Can a "third party" adjudicate against you?

01 October 2014

Can the rights of a "third party" enforceable under the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act) be determined by adjudication under an express term contained within an agreement between the original contracting parties?

In Hurley Palmer Flatt Limited v Barclays Bank PLC, Mr Justice Ramsey declared that the "third party", in this case Barclays Bank PLC (Barclays), was not entitled to commence adjudication proceedings. The notice of adjudication and referral notice were therefore ineffective and the adjudicator had no jurisdiction to determine the claims.

The court decided that Barclays did not have a freestanding right to enforce the adjudication provision in the agreement. Separately, Barclays did not have a right derived from the 1999 Act to enforce its rights under the agreement by adjudication.

The court also made reference to the provisions of the Scheme for Construction Contracts (the Scheme) (which was incorporated into the agreement) which referred to adjudication as being between parties to a construction contract. It held that it was evident from these provisions that the adjudication provisions in the agreement were inapplicable to the relationship between Barclays, as third party, and Hurley Palmer Flatt Limited (HPF) because Barclays was not a party to the construction contract.

Background

By an appointment document dated 28 January 2008 (the Appointment), HPF agreed to provide mechanical and electrical engineering design services to Barclays PLC (the Client) in relation to the design and construction of a new data hall.

A dispute arose over the chilled water system, leading to a claim against HPF of more than £4 million. An adjudication was commenced. However, it was not brought by the Client under the Appointment, but by a third party, Barclays, based on its rights as an "Affiliate" under the Appointment.

The Appointment document

Clause 14 of the Appointment provided for third party rights. In the Appointment, HPF was described as the "Consulting Engineer".

Clause 14.3 provided:

"Any Affiliate with a direct interest in the Project shall be entitled to enforce the terms of this Agreement as "Client" always provided that the Consulting Engineer shall be entitled [to] rely on the equivalent defences in respect of such liability which it has against the Client".

It was accepted that Barclays fell within the definition of "Affiliate" referred to in clause 14.3.

Third party rights were also dealt with in the following provisions of the Appointment:

Clause 2.3

"Unless expressly stated otherwise in this Agreement, nothing in this Agreement confers or is intended to confer any rights on any third party pursuant to the Contracts (Rights of Third Parties) Act 1999".

Clause 14.2

"Save as expressly provided in clause 14.3 and clause 10 (collateral warranties) nothing in this Agreement shall confer or purport to confer on any third party any benefit or right to enforce any terms of this Agreement".

Adjudication provisions

The Appointment also included a provision (at clause 27.1) that the adjudication provisions contained in the Scheme applied to the Appointment.

HPF commenced proceedings in the TCC seeking declarations that Barclays was not entitled to commence adjudication proceedings against them and that the notice of adjudication and referral notice were ineffective and the adjudicator did not have jurisdiction.

The issue before the court was whether or not the rights given to Barclays in the Appointment as a third party Affiliate included the right to have liability under the Appointment determined by adjudication under the provisions of clause 27.

Submissions of the parties

HPF said that under the 1999 Act the enforcement of Barclays' rights under clause 14.3 of the Appointment had to be by way of court proceedings. While the 1999 Act makes express provision in relation to arbitration clauses, so that a third party would be treated for the purpose of the Arbitration Act 1996 as being a party to the arbitration agreement, there is no equivalent provision relating to adjudication. Adjudication, it was said, is a contractual dispute resolution method between the original contracting parties.

Barclays said it had a right to adjudicate as a freestanding procedural right as part of the benefit given to it by clause 14.3 of the Appointment. It argued that the position was analogous to the position on assignment and that it was entitled to adjudicate under the terms of clause 27. Alternatively, the right to adjudicate under clause 27 was a procedural qualification to the right to claim damages granted to it under clause 14.3 of the Appointment.

Barclays referred to Section 1(4) of the 1999 Act, which provides:

"This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract".

It was said that, as a result, Barclays' substantive rights to damages under Clause 14.3 were subject both to the rights of adjudication under the Appointment as well as the rights of commencing court proceedings.

Barclays argued it was entitled to "stand in the shoes" of the Client under the Appointment and could therefore commence adjudication.

Decision

Firstly, Mr Justice Ramsey decided that Barclays did not have a freestanding right to enforce the adjudication provision in the Appointment under the terms of clause 14.3.

When read with clauses 2.3 and 14.2 the Judge held that it was clear that clause 14.3 contained the full scope of Barclays' right to enforce any term of the Appointment. Clause 14.2 and a true construction of clause 2.3 meant that, with the express exception of clause 14.3, no rights were conferred on a third party which were enforceable under the 1999 Act.

The court drew a distinction between the clauses of the Appointment which related to substantive terms and gave rise to potential liability of HPF to Barclays PLC as the Client and other provisions of the Appointment which conferred "procedural rights" (e.g. the ability of the Client to suspend the performance of HPF's services or to terminate HPF's Appointment).

The court concluded that the wording of clause 14.3 indicated that it was the terms of the Appointment which related to HPF's liability to the Client which were intended to be enforced under the terms of clause 14.3 and not the procedural rights such as those in clause 27 (i.e. the adjudication provisions). Accordingly, Barclays was not given a right to enforce the terms of the Appointment by adjudication under clause 27.

Mr Justice Ramsey went on to say that even if he was wrong in this conclusion, the adjudication clause (clause 27.1) was not applicable to the relationship between Barclays as a third party and HPF. This was because the 1999 Act does not contain an equivalent of Section 8 (which relates to arbitration), for adjudication.

Section 8 provides for a third party to be able to enforce its rights under a contract containing an arbitration clause by way of arbitration. Without the provisions of that section, an arbitration agreement made between the parties to the contract would not apply as between the third party and one party to the contract. The wording of the arbitration clause would not otherwise be applicable.

Section 1(4) (relied upon by Barclays) was not sufficient of itself. The provisions of section 8 of the 1999 Act were essential in giving the third party the status of a party to the arbitration agreement so that the conditional benefit referred to in section 1(4) can properly be effected.

Without an equivalent of section 8 of the 1999 Act to make the adjudication provision applicable to the relationship between Barclays as third party and HPF, the terms of the adjudication provision were not applicable.

The court also referred to paragraph 1(1) of Part 1 of the Scheme which refers to any party to a construction contract being able to give written notice to refer disputes to adjudication and paragraph 1(2) which refers to the notice of adjudication being given to every other party to the contract. It held that it was evident both from these provisions of the Scheme and from the provisions of the Appointment that clause 27 was inapplicable to the relationship between Barclays and HPF.

For these reasons the court concluded that Barclays did not have a right (derived from clause 14.3 of the Appointment and section 1(4) of the 1999 Act) to enforce its rights under clause 14.3 by referring any disputes to adjudication under clause 27.

Comment

This appears to be the first time that this issue has been considered. Although in part fact specific, as it is based upon the contractual provisions set out in the Appointment, the judgment is likely to be welcomed by designers and contractors as it apparently confines the class of parties to which adjudication is available.

It follows (in time) Parkwood Leisure Limited v Laing O'Rourke Wales and West Limited [2013] where the TCC decided that the collateral warranty in that case was a construction contract entitling the beneficiary of that warranty to adjudicate against the contractor.

From an employer's perspective, particularly if it wants adjudication to be available to group companies with an interest in the project, the effect of this and the Parkwood case is that collateral warranties are more attractive than relying on third party rights. The position of an assignee is different to that of a "third party", as this judgment confirms - although the court was not required to decide what the position of the assignee was here.


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