Adjudication watch - August 2014

04 August 2014

In this month's 'Adjudication watch', our construction experts review the most important cases involving adjudication enforcement from the last six months.

Miller Construction (UK) Ltd v Building Design Partnership Ltd

Background

Miller was the Design and Build Contractor and Building Design Partnership (BDP) was the lead Consultant and Architect on a project for a new facility at Motherwell College.

After completion it was discovered that the ventilation system did not comply with a contractual requirement of a fresh air flow rate of 8 litres per person per second. A new system costing £448,089 plus VAT was installed by Miller.

The adjudication

Miller started an adjudication to recover the cost of the new ventilation system. Miller alleged that BDP was in breach of contract and in any event failed to meet the standard of skill and care required of a competent mechanical and electrical engineer in providing a defective design. BDP argued that it was not required to examine the design of proprietary products supplied by Miller and had advised Miller that "Passivent" units were the only suitable units, but that instead of heeding their advice Miller had used "Renson" units in order to save money.

The adjudicator found that BDP was not involved in the actual selection of the ventilation units, but that both parties were involved in the process of managing the installation. The adjudicator held that the parties shared responsibility for the failure of the ventilation system. Despite this he found that BDP had not fallen below the standard of skill and care expected from a reasonably competent lead consultant, but still had a degree of accountability for the performance of the system as a whole. This was because "both parties took risks in assuming that the Renson System would meet the contractual requirements". The parties were held liable for the costs of the replacement system on a 50-50 basis.

The enforcement arguments

As BDP did not pay Miller, Miller applied to enforce the adjudicator's decision. BDP challenged the enforcement and in doing so it:

  1. argued that the adjudicator's reasoning was inadequate and incoherent,
  2. alleged a breach of natural justice because the Adjudicator had determined the dispute on a basis not raised or put forward by either side.

It submitted that given Miller's case was solely brought on the allegation of negligence and the Adjudicator found that BDP were not negligent, there was no scope in the adjudication for finding a breach of contract and liability on some other basis.

The decision

In answering the first question, the court confirmed that if an adjudicator's decision is "so muddled or confused as to perplex the reasonable reader it will not be enforced", but that "there is no question of muddled or confused reasoning in respect of this award".

In answering the second allegation, the judge held that BDP had taken too narrow a view on both the issues in the adjudication and the scope of the adjudicator's decision making powers. Rejecting BDP's submissions, the judge stated that the broad issue remitted to the adjudicator was to determine whether BDP undertook responsibility for the design of the ventilation system which failed to meet the minimum air flow requirement and that therefore there was no breach of natural justice because the adjudicator had not acted outside his jurisdiction. He had not gone, as BDP claimed, on "a frolic of his own". Accordingly, the judge granted a summary degree in favour of Miller.

Comment

This case is another example of the continuing policy of the courts enforcing adjudicator's decisions and giving short thrift to most arguments about allegedly "incoherent" adjudicators' decisions. Although in principle the Scottish courts will not enforce decisions so incoherent that they "perplex" the reasonable reader, this threshold is rarely met in practice. There is no English authority to support that proposition.


University of Brighton v Dovehouse Interiors Ltd

Background

The University of Brighton (Brighton) engaged Dovehouse Interiors Limited (Dovehouse) to do some fit-out and associated works using the JCT Intermediate Building Contract.

Clause 1.9 of the contract provided that the Final Certificate would be conclusive evidence of the sum due to Dovehouse save in respect of any claims raised in adjudication, arbitration or other proceedings commenced within 28 days of the Final Certificate. The agreement provided for the nomination of an adjudicator by the president or vice president of the Chartered Institute of Arbitrators (CIArb) and that the Scheme was to apply.

Dovehouse carried out the works and practical completion was certified on 30 October 2012, but there were various disputes between the parties. The contract administrator issued the Final Certificate, triggering the 28-day period under clause 1.9.2, on 9 December 2013. The parties agreed to extend this period to 66 days (to expire on 14 February 2014), hoping to settle their disputes.

Despite the Valentine's day deadline, the parties could not reach an amicable settlement and on 13 February 2014 Dovehouse served a notice of adjudication, which incorrectly stated the nominating body as the Royal Institute of Chartered Surveyors (RICS). Dovehouse also forwarded the notice to RICS when requesting an adjudicator for appointment.

On 19 February RICS appointed an adjudicator and the referral was sent to him on 20 February. On 21 February, he resigned, having realised the mistake, and Dovehouse issued a revised notice on 24 February seeking an appointment by the president or vice president of CIArb.

The issue

Brighton issued court proceedings seeking a declaration that the Final Certificate was, in accordance with clause 1.9, conclusive of the amount due to Dovehouse. The question was whether Dovehouse had "commenced" adjudication proceedings on 13 February 2014.

Brighton argued that adjudication did not commence until the Referral was served on a properly appointed adjudicator. Moreover, the notice was argued to be ineffective on the grounds that it referred to the wrong adjudicator nominating body and was served on Brighton at the wrong address (although it was common ground between the parties that it reached them).

The decision

The judge held that construing the wording of the clause, the contract as a whole and the Scheme as a whole, adjudication proceedings were commenced when a notice of adjudication was served, namely on 13 February 2014.

Since there was no requirement to identify the nominating body in the notice, the judge held that the incorrect references to RICS did not invalidate the notice. Similarly, the failure to serve it on the correct address did not invalidate it because the contract entitled the parties to serve a notice by any effective means and the parties agreed that Brighton had received the Notice on 13 February 2014.

Commentary

The judge considered that Brighton's interpretation of the clause did not make commercial common sense because it would, inter alia, reduce to 14 days the period available to the contractor for challenge following issue of the Final Certificate. The judge considered that clause 1.9 did not intend to operate to stop the contractor from challenging the Final Certificate if the referral was not served in time for reasons beyond the parties' control.


Twintec Ltd v Volkerfitzpatrick Ltd

Background

Volkerfitzpatrick instructed Twintec to construct floor slabs for a wine warehouse and bottling plant it was constructing for Accolade Wines. In doing so it provided Twintec with a letter of intent requiring it to carry out the works "in accordance with" the DOM/2 sub-contract. As frequently occurs, the parties did not enter into a formal sub-contract. Accolade Wines claimed the floor was unfit for purpose and issued a claim for damages.

The appointment of the adjudicator

Volkerfitzpatrick served a notice of adjudication on Twintec for costs incurred testing the floor slabs and, in compliance with the DOM/2 sub-contract, it applied to the RICS to have an adjudicator appointed.

The adjudicator was subsequently appointed. Twintec challenged the appointment and applied for an injunction, claiming that the adjudicator had been appointed under contractual terms which did not exist and that the adjudication was oppressive and unreasonable.

The decision

The court had to decide whether any terms of the DOM/2 were incorporated into the agreement made pursuant to the letter of intent. It was held that since the formal contract was to have retrospective effect, Twintec had agreed to perform in accordance with the DOM/2 terms, but that not every term of the DOM/2 was necessarily incorporated.

The court only considered it necessary for the terms which were primary obligations to be incorporated, inter alia, those concerning programme, design and payment. Importantly however, secondary obligations, including dispute resolution, were not incorporated.

The court found that the adjudicator had been wrongly appointed. Since the adjudication terms had not been incorporated, the Scheme for Construction Contracts would apply and the adjudicator would be appointed pursuant to it - the appointment of an adjudicator by another process was a nullity. The injunction was granted. Since the appointment procedure "goes to the heart of his jurisdiction" an incorrectly appointed adjudicator cannot decide the dispute.

Twintec failed, however, on its argument that the adjudication was oppressive and unreasonable. The court held that exceptional facts were required to find the act of referring a dispute to adjudication to be unreasonable and oppressive. In contrast, this adjudication was brought while the parties were involved in large multi-party litigation.

Although sympathetic to the difficulties Twintec and its experts had been placed under by the decision to refer the dispute to adjudication, the judge held the pressure was not itself sufficient to amount to exceptional circumstance. Any additional costs, duplication and use of resources that defending the adjudication required was "a burden that parties to a construction contract sometimes have to accept".

Commentary

This is a rare case where an adjudication was stopped by the court. It may be a case on its own facts.


T Clarke (Scotland) Ltd v MMAXX Underfloor Heating Ltd

Statutory adjudication's purpose is to allow the swift resolution of disputes between parties with the primary intention of promoting cash flow within the construction industry. In this case, T Clarke alleged that MMAXX was deliberately seeking to abuse this process by referring disputes without merit to run up its costs and to force payment of monies that were not due.

T Clarke sought an interim interdict (it was a Scottish case) - a discretionary remedy similar to an interim injunction granted by the court when it considers that the party has made a prima facie case and, therefore, the balance of convenience favours it - to prevent MMAXX from commencing or insisting upon any adjudications in relation to a contract between the parties from the Court of Session.

Background

The parties entered into a contract to provide underfloor heating and heat pumps at a school. Relations between the parties were strained nearly immediately after works started and it did not take long for disputes to emerge. T Clarke alleged that MMAXX began acting in bad faith by seeking payment of monies that MMAXX admitted were not due.

The pursuer relied in particular on comments made by the Director of MMAXX, Mr McFarlane, during two telephone calls. He stated he was MMAXX's only shareholder and had only invested £1 in the company, implying it had little to lose. He threatened to commence an adjudication and added that he had prior experience of obtaining money in such proceedings and "would never give up". In a later call he stated, "I'm a maverick, I don't play by the rules" and that he would "do what I need to do" including suspending the works. He reiterated that the pursuer would face significant legal costs defending the claims.

MMAXX commenced a series of eight adjudications. T Clarke felt this behaviour was an abuse of process and requested an interim interdict to prevent MMAXX raising any further adjudications under the contract.

T Clarke argued that the right to refer a dispute to adjudication only applied to genuine disputes, which was not what MMAXX was doing. It argued that MMAXX's conduct and threats meant the balance of convenience supported the granting on an interim interdict.

T Clarke also submitted that the balance of convenience supported the grant of an interim interdict as, on the basis of MMAXX's conduct and threats throughout the contract process, T Clarke was understandably apprehensive that MMAXX would continue to raise further fictitious claims. This could result in T Clarke incurring substantial legal costs in defending vexatious claims. Depriving MMAXX of its ability to go to adjudication would not deprive it of an ability to recover any genuine sums in a court action.

MMAXX did not challenge the facts, but submitted that the order was too broad and that the more appropriate approach would be for T Clarke to bring a claim with respect to each subsequent adjudication that could be shown to be an abuse of process. It submitted that it would be unfairly prejudiced by the proposed interdict if it had to go to court to vindicate its claims due to the higher cost of the court process. Finally, it submitted that past events did not mean future referrals would be in bad faith.

The decision

The court decided that T Clarke failed to show that MMAXX was deliberately abusing the adjudication process. Although a "cloud of suspicion" hung over MMAXX's conduct, the court was unable to infer that it had acted unreasonably and oppressively. Many of the failed adjudications had failed due to procedural issues, one was partially successfully and Mr McFarlane's conduct and comments were consistent with a "robust approach".

As summarised in the judgment's final paragraph, the court concluded:

  1. T Clarke's case did not pass the high threshold required,
  2. MMAXX could be "significantly prejudiced if it could not take advantage of the speedier and cheaper means of dispute resolution provided by adjudication",
  3. it would be unjust if the pursuer but not the defender could refer a dispute to adjudication and
  4. the pursuer does have a remedy: it can raise an action seeking damages for abuse of process.

Comment

The question of restraining a party from bringing adjudication proceedings is a relatively novel one. These two cases indicate that although it is in principle possible, courts will only grant this remedy in exceptional circumstances.

Due to the fact specific nature of the cases, it is unsurprising that these two cases do not provide huge amounts of guidance on how unreasonable or oppressive the offending party's conduct is required to be before the remedy will be granted. However, it is clear a high threshold will be required to prevent the referral of "any" dispute under a contract to adjudication.


Viridis UK Ltd v Mulalley & Company Ltd

Background

Mulalley was the main contractor on a refurbishment project for a housing association. Viridis, a specialist window subcontractor, tendered for the contract to replace the windows and doors. Mulalley issued several orders to Viridis.

Following termination by Mulalley, Viridis referred a final account dispute to adjudication. The adjudicator resigned after accepting Mulalley's jurisdictional challenge that there was no dispute.

Not to be deterred, Viridis commenced another adjudication and Mulalley raised another jurisdictional challenge contending that the alleged main "sub-contract order" had never been accepted by Viridis and that all works had been undertaken under six separate contracts rather than a single one. As such, the disputes could not be referred under a single adjudication.

The adjudicator rejected Mulalley's argument, found he had jurisdiction and made an award in favour of Viridis. When Mulalley did not pay Viridis sought to enforce the award.

The decision

At the enforcement hearing Mulalley maintained its argument about multiple contracts and Viridis alleged there was an overarching contract with subsequent orders either being works orders placed under it or were variations to it. The issue required witness evidence and so Viridis withdrew the summary judgment application and the parties proceeded to a full trial.

The judge held that the decision should not be enforced. The adjudicator did not have jurisdiction as a dispute arising under more than one contract had been referred to him. The court held that the parties never reached agreement on the liquidated damages, payment terms and survey costs of order 24 (the order that was held to be the crucial part of the "overarching framework contract") and so Viridis could not be said to have accepted the order. The subsequent orders could not be said to be variations of that agreement or orders placed under an "overarching framework contract".

The court also held that an adjudicator can decide jurisdictional issues that are part of the substantive dispute only if appointed under a contract about which there is no dispute. Since a finding was made that Viridis had not accepted order 24, the very contract under which the adjudicator was appointed was allegedly appointed was in dispute. Moreover, since Viridis had only advanced a final account claim the issue of whether there was more than one contract was not part of the substantive dispute and therefore went to the adjudicator's jurisdiction.

The court's decision also decided, although obiter, that the challenges to enforcement based on a breach of natural justice failed.

Commentary

This is a rare case of an adjudicator's decision not being enforced by the courts. The finding of fact with respect to the main sub-contract order left no room for any other conclusion.

Moreover, the case is an example of circumstances when it may not always be appropriate to seek summary judgment to enforce an adjudicator's decision, with the parties proceeding to a full trial due to the large amounts of evidence required.

However, they proceeded on a basis that mimic a typical adjudication: the parties agreed to limit costs by dispensing with disclosure and limiting oral evidence to individuals involved in the project and could give evidence on the parties' contractual relationship.


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.