Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, access, partial possession, use or occupation, liquidated damages, penalty, loss and expense, Clause 26, JCT 1981, relationship of arbitration and adjudication, Judge Thornton. |
The decision of His Honour Judge Thornton Q.C on 2nd May 2002 in Impresa Castelli SpA v Cola Holdings Limited (2002) TCC deals with the meaning of the terms “access”, “partial possession” and “use or occupation” in the context of JCT forms of contract. The incisive analysis by Judge Thornton is of general application it is suggested, not least in the consideration given to practical aspects of construction in the interpretation of the terms of the contract. The case also deals with issue of whether a liquidated damages sum is a penalty re-stating established law. Judge Thornton also examines whether a compromise agreement dealt with a loss and expense claim under Clause 26 which had not yet crystallised, and gives a useful analysis of the operation of that Clause which in one aspect (the timing of the ascertainment of loss and expense being after the valuation of the works) may be considered surprising at the very least. Judge Thornton also examined complex dispute resolution procedures in the contract which provided for arbitration to be preceeded by adjudication for some matters. He appears surprisingly to have accepted that such provisions may have the effect of preventing application to adjudication at any time as provided by the Housing Grants Construction and Regeneration Act 1996. This part of his reasoning does not however appear to be necessary for his decision and is obiter dicta it is suggested.
Impresa was the main contractor who constructed the Kingsway Hall Hotel at Great Queen Street, London, WC2 for the employer, Cola, the proprietor. The contract incorporated the 1981 edition of the JCT With Contractor's Design Standard Form of Building Contract.
Disputes arose on the usual issues of loss and expense, the application of liquidated damages and defects. Decisions were made in several adjudications, leaving four preliminary issues to be decided by His Honour Judge Thornton Q.C in an action in the High Court. Judgment was handed down on 2nd May 2002.
At various stages of the contract, the parties met and entered into three variation agreements. The first agreement was made in February 1999 and the second in September 1999. The third and final variation agreement was made in October 1999 and provided for a new and deemed date for practical completion, that no liquidated damages would be recoverable until 30 November 1999 by when all work was to be finished and a new rate for liquidated damages of £5,000 per day. The parties agreed a complex formula for the date on which practical completion was to occur. The agreement also covered the final value of the works and provided that the unpaid balance would be paid in two instalments. Judge Thornton had to decide four issues:
Cola claimed £1.17m liquidated damages for the alleged failure by Impresa to achieve practical completion by 30 November 1999. Damages was calculated by applying the rate of £5,000 per day to the period from 30th November 1999 to the date of 30th May 2001 when Cola stated that practical completion had occurred. Cola argued that if partial completion had taken place then the full rate still applied since the effect of the September and October Agreements was to delete Clause 17.1.4 which reduced the liquidated damages rate where partial completion had taken place.
Impresa argued that partial possession of the greater part of the works had occurred as a result of either or both of the September and October Agreements. Impresa argued that only a very much reduced rate of liquidated damages per day was recoverable. Impresa submitted that if no partial possession occurred or if Clause 17.1.4 has been deleted from the conditions, with the result that the full daily rate of liquidated damages was still recoverable whether or not partial possession occurred, then the full rate for liquidated damages was a penalty and unenforceable.
The case therefore raised familiar issues common in construction contracts, but complicated by the existence of additional agreements amending the original contract. The interest in the decision is that in order to decide the issue Judge Thornton examined the meaning and application of the terms “possession”, “occupation” and “handing over” and provided a useful summary of the structure of JCT contracts for completion.
Judge Thornton observed that the conditions of contract contained an elaborate code relating to the occupation, possession and handing over of the site, which were linked to the practical completion of the works, the completion date of the Works and the obligation to pay liquidated damages. The familiar terms of the JCT contract were in summary:
A critical date was Completion which was to be taken to be the date on which the works achieved practical completion (Clauses 16.1 and 24.2.1). When Completion occurred then several significant events occurred:
The Employer is entitled to take partial possession of part of the works whether or not that part has been completed, but only with the consent of the contractor which must not be unreasonably withheld (Clause 17.1). On such partial possession:
The employer is entitled to use and occupy part or all of the works with the consent of the contractor which shall not be unreasonably withheld (Clause 23.3.2). Such use or occupation does not constitute partial possession or practical completion (Clause 23.3.2).
Judge Thornton provided a useful summary of the JCT provisions for possession, partial possession and occupation.
The contractor is granted exclusive possession of the site and of the works and retains exclusive possession until practical completion occurs unless parts of the works are handed back to the employer and are taken into the employer's exclusive possession at an earlier stage.
That can occur whether or not those parts of the works have been completed and, if this happens, the contractor's obligation to continue with the works in that portion ceases and is replaced by a defects liability obligation.
It is the return of exclusive possession by the contractor to the employer which brings the working period of the contract to an end.
Although the works and each part of them are in the exclusive possession of either the contractor or the employer, a lesser form of physical presence on or within the works that is defined as the use or occupation of the incomplete works by the employer is allowed notwithstanding the exclusive possession of the works by the contractor.
This presence by the employer has no effect on the contractor's exclusive possession of the works nor on the contractor's obligations and entitlements with regard to liquidated damages, retention, defects liability, insurance, reinstatement or the preparation of a Final Account. The employer is, in effect a sub licensee to the contractor who, otherwise, retains exclusive possession of the works.
Judge Thornton identified three relevant and separate types of possession and occupation which needed to be considered.
Judge Thornton then considered the effect of the September and October Agreements. He examined first whether the effect of the September agreement, and in particular the access it afforded to Cola, was to give Cola partial possession of any part of the Works.
Judge Thornton found that until the September agreement took effect on 1 September 1999, Impresa was in full and exclusive possession of the whole site and of the entirety of the works. The second recital of the September Agreement provided that in breach of the terms of the original agreement the contractor had failed to complete the development by the agreed date. Judge Thornton held that the effect of the second recital to the Agreement was that the parties were unequivocally agreeing that the works as a whole had not been completed by the date of the September agreement and that Cola had not taken into possession any part of the hotel had by that date.
The background to the September Agreement was that the hotel remained incomplete in significant respects yet the advertised opening date was near. Cola needed sufficient access to the hotel to enable it to open as an hotel before completion was likely to occur. Cola also needed the air conditioning system to be made to work and to be completed to its satisfaction prior to the completion of the works. The air conditioning system was not a discrete physical object but permeated the entire hotel. The extensive work which might be needed to adapt or correct the system as a whole, might need to be undertaken in or from every room and open area that the system serviced.
Judge Thornton interpreted the September Agreement against that background. Clause 4 of the September Agreement provided a list of works, including the snagging of the entire development, the commissioning of the air conditioning system, and the completion of both the gymnasium and the subbasement which were not yet complete. These works, particularly the air conditioning, were located throughout the hotel and Clause 4 recorded that they would be likely to remain outstanding by 12 September 1999, the date when Cola required to operate the hotel. Clause 8 provided that no access to the building by Cola under the terms of the September Agreement would be deemed to amount to Practical Completion for the purposes of the original agreement. The third recital provided that notwithstanding Impresa's breaches of the original agreement in failing to complete by the agreed completion date, a portion of the retention would nonetheless be released.
The issue was whether Impresa's obligation to give Cola access to large parts of the works to allow Cola to fully operate the hotel constituted the taking by Cola of partial possession of those parts of the hotel or was merely the granting of the right to use and occupy the works for that purpose.
Judge Thornton considered the nature of the three different states of "possession of the site", "partial possession of the works" and "use and occupy the site or the works" that were provided for in the conditions. He held that it was clear that the nature of the possession and partial possession that was provided for was one of exclusive possession by the contractor or, once partial possession was taken, by the employer. The contractor, following its giving up possession or partial possession, had no further right to enter the part of the works taken possession of save for the express purpose of making good work as part of its obligation to make good defects in the work.
On the other hand, the use and occupation of the works by the employer that was referred to could encompass a wide range of situations since, as provided for in Clause 23.3.1, such as for the purposes of the storage of the employer's goods or for any other purpose defined by the employer when requesting this facility from the contractor. This wide range of circumstances is provided for by the word "or otherwise" in Clause 23.3.2. In all of these situations, the contractor retained exclusive possession of the parts of the works affected by such use and occupation but, by way of what was in effect a sub-licence, the contractor allowed the employer to use or occupy the land to the extent necessary for the particular purposes that the employer had in mind.
Judge Thornton held that the language of the September Agreement was more naturally directed, in relation to Cola's entitlement to obtain access, to the type of use and occupation contemplated by Clause 23.3.2 of the conditions than to the exclusive partial possession provided for by Clause 17.1. The more natural meaning of access, as used in the context of the conditions and the associated September agreement, was the use and occupation of the relevant parts of the hotel by Cola rather than in its taking partial possession of the hotel. Clause 8 of the September Agreement provided a clear indication that neither full nor partial possession of the Works was brought about by the September agreement. It was clear that the parties intended that the defects liability provisions of the conditions were not to be brought into operation by the access being provided to Cola, because the September Agreement provided that the works were to be completed in the period following that access and one of the incidents of partial possession was that the defects liability period for the relevant parts should start as soon as partial possession is taken. Further the obvious reason for the third recital of the September Agreement was that, without it, no part of the retention would have been released by the September agreement. However, had partial possession been granted by the access provisions of the September agreement, an immediate release of part of the retention fund would have occurred without the need for the September agreement to provide for its release. The third recital of the September agreement was, therefore, a further clear pointer to the parties' intentions that the access provisions of that agreement were granting Cola use and occupation but not partial possession of the hotel.
Judge Thornton held that until the incomplete works referred to in Clause 4 of the September agreement had been completed, Impresa remained at risk of having to pay liquidated damages at the full rate even though access to the hotel was being provided to Cola pursuant to the September agreement. In other words, Impresa's obligation to complete the entirety of the works by 20 May 1999, or by any other extended Date for Completion, remained in full as did its obligation to pay £10,000 per day for any period of non-completion.
Judge Thornton then considered whether the effect of the October Agreement was to give Cola partial possession of any part of the Works that were not previously subject to partial possession.
The effect of the September and October Agreements was to vary the combined effect of the conditions and the two agreements in three respects:
Apart from these 3 changes, clause 8 of the October Agreement unequivocally stated that all other terms and provisions contained in the Construction Contract were to remain in full force and effect save as specifically varied by the October Agreement.
Judge Thornton held that the October Agreement did not alter the basis upon which Cola was using and occupying the entire Works and any part of the Works by virtue of the access under the September agreement. The only alteration made to the provisions for the payment of LADs was to vary the full rate from £10,000 per day to £5,000 per day. The October agreement did not vary or delete clause 17.1.4 of the conditions, whether expressly or by implication. At the date of the October agreement no part of the Works had been taken into possession so that, at that date, the prevailing rate was £5,000. It was a question of fact whether, after the October agreement took effect, Cola took any part of the Works into partial possession and as to when practical completion or deemed practical completion of the works or any part of them occurred. Any partial possession occurring after the date of the October agreement was to be founded on events or agreements occurring after that date and could not be founded exclusively on the terms of either or both of the September and October variation agreements.
Judge Thornton then considered the usual arguments whether the liquidated damages were a penalty.
Impresa argued that if clause 17.1.4 had been excluded from the conditions by either the September or the October Agreement, the effect would be that there would be no reduction from the contractual rate if and to the extent that the Works were taken into partial possession. Therefore, the agreed rate would be payable whether the whole of the Works were delayed in being completed or whether only a small part of the Works was left incomplete beyond the Date for Completion with most of the Works having been taken into possession by Cola. Impresa submitted that this amounted to a penalty.
Judge Thornton held that Clause 17.1.4 was not excluded from the conditions by either of the two agreements. On that basis he considered that the argument would be that since the rate of £5,000 per day was the same rate whether Cola had no use or possession of the Works, or whether Cola had the effective use of the Hotel, albeit with Impresa technically in possession of the whole Works, then the rate could not be said to amount to a genuine pre-estimate of loss.
In the event the issue turned on the evidence provided, suggesting that in certain circumstances the grounds for objection may be valid.
Cola adduced evidence of a loss of up to £2,645 per day due to the condition of the Hotel. It was argued that there could be additional losses resulting from a loss of reputation amongst possible clientele from such malfunctioning, increased maintenance costs and a possible risk of total or partial closure whilst the remaining works were being finished off. The evidence was that these risks were all such that the potential loss to Cola of delayed completion, even though the hotel had opened and Cola was using most of the Works, greatly exceeded the rate of £5,000 per day. Since this evidence was neither cross examined nor challenged by Impresa, Judge Thornton accepted it.
Judge Thornton held that there was evidence that the rate of £5,000 per day amounted to a genuine pre-estimate of loss if that loss was considered as the possible loss within the parties' contemplation at the date of the October Agreement and taking into account that the hotel had opened already and that Cola was in use and occupation of most of the Works. The stipulated loss was such as to be recoverable and not to be characterised as a penalty if the test that is usually applied which is set out in the speech of Lord Dunedin in Dunlop, Pneumatic Tyre Co Ltd v New Garage & Motor Co [1915] AC 79, adopted and applied by the Privy Council in the opinion of the Board delivered by Lord Woolf in Philips Hong Kong v AG of Hong Kong (1993) 61 BLR 41. The rate in question in this case, when considered by reference to the state of the parties' intentions at the date they agreed to the October Agreement, was one which was: "a genuine covenanted pre-estimate of damage" and was not one which was "greater than the sum which ought to be paid". Furthermore, the "consequences of the breach [were] such as to make precise pre-estimation almost an impossibility [thereby creating] ... just the situation when it is probable that pre-estimated damage was the true bargain between the parties." Judge Thornton held that the rate of £5,000 per day was both enforceable and a genuine pre-estimate of the loss at the date of the October Agreement and notwithstanding the use and occupation by then being made of the Hotel by Cola.
The next issue was whether the October Agreement compromised Impresa's loss and expense claim and in the event turned on the facts and interpretation of the Agreement.
Impresa argued that the settlement embraced its entitlement for payment for the work carried out but did not extend to any entitlement to loss and expense which was not a payment for the value of the work but represented payment for additional sums due once the value of the work has been ascertained. In addition Impresa submitted that the loss and expense claim had not been formulated at the date of the October agreement and was not, in consequence an "outstanding claim" or an "existing claim" covered by that agreement.
Cola argued that the October agreement should be construed as a commercial agreement entered into by business men. It should not be subjected to a minute textual analysis undertaken by reference to the minutiae of the valuation provisions of the conditions. On that basis, the agreement clearly intended to wrap up all disputes and claims other than those expressly held over by the wording of the Agreement. The claim for loss and expense was an outstanding claim at the date of the agreement since, even if the details had not been advanced, it was one which was known about at that time and involved payment for events already known about at the date of the agreement.
Judge Thornton held that the conditions distinguished between the valuation of works, particularly variations and provisional sum work, and the ascertainment of direct loss and expense not otherwise recoverable under any other condition of the contract. The October agreement was defined as covering the final value of works carried out in accordance with the contract Bills and drawings. The October Agreement distinguished between sums for work which had been arrived at by a process of valuation from other sums, particularly those that had been ascertained. He held that until the contractor made a written application for payment of loss and expense under clause 26 with supporting details, no sum recoverable under clause 26 was either due or could be said to have been claimed. Thus, until the necessary application had been made by Impresa, Cola's obligation to pay loss and expense had not crystallised and, in consequence, no claim for payment or dispute as to the payment of loss and expense could have arisen.
He held that in this case, Practical Completion had not occurred at the date of the agreement and no clause 26 particulars or application had yet been served by Impresa. The best that had been provided was an intimation, in a letter, that additional costs had been incurred as a result of fundamental delays caused to Impresa. This was in clear contrast to the details of the claimed valuation for all variations included with the same letter and which were used in the discussions leading to the October Agreement a few days later. These details expressly excluded any disruption or acceleration.
He considered that the October Agreement could be taken to cover all claims if it was read in a broad and commonsense way and that if that approach was adopted, it would readily read as a so-called wrap up agreement. He held however, that the broad approach was one which the parties had themselves legislated against. The October Agreement required the words and terms in it to have the same meaning as that assigned to those words in the Construction Contract including the conditions incorporated into that Contract. The words "final value", when read in the context, and against the background, of a final valuation of the Works undertaken in accordance with clause 30 of the Conditions, were a reference to the necessary adjustments to the Contract Sum resulting from a valuation of both the original works and the variations, but were not a reference to the further adjustments resulting from the separate and distinct ascertainment exercise of direct loss and expense. This second exercise involved the ascertainment of direct loss and expense not otherwise reimbursable under any other provision of the Contract which presupposed that the valuation exercises have been carried out and concluded before that final ascertainment exercise was undertaken. The "valuation" of the Works was, therefore, a separate and discrete exercise that must be concluded before the exercise concerning the "ascertainment of the amounts incurred as direct loss and expense" was concluded. Those further adjustments, therefore, result from an ascertainment exercise and not a valuation exercise and could only be undertaken once the valuation exercises had been concluded and the necessary valuation adjustments to the Contract Sum had been made.
Judge Thornton concluded that loss and expense and their ascertainment was not comprehended by the phrase "final value" in clause 1 of the October agreement. The October Agreement did not cover any part of the claim for loss and expense advanced under clause 26 by Impresa.
The conditions of contract contained an elaborate code for the adjudication and arbitration of disputes. The relevant provisions, in summary, provided that all disputes between the parties were to be referred to arbitration to be appointed, in default of agreement, by the President or vice-President of the RICS. However, no reference could be opened until after Practical Completion save for a number of limited types of dispute, particularly those concerned with whether a payment had been improperly withheld or was not in accordance with the conditions.
Certain disputes arising prior to Practical Completion or alleged Practical Completion of the Works or termination or alleged termination of the Contractor's employment, were not to be referred to arbitration but were to be referred to adjudication. Once the adjudicator had given his decision, that decision was to be final and binding on the parties unless referred to arbitration, but only if either party had previously informed the other in writing that the decision was not acceptable within 14 days of the receipt of the decision. The resulting dispute was not to be opened in the arbitrations until after Practical Completion of the Works.
Judge Thornton observed that the provisions contained a clearly defined code for the resolution of disputes. If a dispute arose before Practical Completion of a kind defined as being an Adjudication Matter, that dispute could not be referred to arbitration but had to be referred to an adjudicator. However, following a decision from the adjudicator and once Practical Completion has occurred, that dispute and the resulting adjudicator's decision could then be arbitrated.
Judge Thornton considered that an Adjudication Matter, which, by definition, could only arise prior to Practical Completion, could not be arbitrated at all unless it had first been adjudicated upon. Furthermore, the notice referring the adjudication of a dispute of an Adjudication Matter to an adjudicator had to be made promptly once the dispute has arisen and the consequent adjudication had to be started and concluded promptly. No adjudication notice could be given, nor could an adjudication be started, once Practical Completion had occurred. Thus, if, after Practical Completion, a dispute about an Adjudication matter had not already been referred to adjudication prior to Practical Completion, alleged completion, termination or alleged termination, it could not then be arbitrated upon at all since there would not have been a prior adjudication and no valid reference to adjudication could any longer be made. For these reasons, the adjudication provisions had to be carefully applied since they had the potential for shutting out from being resolved at all disputes about Adjudication Matters.
Impresa submitted that the relevant claims put forward by Cola, based on alleged breaches of contract by Impresa that gave rise to defective or incomplete work, were not referred to adjudication and that, in consequence, they could not now be litigated or arbitrated, since an adjudicator's decision was a precondition to any subsequent pursuit of those claims in arbitration or litigation. Impresa contended that if Cola now initiated adjudication proceedings and obtained a decision about these disputes from an adjudicator, it could then initiate fresh proceedings and pursue those claims in arbitration or litigation.
Some matters were referred to adjudication and the Adjudicator made his decision. The Parties agreed to litigation rather than arbitration.
Judge Thornton held that there were two reasons why the relevant disputes were not Adjudication Matters. Firstly, the relevant disputes as to the existence and effect of those defects could only first have come to light after termination or abandonment of the Works and not before. The dispute was as to the damages recoverable as a result of Impresa's repudiation or the costs recoverable as a result of the termination of Cola's employment. Secondly, the disputes were not about whether or not the Works "are being executed in accordance with the Conditions" but were, instead, about whether they had been executed in accordance with the conditions. In other words, an Adjudication Matter was concerned with works whilst they were still on-going and were not concerned with the allegedly defective state of the works once that work had, for better or for worse, been completed or terminated.
The contract did not involve the necessity of obtaining a decision but merely imposed on the claiming party an obligation to refer the requisite disputes to an adjudicator. Cola complied with that obligation when serving its January 2001 schedule of defects on both the adjudicator and Impresa. Moreover, a decision was obtained from the adjudicator about the relevant disputes, namely that he had no jurisdiction to determine them. That decision was one that was sufficient to enable Cola to serve a notice of unacceptability and to proceed to arbitrate or litigate the disputes. It served the requisite notice by initiating the proceedings before Judge Thornton. That step, given the agreements to extend time for serving a notice and for waiving reliance on the arbitration clause, constituted the giving of the requisite notice.
It followed that, even if the disputes were Adjudication Matters, they were validly referred to adjudication. Moreover, an appropriate adjudicator's decision was issued which enabled the disputes to be litigated. Thus, the requirements of the conditions of contract concerned with the precondition of a reference to adjudication of the relevant disputes were complied with.
There was a final reason why the disputes were within the jurisdiction of the court. This flowed from the parties agreement in January 2001 that all disputes then in existence, including those flowing from the defects schedule served a few days earlier than that agreement and which founded the counterclaim, could be litigated in the TCC and that Impresa would take no objection to that course being taken. Having reached that agreement in January 2001, Impresa was now estopped from taking its jurisdictional objection or, alternatively, was to be taken to have waived that objection.
Judge Thornton held that the court had jurisdiction to determine all defects disputes including those first arising after 23 March 2000 and Impresa's arguments to the contrary failed.