Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, jurisdiction, proper party, rectification in adjudication, costs as damages for breach of contract, oral variations, agreement in writing, Section 107, enforcement, set-off, stay, Judge Wilcox. |
The decision in Total M and E Services Ltd v ABB Building Technologies Ltd (2002) TCC identifies the importance of correctly identifying the party to the adjudication. In this case there was no misunderstanding, but in other cases the correct description might be critical. The decision is also important since it decides whether or not the costs of the adjudication are recoverable as damages for breach of contract. The decision also deals with the status of the Adjudicator’s award for work which was outside the original scope where the contract had no mechanism for dealing with such additional work and whether a contract varied orally is caught by the Act and particularly Section 107. The decision also examines claims for loss due to late preparation of the final account and alleged loss due to the need to settle other accounts without the benefit of the final account. Finally the decision examines whether a stay will be granted when a Claimant’s financial circumstances have not changed since contract and in respect of counterclaims which have not been considered by the Adjudicator.
Background ABB was engaged to undertake electrical work at Somerset House under a sub-contract with Heather Trust. On the 13th January 1999 ABB entered into a labour only sub-contract for electrical installation works with Total M and E. The contract did not have a mechanism for variation. There was no provision in the contract for work beyond the scope described in the contract, nor was there any provision for payment for such work. Substantial work beyond the original scope of works was performed by Total M and E. At all times ABB accepted that the additional work should be paid for, and some additional payment was in fact made.
Disputes arose on the valuation of the final account and the matter was referred to adjudication by Total M and E on 3rd October 2002. ABB participated in the adjudication but objected to the jurisdiction of the Adjudicator, particularly by its letter dated 11th October 2001. The Adjudicator awarded Total M and E the sum of £462,788 which included £8,311 for the adjudicator’s fees and expenses, net of VAT. Total M and E applied for summary judgment in the sum of £555,300. The difference between the amount awarded of £462,788 and the sum claimed £555,300 represented a claim for the costs of adjudication proceedings by Total M and E as a head of damages.
The first issue was ABB’s submission that the Adjudicator had no jurisdiction to adjudicate in the dispute arising out of a contract between Total M & E Services Limited and the Defendant because the reference was made in the name of Total Mechanical and Electrical Services Limited.
ABB submitted that these companies were different legal entities and had nothing in common except for a similarity of name. There were no common directors. They were companies registered at different times and had no connection with each other. ABB submitted that the Court could not give Total M and E Services the benefit of an adjudication between a different company and the ABB by enforcing the Adjudicator's Award.
Total M and E submitted that this was not a jurisdiction issue at all. At no time could ABB have believed that a party other than the named party to the sub contract had commenced adjudication proceedings against it. In the course of dealings between ABB and its sub contractor under the original sub contract properly described in these proceedings, a number of styles had confusingly been used. At all times the responsible person representing the company was Mr Deeks who was and and continued to be the Director of the company Total M and E Services Limited.
Judge Wilcox found that the uncontraverted evidence was that Total Mechanical and Electrical Services Limited was not formed or registered as a company until April 1999 after the sub contract was signed in January 1999. ABB had at no time expressed any doubt as to which company and personnel controlling it was party to the original contract. ABB had correctly asserted from the outset when the dispute was first joined, who were the proper parties to the subcontract making it clear to the solicitors of Total M and E.
Judge Wilcox found that on the 11th October 2001 at commencement of the Adjudication, ABB’s solicitors identified the mis description of the Referring Party to the solicitors of Total M and E. Judge Wilcox expressed surprise that after the earlier mistake as to parties Total M and E did not either issue a fresh reference in the correct name, which might have caused a little delay, or seek to rectify the name in the reference document.
ABB conceded that had rectification had been sought of the Adjudicator he would have had the jurisdiction to grant the rectification provided no one had been misled or prejudiced.
Judge Wilcox observed that the adjudicator’s jurisdiction derived from the reference of the dispute under the sub contract to him under the Act. He held however that the question in this case was is not a matter of jurisdiction. It was a question involving misdescription and possible mistake. Judge Wilcox found that in the course of the adjudication proceedings the parties elected to leave this question to the Court.
Judge Wilcox held that the proper description of the identity of the Referring Party was Total M and. E Services Limited, the Claimant in the court proceedings who therefore had the benefit of the Adjudicator’s Award. He held that there was a clear case of mis description where Total M and E and ABB at all stages were aware of the true identities of the contracting parties and no one could have been misled. He observed that where there was similar company names, as for instance in a group of companies or where there were subsidiaries with overlapping management systems and some common directors a precise description of the Referring party could be critical.
The next issue was Total M and E’s claim for its costs of the adjudication.
Total M and E submitted that the costs of the Adjudication were recoverable as a damages claim. It was argued that if a party fails to pay under a construction sub contract to which the Act applies it is foreseeable that the Claimant would seek adjudication and properly incur costs, and thereafter seek to recover them.
ABB submitted that since the Statutory Scheme did not make any provision for the Adjudicator to award costs unless the parties agree otherwise, the Adjudicator had no jurisdiction to order that one party's adjudication costs should be paid by the other. There was no such agreement in the present case, indeed, the entire basis of Total M and E’s claim was that there was no such agreement.
Judge Wilcox held that since the Act did not provide for the recovery of costs the claim was misconceived. Furthermore, ABB’s claim was put as a claim for damages for breach of contract arising out of ABB's failure to pay. Judge Wilcox held that because the Statutory Scheme envisaged that both parties may go to Adjudication and incur costs which they cannot under the Act recover from the other side, it followed that such costs could not therefore arise as damages for breach.
Judge Wilcox held that to permit such a claim would be to subvert the statutory scheme under the Act.
The next issue was the status of the Adjudicator’s award for work which was outside the original scope where the contract had no mechanism for dealing with such additional work and whether a contract varied orally is caught by the Act and particularly Section 107.
The sub contract was for a lump sum of £250,000. It was common ground that there were considerable additional works performed by Total M and E and the Adjudicator's award reflected the value of such additional work.
ABB submitted that the Adjudicator had no jurisdiction to base an award upon the additional works. They submitted that there was no evidence as to the true contractual basis upon which such work was performed and in respect of which payment was due. ABB submitted that it could not be under a variation of the original sub contract since there was no written mechanism for variation within the sub contract. It followed that any additional work must have been carried out under a series of separate oral agreements which would not comply with the requirements of Section 107 of the Act which provides that the Act is applicable only to agreements in writing. ABB contended that the Adjudication claim was fundamentally flawed as the Adjudicator had no jurisdiction to reach a series of decisions on a series of disputes under a series of separate oral agreements. On that analysis then under the Statutory Scheme the Claimant has no right to refer more than one dispute or more than one contract to Adjudication Grovedeck v C Demolition Limited [2000] Build L R (8).
Judge Wilcox observed that the Notice of Adjudication identified two alternative bases of claim namely the alleged failure to pay sums due on a timesheet basis, and alleged failure to pay sums due on the basis of a contract sum plus variations. The basis upon which the Adjudicator proceeded disclosed in his reasoned award clearly was that of contract plus variations.
Judge Wilcox further observed that the additional work performed by Total M and E was the same type of work which was the subject of the original sub contract.. He held that the only inference to be drawn was that the scope of the sub contract work was enlarged. He held that the Adjudicator was right to proceed on the contract plus variations basis. That was the proper analysis. That view was held and expressed by ABB in its letter of the 21st February 2000 in which it stated that it was entitled to and did instruct Total M and E to carry out additional items of work and that such items were variation instructions within the remit of the "labour only sub contract". ABB had stated that the items should be valued in accordance with a contract.
ABB submitted that an oral variation of a written contract would then be partly in writing and partly oral and the Housing Grants Construction and Regeneration Act 1996 only applied where a construction contract was in writing. Such a contract was required by law to be made in writing by Section 107 of the Act.
ABB submitted that since a construction contract must be in writing it could not be varied orally and relied on a passage in Chitty 28 Edition Volume 1 at paragraph 21 33 which stated that a contract required by law to be made in or evidenced by writing can only be varied by writing. ABB also relied upon two law of property cases New Hart Builders v Brindley [1975] Ch. Page 42 and McCausland v Duncan Lawns Limited [1997] WLR page 38 CA.
Judge Wilcox observed that in New Hart Builders whilst there was an enforceable contract concluded and binding on the parties at. some time earlier than subsequent alterations, there was no sufficient memorandum in writing of the subsequent option agreement to comply with Section 40 of the Law of Property Act 1925. In McCausland Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 was considered. That Act repealed Section 40 of the Law of Property Act. Whereas a failure to comply with the requirements of the 1925 statute rendered an agreement merely unenforceable, under Section 2 a provision relating to the sale or disposition of land was held to be “ineffective”, thus a commercially sensible oral variation of a completion date from Sunday to the preceding Friday was held to be of no effect because it was not in writing.
Judge Wilcox further observed that there are no requirements as to formality in relation to construction contracts as there have been in the field of the Law of Property as under Section 4 of the Statutory Frauds, the Law of Property Act 1925 Section 40 or Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, or as in the field of Consumer Credit law as required by the Consumer Credit Act 1974 and its prescription as to the manner of variation of a regulated agreement under Section 82.
Judge Wilcox held that what had to be considered was not the enforceability of the contract but whether the statutory adjudication scheme could be invoked in relation to a particular construction contract. That wa governed by Section 107 of the Act. Sub section 3 refers to an agreement made otherwise than in writing. Such an agreement, provided it refers to terms which are in writing, is an agreement in writing. He held that the Adjudicator made his decision on the basis of dispute arising out of the single written construction contract as varied orally by the parties. He held that the contract as varied was clearly within the provisions of Section 107, notwithstanding that it was a contract evidenced partly in writing and partly oral. Judge Wilcox held therefore that the Adjudicator had jurisdiction to make determinations as to the additional works.
The next issue was ABB’s set-offs and counterclaims. ABB maintained both a set off and counterclaim in respect of defective and incomplete work.
The first set off was in respect of defective work and the cost of plant and labour valued at £121,087.50 and had been upon by ABB in the Adjudication proceedings. Judge Wilcox held that it was a decision that on the evidence the Adjudicator was competent in law to decide. The Adjudicator decided that the “without prejudice” report of ABB’s quantity surveyor, prepared for the purposes of negotiation was not a notice under Section 111 of the Act and because it was served in June 2000 which was not within seven days of the final date for payment which was held by the Adjudicator to be in February 2000.
ABB sought to re open the issue which Judge Wilcox held the Adjudicator was properly seized of. He held that save where questions of jurisdiction were reserved or properly arise it was not the function of the Court in enforcement proceedings to review each and every aspect of the Adjudicator's Award. To do so would be to detract from the swift and summary nature of the scheme put in place by Parliament, Bouyges v Dahl Jansen [2001] 73 Con LR at page 125.
The second set off in the sum of £331,777 was based upon the contention that Total M and E failed to provide a final account promptly. A draft final account was tabled by ABB, for purposes of negotiation on without prejudice basis in June 2000, the quantity surveyor draft of June 2000. By December 2000 ABB was being pressed to settle its Trade Contract final account with Heather Trust the Employer. They reached a final settlement. Seven months later the Claimant produced their final account which in due course led to the adjudication.
ABB contended that to the extent that the Claimant was entitled to additional sums arising out of its final account, ABB was prejudiced because it could not recover the sums from Heather Trust. The claim for £331,777 was divided into two parts. The first amounted to £213,015 under recovered because of the absence of documentation or claims from Total M and E.
Judge Wilcox held that the first part of the claim was clearly wrong. Even if liability was established it could only amount to the loss of a chance to establish a claim to further sum. He found it difficult to understand ABB’s apparent ignorance as to the extent of the work done under the labour only sub contract since ABB supervised all the works, and in fact had formulated a claim under the set off for the costs of such supervision. By June 2000 ABB also had the quantity surveyor’s draft final account.
Judge Wilcox observed that the claim is put on the basis of an implied term that Total M and E should have provided a final account in a reasonable time, namely between June and December 2000.
Total M and E submitted that in the circumstances of this case there was no need to imply such a term into the Sub contract. The test for such an implication is necessity.
Judge Wilcox held that the Court did not make or improve contracts. Its function was to interpret and apply the contract which the parties had made for themselves. If the expressed terms were perfectly clear and free from ambiguity there was no choice to be made between different possible meanings. The clear terms must be applied even if the Court thinks some other term would have been more suitable. Non expressed term can be implied if and only if the parties must have intended that term to form part of their contract; it was not enough for the Court to find that such a term would have been adopted by the parties as reasonable even if it had been suggested to them; it must have been a term that went without saying; a term necessary to give business efficacy to the contract; a term though tacit forms part of the contract which the parties made themselves Trollope & Colts v North West Metropolitan Regional Hospital Board [1973] 2 WLR page 601 House of Lords at page 610.
Judge Wilcox held that the contract plainly could work perfectly well without such a term. The timing of the claim and its details were not matters that need be prescribed by implication, because this was a labour only sub contract originally for a fixed sum supported by contemporaneous timesheets for additional works and supplied to ABB.
Turning to the claim for loss, Judge Wilcox observed that it was curious that no signed document evidencing the settlement said to be worth £4.5m net of VAT was in existence. There was no evidence that ABB sought the assistance of Total M and E in negotiating the settlement with the Employer. There was evidence by Total M and E that the settlement was never mentioned to Total M and E by ABB.
The Counterclaim as to £331,777 only arose if a term should be implied. Judge Wicox held that there was no sensible basis which arguably gave rise to such an implication and rejected it. Further, there was no arguable case that the alleged breach caused any loss. The evidence from Toatl M and E militated against such a finding, and there was no evidence that the Employer would have agreed to pay ABB any more. Judge Wilcox decided that however the claim could be put, it was no more than a shadowy loss of a chance at its highest.
Accordingly Judge Wilcox held that Total M and E were entitled to summary judgment in the sum of £454,477.67, plus Adjudicator's fees and expenses of £8,311.72, giving a total of £462,789.69 plus VAT
Part 50.2 of the Civil Procedure Rules allows the Court to Order stay of the execution of a Judgment or Order for the payment of money, where the Court was satisfied that there were special circumstances which rendered it inexpedient to enforce the Judgment or Order or the applicant was unable from any cause to pay the money, either absolutely or for such a period and subject to such conditions as the Court thought fit.
ABB’s fear was that if the matter was to be litigated in full and the Adjudicator was found to be substantially in error, then there was risk that Total M and E would not at the time of such judgment be able to repay monies awarded under the erroneous adjudication decision. Total M and E were clearly not a fixed asset rich company and neither did it own quantities of expensive plant and equipment. Judge Wilcox observed that this was not surprising since it was engaged in the business of labour only sub contracting. He observed that on 30th January 2000 after the signing of the labour only sub contract ABB obtained a Dunn & Bradsheet credit report. It showed a company with £1,000 paid up capital by its directors one of who m was Mr Deeks with whom they dealt. No accounts had been filed since 1998.
It was common ground that ABB continued to deal with Total M and E and placed considerable additional work in their way. ABB expressed the fear that should Total M and E receive the amount of the summary judgment claimed they would cut and run disposing of the monies and liquidating the company.
Judge Wilcox held that in considering whether or not to grant a stay in a case such as this, it was a relevant consideration as to whether there is a real risk that any sums paid by ABB would be irrecoverable. It was for the Court on the evidence before it, if it could, to consider the degree of risk amongst all the other circumstances. Judge Wilcox considered three judgments.
In the first judgment in Rainford House Limited (in Administrative Receivership) v Cadogan [2001] HHJ Seymour QC gave summary judgment in favour of the Claimant for £77,350 under the terms of an Adjudicator's award. There was uncontradicted evidence before him, in addition to the Administrative Receivership, that there were substantial trade debts owing and that subcontractors had been called off the site. He held that the policy underlying Part 2 of the Act was that there should be a swift mechanism by which a dispute under a construction contract as to who has to pay what to whom while the construction work to which the contract related was in progress could be resolved on a binding but interim basis leaving the final resolution of disputes if that proved to be necessary, to follow at leisure without disrupting the cash flow of the project. It was held in Rainford that the policy of the statute did not transfer as between the parties to construction contracts the risk of insolvency via the parties. That was clear from the terms of Section 113 of the Act. It was held in Rainford that if the policy of the statute was that a "pay when paid" provision may properly be relied upon if the ultimate paying party is insolvent so the intermediate paying party may end up out of pocket if called on to pay the Claimant, it was plain that the statute was not concerned to reallocate the risk of having to endure the consequences of a trading partner becoming insolvent but simply to address the question on the footing of all parties being solvent which party should hold the sum of money about which the dispute, pending the resolution of that dispute. Thus if there was a substantial chance demonstrated by the objective evidence such as the making of a winding up order or the appointment of a receiver that money the obligation to pay which is actually disputed, notwithstanding that notice contemplated by Section 110 of the 1996 Act has not been given, would if paid for practical purposes be lost, that was a circumstance which, as Chadwick LJ indicated in his judgment in Bouygues ought to be considered on any application for summary judgment. That was not to say that vague fears or unsubstantiated rumours of insolvency will merit much attention, but evidence that some third party has taken action which puts the continued financial viability of a Claimant at hazard must be evaluated seriously.
In the second judgment risk of non payment was also considered in Herschell Engineering Limited v Breen Property Limited (2000). His Honour Judge Humphrey Lloyd QC at page 3 he characterized the nature of the judgment debt based on the award. He held that the debt which crystallized as a judgment debt was one of a somewhat unusual nature, since it stemmed from the decision of an Adjudicator which was provisional and not final and was capable of being reversed in that the ultimate Tribunal (Court or Arbitrator) which has jurisdiction to resolve the dispute finally might take a different view. That Tribunal might decide that, for example, the sum order to be paid was not due either in fact or in law in whole or in part, perhaps because of additional evidence or submissions, just as an adjudicator had to take account of all the available evidence and submissions and was not confined to the reasons which gave rise to the dispute. It was held in Herschell that the Adjudicator's decision was not therefore a decision for all time that the Defendant owes the Claimant a particular sum of money, it was merely a decision that, at that time and on the basis of the material then available to the Adjudicator a sum of money appeared to the Adjudicator to be due. The Adjudicator's decision had to be taken in a limited time and frequently on a limited basis and might not therefore be the correct resolution of the dispute. Unless the decision was made without jurisdiction or there was some other reason why the decision should not be enforced it was well established the Adjudicator's decisions would be enforced on an application for summary judgment.
Judge Humphrey Lloyd stated in Herschell that he was invited to draw the inference that the company would not be able to repay the money if the ultimate Tribunal found in favour of the Defendant. That raised the question at what stage would that decision be made. It was not a question of whether it would not be able to repay the money at the time of the judgment, but whether it would not be able to repay the money at the time when the moment of repayment might arise. The test was, therefore, comparable to that under Section 726(l) of the Companies Act 1985 (reference CPR Rules 25.12 and 25,13(2)(c)) on an application for security for costs). It was therefore incumbent on an applicant to establish when that date was.
Judge Humphrey Lloyd stated in Herschell that it was for the Defendant to re establish the proposition that, if there was a judgment which did not uphold the Adjudicator's decision then the amount due under that judgment would not then be honoured by the Claimant. He held in Herschell that the Applicant in that case had failed to do so.
In addition Judge Humphrey Lloyd stated in Herschell held that he could not draw an inference that the company which was considered by the Defendant to be worth the business granted to it by the Defendant within a few months of its formation the previous year had somehow changed its nature in the course of the year to become a company which was, as it were, teetering on the verge of insolvency either at that time and in the future and would thus be unable to repay the money. He held that on the evidence there had been no apparent change in the company. It was still an unknown entity in financial terms. That was the company with which the Defendant contracted; that was the company which the Defendant , entrusted with the work. He held that the situation had not changed one iota between 1999 and July 2000 except the company itself had now became entitled to money due under the contract and the Defendant, did not wish to pay that money. That said nothing about the ability of the Claimant to repay the money or ability to repay the money or its inability to do so.
Judge Humphrey Lloyd held in Herschell that on an application for a stay where a party had entered into a contract with a company whose financial status was or might be uncertain and found itself liable to pay money to that company under an Adjudicator's decision, the question was whether it was not an inevitable consequence of the commercial activities of the Applicant if it finds itself in the position it is in? It had at it were contracted for the result. That was not normally a ground for avoiding the consequences of a debt created by the contractual mechanism.
In the third judgment in Absolute Rentals Limited v Glencor Enterprises Limited (1999) Judge Wilcox gave summary judgment in favour of the Claimant and refused a stay on the grounds of the alleged impecuniosity of the Claimant company. In that case the application was based upon late served statements which put into question the Claimant's financial viability. At that stage it was inappropriate and unfair to come to any conclusion as to financial risk and he declined to do so.
Judge Wilcox held in the present case that where a stay was sought the Court must consider all the circumstances. It must consider whether there were special circumstances which rendered it inexpedient to enforce the judgment. The risk of an inability to repay on due time was one of a number of factors to be taken account of in the balancing exercise. Where the risk was high as where there was strong uncontradicted evidence of a present inabiIity to pay or a company was in administration a stay might be appropriate on terms safeguarding the disputed monies. The burden was clearly upon the party seeking a stay to adduce evidence of a very real risk of future non payment. The balancing exercise was of course subject to the overriding considerations of Part 1 of the CPR ensuring justice and fairness between the parties. In considering what was just and fair in an application for a stay of execution of a summary judgment under Part 24 in circumstances before it, the Court must be careful not to reallocate the commercial risks accepted by the parties who engage in a construction contract mindful of the provisions of the Housing Grants Construction Regeneration Act 1996 and subject to the general safeguards of insolvency law.
Judge Wilcox held in the present case that there was evidence that Total M and E had been tardy in filing company accounts in accordance with its statutory obligation. A search made on behalf of ABB dated late January 2000, after the original contract was signed showed that no accounts were filed since 1995. ABB found it expedient to place further and additional work with Total M and E substantially enlarging the scope of works. There was a floating charge over the assets of the company, in relation to some present indebtedness. There was a called up share capital of £1000. The person with whom ABB dealt, Mr Deeks had throughout been a director of the company. Since the company that ABB chose to deal with was a labour only subcontractor it was hardly surprising that there should be no fixed assets such as buildings or valuable chattels such as plant and machinery. Labour was supplied to ABB by LSM (NS Management Limited) and there was indebtedness by Total M and E to this company in respect of labour supplied for the additional works. There was evidence that Total M and E’s credit was spent and no further credit will be given until monies were paid to LSM. Thus the capacity of Total M and E to pay in the future was directly limited to its present entitlement and use of the Adjudicator's award. Were the whole of it to be paid into Court and Total M and E deprived of its benefit, its’ sub contractor would be in exactly the same position he would have been in had the Housing Grants Construction Regeneration Act never been enacted. They would be starved of the funds to which present entitlement has been shown and upon which they were dependent for the future progress of their business and which governed their earning capacity as to future obligations.
Judge Wilcox found that since January 2000 there has been no real change in Total M and E's financial status. ABB was adjudged to have had the substantial benefit of Total M and E’s labour measured in financial terms. ABB had been and were, it was said a substantial Multi million pound. company who clearly had ability to pay. The evidence as to the risk of future non payment was not based on compelling and uncontradicted evidence. Judge Wilcox held that there were no special circumstances which render edit inexpedient to enforce the judgment. The proper order to make was to refuse the stay save that the sum of £121,087.50 plus VAT, about which there has been no adjudication on the merits (since there was held no valid withholding notice), should be paid into Court to be held pending the hearing of the action or further order. Judge Wilcox ordered ABB to pay the costs of the application.