third that had taken place between the parties under the same contract. The same Adjudicator was appointed in both the second and third adjudications. Each party contended that it had validly terminated the building contract. In the second adjudication, the Adjudicator decided that Trigram did not terminate the contract. In the third adjudication, the same Adjudicator decided that Niken had successfully terminated the building contract and that as a result Niken was due monies on its termination account.

Trigram argued that it was entitled under the Construction Act to have adjudication decided in legal proceedings and to seek declaratory relief as to the matters at issue. These enforcement proceedings were heard in the Birmingham District Registry of the TCC. The TCC rejected Trigram’s challenge and confirmed that while it is indeed correct that Trigram had a right to have matters in issue finally determined, whether by litigation, arbitration or any other appropriate form of dispute resolution; that is not of itself a good reason why a valid decision of an adjudicator should not be enforced.

Trigram also sought to argue that there had been a breach of natural justice in that the Adjudicator had made an error in reaching the wrong conclusion in both the second and the third adjudication. The TCC also rejected this challenge, stating that the fact that the Adjudicator may have been wrong is not a reason for his third decision not to be enforced. The objection made by Trigram alleged a mistake of fact or law. It did not go to matters of natural justice.

Trigram then argued that it had a real prospect of successfully defending Niken’s claim at trial. The TCC agreed with Niken that this ground was meaningless because Niken’s claim was not one in which it sought to litigate the underlying issues between the parties, but was instead an application to enforce a valid decision of an Adjudicator.

Trigram’s also sought to challenge enforcement on the basis that the disputes between the parties were complex, and it was desirable for all matters to be heard together at trial to be decided once and for all. The TCC also rejected this submission, finding that the mere fact that the underlying issues between the parties are complex and/or substantial is not of itself good or sufficient reason not to enforce a valid decision of an Adjudicator.

Accordingly the TCC was not persuaded by Trigram’s arguments, and enforced the Adjudicator’s decision such that payment was due to Niken.

This case is a reminder of the difficulties in persuading a court to resist enforcement of an Adjudicator’s decision. Whilst a party has a right to have its dispute finally determined at trial, the Adjudicator’s decision should be complied with in the interim until the final determination has been obtained. This is in line with the “pay now, argue later” ethos of the Construction Act.

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Carly Thorpe - Senior Associate, Construction & Engineering at Walker Morris LLP

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