Adjudication update

We continue to hold our regular Update Seminars at the Savoy. Our last seminar in May 2005, when we were fortunate to have Mr Justice Jackson as one of our guest speakers, was our most popular yet.

The previous October, one of our speakers was Graham Watts, Chief Executive of the Construction Industry Council (CIC). His presence was particularly topical, as Graham had chaired the Adjudication Working Group, which formed part of the Construction Act Review chaired by Sir Michael Latham.

That review reached its final stage in June 2005 with the submission of final comments on the Government Consultation Paper. At the time of finalising this Review, it is not known exactly what changes will be made to the adjudication legislation or when they might take place.

However, Jeremy Glover, in a paper given at the 11th Update Seminar outlines some of the issues up for discussion.

The paper followed a talk given by Jeremy the previous November to the King’s College Construction Law Association entitled “What I should like to do the Housing Grants, Construction and Regeneration Act 1996”. The premise behind the talk was the review into the Housing Grants, Construction and Regeneration Act (the “HGCRA”) undertaken by Sir Michael Latham and his two teams, the Construction Umbrella Bodies Adjudication Task Group under Graham Watts and the Payment Working Group under Richard Harryott.

Among the topics considered in that paper were:

1. Payment:
   • Payment and withholding notices;
   • What happens if you suspend work for non-payment? and
   • Is it possible to withhold sums against an adjudicator’s decision?
2. Adjudication:
   • Agreements in writing; and
   • The meaning of dispute.

On 22 March 2005, the Construction Minister Nigel Griffiths and the Welsh Assembly Government Minister for Social Justice and Regeneration Edwina Hart launched a joint Consultation Paper based on that Latham Review entitled “Improving payment practices in the construction industry”.[1]

The Consultation Paper was said to be an “initial consultation” and was aimed at improving the ability of parties to a construction contract to:

1. reach agreement on what should be paid and when, given the work done under the contract or, where they cannot agree, to make an informed referral to, or response at, adjudication;
2. manage cash flow and enable completion of work on the project in the event of problems such as payment default or insolvencies elsewhere in the supply chain; and
3. refer disputes to adjudication without disincentives such as avoidance, frustration or unnecessary challenge.

The aim of the Consultation was said to be:

“…to build a general consensus on the way forward. Should clear support for changes to the legislation be identified, there will then be consultation on draft amendments.”

It will be interesting to see whether there is clear support for those proposed changes. Nigel Griffiths acknowledged that there was a lack of consensus in the construction industry, particularly in respect of the payment provisions. He recognised that:

“…the construction sector does not speak with one voice… What constitutes fair payment is the subject of considerable debate and views differ depending where a firm may feature in the construction supply chain.”

Sir Michael Latham has taken a positive view on the Consultation Paper and indeed congratulated the Government for being:

“…very bold in taking on matters where there was no consensus between industry sectors in original discussions. There were strong feelings on both sides of the debate, and the government has tried to reflect all views rather than ignoring them. It also goes further than I expected to address payment.”

However, a number of some notable proposals and suggestions that were made during the initial review have not been pursued. As a starting point I would like to consider how the six points I referred to in my original talk fared.

The logical place to start is payment. Of the 14 proposals to be found in the Consultation Paper, 9 relate to this issue.

Payment and withholding notices

The problem as I saw it: What was the point of section 110 of the HGCRA?

Section 110 states that every construction contract should provide an adequate mechanism for determining what payment became due and when – something that sounds straightforward enough. In addition, every construction contract should provide for the giving of a notice by a party not later than five days after the date on which the payment became due setting out the amount (if any) of the payment proposed to be made and the basis on which that amount was calculated. The notice should identify the amount due under the contract, assuming that the other party had carried out its obligations under that contract and ignoring set off or abatement in respect of other contracts.

However, the problem was really what happened if a notice of payment was not served. In most cases absolutely nothing. The HGCRA did not say what happens if a payment notice was not served. It made no provision or sanction for the failure to issue such a notice.

Some contracts did consider the consequences. Clauses 30.3.3 and 30.3.5 of the JCT with Contractor’s Design 1998 provide that if the payment notice was not served, the amount claimed by the contractor became the amount due and must be paid in full accordingly (subject to any withholding notice).

This issue has, of course, been considered in a number of court cases,[2] all of which conclude that where the employer fails to issue the requisite notices pursuant to the contract, then the contractor is entitled to be paid, even if the employer has grounds to withhold payment.

The solution I proposed:

There were three possible options:

1. doing nothing;
2. removing section 110; or
3. giving section 110 some teeth and introducing some form of sanction.

I favoured the second suggestion. It was cleaner.

The Latham Review concluded that it would be better to remove section 110(2) and replace it with a definition of what constitutes an “adequate mechanism for determining what will be paid and when” in the contract, as required by section 110(1) of the Act.

That must be right. TECSA suggested such a mechanism should include agreement of:

1. What amounts are determined;
2. When this determination occurs;
3. How these amounts are to be calculated/assessed;
4. When the payment determined must be made (i.e. debt crystallisation). This date would be referred to as the Payment Date;
5. The provision of information (who provides what, to whom and in what level of detail);
6. What happens in default of operation of the contractual mechanism; and
7. How are entitlements (e.g. loss and expense and retention) to be determined and paid?

In New Zealand, a system has been developed which introduces a simple default mechanism into contracts for any failure to operate the payment mechanism. The amount claimed as due by the payee would become payable if no withholding notice were served. This has certain commercial logic and provides clarity about the status of an application in the legislation, a matter which, somewhat inconsistently up to now, has been left only to contract. Under some contracts at present, no application process is necessary.

What has been recommended?

The Consultation Paper proposes:

1. that the requirement for the notice currently referred to in Section 110(2) should be removed; and
2. that the content of an adequate payment mechanism in section 110(1) be defined to include:
   • terms on what amounts constitute the payment under the contract;
   • when a payment is to be assessed under the contract;
   • how the amounts are to be determined;
   • the period of time that should elapse from the “assessment date” before the final date for payment; and
   • what information is to be communicated between the parties.

What happens if you suspend work for non-payment?

The problem as I saw it:

Under section 112 of the HGCRA, the payee had the right to suspend performance of his obligations under the contract if a sum “due” under the contract was not paid in full by the final date for payment and no That right could only be exercised if the party intending to suspend gave at least seven days’ notice in writing, specifying the ground or grounds for suspension.

The problem was that the compensation to which the suspending party is entitled under the legislation in the event of a legitimate suspension was not generous. Subsection (4) simply confirmed that the suspending party was entitled to an extension of time for completion of the works covering the period during which performance was suspended. An extension did not necessarily extend to the seven-day notice period prior to the right to suspend becoming operative and did not apply to the time which it might take to re-mobilise following the suspension. This was important since the right to suspend ceased on payment of the amount “due” in full.

Some standard forms do deal with this point. A good example can be found in clauses 25.4.17 and 26.2.9 of the JCT with Contractor’s Design 1998 where delay arising from a suspension is listed as a relevant event and the right to claim loss and expense incurred as a consequence is provided for, as long as the suspension is not frivolous or vexatious.

The solution I proposed:

Quite simply, I suggested that the approach of the JCT family of contracts should be adopted.

What has been recommended:

The Consultation Paper has recommended that the statutory right to suspend performance should be supplemented with a right to reclaim the reasonable costs of suspension and remobilisation, provided nothing has compromised the ability of a payer to reject a claim for such costs where a suspension was unjustified.

Slightly more controversially, it has been suggested that insofar as the Scheme for Construction Contracts is concerned, the reasonable costs of suspension and re-mobilisation should not exceed 5% of the value of the payments in default. An appropriate delay in re-mobilisation ought not to exceed seven days.

Withholding against an adjudicator’s decision

The problem as I saw it:

Although Court of Appeal Decisions such as Levolux v Ferson[3] had left the impression that the attempt to set off against sums awarded by adjudicators would fail, attempts were still being made to try and get round adjudicator’s decisions by adopting set-offs or counterclaims.

To many this is contrary to the “pay now, argue later” public policy of the HGCRA.

The Levolux case was recently considered in the case of Balfour Beatty v Serco Limited.[4] Here, Serco engaged BB to design, supply and install variable message signs at locations on motorways. By an adjudication decision, BB were awarded an extension of time providing a revised completion date of

7 June 2004 and also the sum of £620,000 plus VAT. Serco refused to pay saying that as at 6 December 2004 the works were not practically complete. Thus, it was entitled to levy liquidated and ascertained damages for the period after 7 June 2004. This sum exceeded the sum payable to BB.

Mr Justice Jackson noted:

“In Ferson Contractors Ltd v Levolux AT Ltd [2003] BLR 118, there was a sub-contract in the GC/Works/Sub-Contract form. A dispute arose between the main contractor (Ferson) and the sub-contractor (Levolux) concerning the efficacy of a withholding notice served by Ferson. The adjudicator held that the withholding notice did not comply with s.111 of the Construction Act. Accordingly, he ordered Ferson to pay to Levolux the sum of £51,659 which was due on application for payment No 2. Ferson declined to pay this sum on the ground that it had determined the sub-contract. The ground for determination was that Levolux has suspended works as a result of non-payment. His Honour Judge Wilcox gave judgment enforcing the adjudicator’s award, and that judgment was upheld by the Court of Appeal. The appeal proceeded on the basis that the sub-contract had been invalidly determined. Mantel LJ gave the leading judgment, with which the other two members of the court expressed agreement. At paragraph 30 Mantel LJ said this:

‘But to my mind the answer to this appeal is the straight forward one provided by Judge Wilcox. The intended purpose of s. 108 is plain. It is explained in those cases to which I have referred in an earlier part of this judgment. If Mr Collings and His Honour Judge Thornton are right, that purpose would be defeated. The contract must be construed so as to give effect to the intention of Parliament rather than to defeat it. If that cannot be achieved by way of construction, then the offending clause must be struck down. I would suggest that it can be done without the need to strike out any particular clause and that is by the means adopted by Judge Wilcox. Clauses 29.8 and 29.9 must be read as not applying to monies due by reason of an adjudicator’s decision.’

I derive two principles of law from the authorities, which are relevant for present purposes.

1. Where it follows logically from an adjudicator’s decision that the employer is entitled to recover a specific sum by way of liquidated and ascertained damages, then the employer may set off that sum against monies payable to the contractor pursuant to the adjudicator’s decision, provided that the employer has given proper notice (insofar as required).
2. Where the entitlement to liquidated and ascertained damages has not been determined either expressly or impliedly by the adjudicator’s decision, then the question whether the employer is entitled to set off liquidated and ascertained damages against sums awarded by the adjudicator will depend upon the terms of the contract and the circumstances of the case.

In the present case, for the reasons set out in paragraph 5 of this judgment, the adjudicator has not reached any definitive conclusion as to the total extension of time which is due to Balfour Beatty. No specific entitlement to liquidated and ascertained damages follows logically from the adjudicator’s decision. It is strongly disputed between the parties whether any liquidated and ascertained damages are due and payable. Paragraph 10 of Appendix A to Schedule 23 of the Contract requires both parties to give effect forthwith to the adjudicator’s decision. The effect of paragraph 13 of Appendix A is that Balfour Beatty is entitled to the relief and remedies set out in the adjudicator’s decision and, moreover, is entitled to summary enforcement of such relief and remedies. These contractual provisions are consistent with the provisions of Part 2 of the Construction Act and with the Parliamentary intention referred to in the authorities.”

Accordingly, Serco was not entitled to set-off against an adjudicator’s decision.

The solution I proposed:

Amend the HGCRA to prohibit a party from withholding or setting off against an adjudicator’s decision.

What has been recommended:

Nothing.

This may well be because the case law is quite clear on this point. However, the outcome in a particular case may largely depend on the specific contract terms. For example, in Shimizu Europe Ltd v LBJ Fabrications Ltd,[5] the contractual payment machinery required the issue of an invoice in order to trigger a period of time leading to the final date for payment. Thus, it was held possible by the TCC to serve a valid withholding notice before the final date for payment which will be effective against the adjudicator’s decision.

However, the review has proposed prohibiting the right of cross-contract set-off, albeit keeping the right to equitable set-off where “a close relationship exists between the dealings and transactions which gave rise to the respective claims”.

Payment – the other issues

The other recommendations of the Consultation Paper are as follows:

1. Payment framework:

• Redefining the content of withholding notices under Section 111 so that they give details of the amounts (if any) remaining to be paid.
• Restricting the use of pay-when-certified clauses.

2. Other payment proposals:

• Making pay-when-paid clauses ineffective in cases of upstream consultancy proceedings.
• Allowing stage payments under the Scheme for Construction Contracts to be made from materials in advance of their arrival on site.

Moving on to adjudication issues.

Agreements in writing

The problem as I saw it:

The key here is the Court of Appeal decision on the meaning of section 107 of the HGCRA in RJT Consulting Engineers Limited v DM Engineering (NI) Limited.[6] Section 107 says that for that contract to fall within the adjudication decision of the HGCRA, must be evidenced in writing.

The Court of Appeal held that all the terms of the contract must be evidenced in writing.

However, it was not entirely clear which terms they had in mind. According to Lord Justice Walker it is all the terms, according to Lord Justice Ward it is all but the trivial terms, whilst according to Lord Justice Auld it is the terms in dispute.

The Court of Appeal decision understandably has largely been followed. For example, HHJ Bowsher QC[7] said that an adjudicator did not have jurisdiction to consider a dispute about an oral variation to a contract that was in writing.

More recently, the Court of Appeal judgment was clarified by Mr Justice Jackson in the case of Trustees of the Stratfield Saye Estate v AHL Construction Limited.[8]

Here the Trustees sought a declaration that an adjudicator did not have jurisdiction because there was no agreed scope of works in writing. The contract had been agreed on a “cost plus” basis because the exact work content could not be fully identified. Shortly after AHL had commenced work, the Trustees cancelled the contract and AHL claimed for loss of profit on the cancelled work. In the adjudication, AHL were awarded £75,000 but the Trustees refused to pay.

Mr Justice Jackson held that all the express terms of a construction contract had to be in writing if the HGCRA was to apply. He said that “the reasoning of Auld LJ, attractive though it is, does not form part of the ratio of RJT”. However, it was not all good news for the Trustees as the Judge found on the facts that the contract and the scope of works were sufficiently evidenced in writing by letters, drawings and minutes of a meeting.

The problem

The problem therefore is a simple one. It is well known that the industry rarely records all the terms of a contract in writing, let alone the material ones. In part this is because the parties are concentrating on getting the job done. However, this decision did potentially open the door to a flood of jurisdictional challenges. Lord Justice Ward in RJT recognised this. He acknowledged that it would be: “…a pity if too much ‘jurisdictional wrangling’ were to limit the opportunities for expeditious adjudication…” and he hoped that “adjudicators will be robust in excluding the trivial from the ambit of the agreement and the matter must be entrusted to their common sense”.

The solution I proposed:

Encourage parties to evidence their contracts in writing. Lord Justice Walker is right to say:

“Writing is important because it provides certainty. Certainty is all the more important when adjudication is envisaged to have to take place under a demanding timetable. The adjudicator has to start with some certainty as to what the terms of the contract are.

There are three alternatives put forward by the Latham review about how to tackle this issue:

1. endorse the first instance RJT decision of HHJ MacKay. The HGCRA should only apply to contracts where all the terms are in writing or evidenced in writing;
2. endorse the purposive approach and allow the HGCRA to apply to contracts which are evidenced partly orally and partly in writing;
3. follow the Australian and New Zealand approach and extend the HGCRA to wholly oral contracts.

All three possibilities have their own problems.

In relation to the first, there is still a large body of construction contracts to which the HGCRA will not apply, because they have not been reduced in writing. That was not the approach of Parliament. It is also possible, as HHJ Bowsher QC suggested, for a contract which was once part of the HGCRA to be taken out of the ambit of the Act because of an oral variation to its terms.

The third, though in many ways the simplest, is probably a step too far. As HHJ Bowsher QC said in Grovedeck v Capital Demolition Limited:[9]

“Disputes as to the terms, express and implied, of oral construction agreements are surprisingly common and are not readily susceptible of resolution by a summary procedure such as adjudication.”

My preferred approach is to adopt the approach of HHJ Mackay.

What has been recommended?

Nothing.

For the time being at least, I suspect the Serco decision will be seen as clarifying where the law stands.

What is a dispute?

The problem as I saw it:

How can you tell if a dispute has arisen? Section 108 states that:

“A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section.”

For this purpose “dispute” includes any difference.

In Beck Peppiatt Ltd. v Norwest Holst Construction Ltd, the then-head of the TCC Forbes J had to consider this issue. He took the middle way saying:

“In my view the law is satisfactorily stated by His Honour Judge Lloyd QC in his unreported decision of Sindall v Solland dated June 2001, in which he said:

‘For there to be a dispute for the purposes of exercising the statutory right to adjudication it must be clear that a point has emerged from the process of discussion or negotiation that has ended and that there is something which needs to be decided.’

As it seems to me, that is a statement of principle which is easily understood and is not in conflict with the approach of the Court of Appeal in Halki. I would have been very surprised if it was. It has to be borne in mind that, as observed in Halki, “dispute” is an ordinary English word which should be given its ordinary English meaning. This means that there will be many types of situations which can be said to amount to a dispute. Each case will have to be determined on its own facts and attempts to provide an exhaustive definition of ‘dispute’ by reference to a number of specified criteria are, in my view, best avoided. I therefore reject the suggestion that the word ‘dispute’ should be given some form of specialised meaning for the purposes of adjudication.”

What I did not like was the use of the stringent test, used by Lord Saville in Hayter v Nelson [1990] 2 LLoyds Rep 265, where the judge refused to give summary judgment and stayed a matter to arbitration because of the existence of an arbitration clause. Lord Saville said that the word “dispute” should be given its ordinary meaning and went on to set out what some would say the infamous “boat race” definition of a dispute, effectively any form of disagreement would suffice:

“…to have an argument over who won the university boat race in a particular year. In ordinary language they have a dispute whether it was Oxford or Cambridge. The fact that it can be easily and immediately demonstrated beyond any doubt that one is right and the other is wrong, does not and cannot mean that the dispute does not in fact exist, because a man can be said to be in dispute if he is right and the other indisputably wrong does not, in my view, entail that there was therefore never any dispute between them…”.

Whilst this, of course, has the advantage of certainty, you can hear the complaints from a mile off. How much easier it would be for a party to (using a phrase beloved by opponents of adjudication) ambush another.

The solution I proposed:

To me the Halki test is too narrow and uncommercial. However, in many ways the solution has now largely been neatly set out by the courts.

First, in October 2004, in CIB Properties Ltd v Birse Construction Ltd, HHJ Toulmin CMG QC, in considering whether there was a dispute, said that:

“…the test is whether, taking a common-sense approach, the dispute has crystallised. Even after it has crystallised, the parties may wish to have further discussions in order to resolve it. Whether or not it has, in fact, crystallised will depend on the facts … including whether or not the parties are in continuing and genuine discussions … to try to resolve the dispute.”

Then, Mr Justice Jackson in the recent case of Amec v The Secretary of State for Transport,[10] in the context of an arbitration, had to consider whether a dispute had arisen. He proposed the following steps:

1. The word dispute should be given its normal meaning.
2. Despite the number of cases, there are no hard-edged legal rules as to what is and what is not a dispute. The accumulating judicial decisions have merely produced helpful guidance.
3. The mere fact that one party notifies the other of a claim does not automatically and immediately give rise to dispute. A dispute does not arise until it emerges that the claim is not admitted.
4. There are many circumstances from which it may emerge that a claim is not admitted. There may be an express rejection, there may be discussions from which objectively it can be said that the claim is not admitted, or a party may prevaricate thus giving rise to the suggestion that it does not and omit the claim. Silence may well also give rise to the same inference.
5. The period of time for which a party may remain silent depends upon the facts of the case and the contract. Where the gist of the claim is well known, a short period may suffice. Where the claim is notified to an agent of a respondent who has an independent duty to consider the claim, a longer period of time may be required.
6. If a party imposes a deadline for responding to the claim, the deadline does not have the automatic effect of curtailing what otherwise would be a reasonable time for responding. However, it is something for a court to consider.
7. If the claim as presented is so nebulous and ill-defined that a party cannot sensibly respond to it, neither silence, nor even an express non-admission is likely to give rise to a dispute for the purposes of arbitration or adjudication.

Judge Kirkham in the case of Orange EBS Ltd v ABB Ltd[11] has been criticised for deciding that a dispute arose between early December and early January. Here, applying these tests led to the conclusion that a five-day deadline given in a letter to respond was a reasonable one. The deadline was imposed for a good reason, namely that the limitation period was about to end. In addition, as a result of previous deadlines it was clear that the deadline would not cause Amec any further difficulty. It was self-evident that Amec would not be prepared to admit liability for massively expensive defects on a viaduct. This solution may not be ideal, since there is always scope to apply the facts of any situation. However, it seems to be a fair and reasonable approach to take.

The Amec decision went to the Court of Appeal who in March of this year confirmed their agreement to the steps put forward by Mr Justice Jackson.

Mr Justice Jackson’s propositions had previously been endorsed by Lord Justice Clarke in the Court of Appeal as being “broadly correct”[12] Lord Justice Clarke in particular endorsed the general approach that:

“while the mere making of a claim does not amount to a dispute, a dispute will be held to exist once it can reasonably be inferred that a claim is not admitted.”

Lord Justice Clarke agreed that Mr Justice Jackson was right not to agree with the suggestion in some of the case law that a dispute can only arise once negotiation or discussion had concluded and stated that it appeared to him that:

“negotiation and discussion are likely to be more consistent with the existence of a dispute, albeit an as yet unresolved dispute, than with an absence of a dispute.”

Adjudication – the other issues

The Consultation Paper also made the following recommendations:

1. Preventing the use of trustee stakeholder accounts to suspend an adjudicator’s award pending litigation other than when the recipient is involved in insolvency proceedings.
2. Providing the adjudicator with the power to rule on certain aspects of his own jurisdiction and providing a right to payment in cases where the adjudicator stands down due to lack of jurisdiction.
3. Providing the adjudicator with the right to overturn final and conclusive decisions where these are of substance to interim payments only.
4. Extending the adjudicator’s immunity under the HGCRA to claims by third parties.
5. Applying provisions on adjudicator independence in the Scheme to all adjudications under section 108 of the HGCRA.

Adjudication – costs

The Consultation Paper also noted that government legislation is intended to deal with certain aspects regarding the costs of the adjudication process, namely:

1. parties to an adjudication should bear their own legal and other costs while the costs of the process are referred to the adjudicator to be decided as part of his decision of the dispute;
2. outlaw contractual provisions which have any other effect – i.e. as in the Tolent case; and
3. provide that, once a dispute has been referred to an adjudicator, if both parties also wish to refer the legal costs they incur in the process, then the adjudicator should also award these as part of his decision of the dispute.

Matters not dealt with by the Consultation Paper

Of the various issues in the Latham Review of September 2004, there were a number which were not referred to at all in the Consultation Paper. These include:

1. introducing a single adjudication procedure for all adjudications. This, in particular, must be a missed opportunity;
2. the widening of the scope of the HGCRA to apply to all residential buildings contracts, PFI contracts and contracts for operations-related process-plant;[13]
3. as mentioned above, widening the meaning of section 107 of the HGCRA in relation to “contracts evidenced in writing”;
4. setting up any statutory limit on payment period lengths; and
5. providing a right to redirect payments owed to insolvent contractors to their creditor subcontractors and suppliers.

Conclusion

As indicated above, we still await final details of what, if any, the changes to the HGCRA will be. However, it is more likely than not that any changes to the HGCRA will be minor.

[1] This can be found on the DTI website at https://webarchive.nationalarchives.gov.uk/ukgwa/20060213221844/http://www.dti.gov.uk/construction/hgcra/hgcralead.htm.

[2] E.g. Watkin Jones & Son Limited v Lidl UK GMBH [2002] CILL 1847 or MJ Gleeson Group PLC v Devonshire Green Holding Limited TCC, unreported, 19 March 2004.

[3] [2003] EWCA Civ 11.

[4] 21 December 2004.

[5] (2003)CILL 2015.

[6] (2002) CILL 1841.

[7] Carillion Construction Ltd v Devonport Royal Dockyard Ltd (2003) CILL 1976.

[8] 6 December 2004.

[9] CILL April 2000.

[10] 11 October 2004.

[11] (2003) BLR 323.

[12] Collins (Contractors) Limited v Baltic Quay Management (1994) Limited – 7 December 2004.

[13] This is no surprise given the comments of Nigel Griffiths in October 2004 when he responded to the Latham Review.