Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, adjudication, jurisdiction, dispute, connected contracts, framework agreement, waiver, condition precedent, refinement of dispute, Judge Seymour QC. |
The decision in Hitec Power Protection BV v MCI Worldcom Limited (2002) , decided by His Honour Judge Seymour QC on 15th August 2002, is of interest because it provides a further and more detailed definition of the meaning of the term “dispute” in the context of adjudication. The facts of the case are somewhat complicated. Hitec and MCI entered into a purchase framework agreement in which MCI effectively guaranteed payment in the event of default of payment by its affiliates under four separate contracts between Hitec and participating affiliates of MCI. Matters proceeded to adjudication in a rather haphazard way and the inevitable objection to jurisdiction was raised. The adjudicator decided that he had jurisdiction and MCI were required to pay Hitec the sum of £792,069.65. Payment was not made and Hitec applied to the court for summary judgment of both the sum of £792,069.65 and the adjudicator's fee of £9,928.76 which Hitec had paid. The decision illustrates that a dispute which arises under separate but connected contracts may not necessarily be evidence of a dispute under the guaranteeing contract.
The facts were as follows. Hitec and MCI entered into an agreement described as a "a purchase framework agreement", dated 26th May 2000 which made provision for the procurement of the design, manufacture, supply, installation, testing and commissioning of equipment comprising certain diesel engines, UPS and HV switch. The purchase framework agreement anticipated that contracts could be placed by either MCI or any of its affiliates. The affiliates involved in this case were MK International Ltd, MK International SA and MK International SRL.
Four purchase orders were placed with Hitec in accordance with the terms of the purchase framework agreement . The first related to a project at St Denis in France and the purchaser order seemed to have been placed by the affiliate MK International SA. The second was for a project in Dublin, in the Republic of Ireland, and the purchase seemed to have been placed by the affiliate MK International Ltd apparently as agent for MCI. The third project related to work in Amsterdam, and again the Purchase Order seemed to have been placed by MK International Ltd. The fourth and final project was in Milan in Italy and the purchaser order seemed to have been placed by the affiliate MK International SRL.
Various invoices were raised by Hitec in respect of work down and materials supplier under the four purchase orders. However sums claimed were not in all cases paid, and by about June 2002 sums totalling £792,069.65 had been invoiced but not paid in relation to the four projects.
Clause 4.7 of the purchase framework agreement provided that if an amount due and payable by the participating affiliate under the relevant purchase order, was not paid when properly demanded, then that amount would be paid by MCI on behalf of the participating affiliate. Payment was to be made within 10 days of written demand by Hitec to MCI. Clause 4.7 provided further that in these circumstances, Hitec acknowledged that MCI retained all contractual rights and benefits available to the participating affiliate under the purchaser order, for example, set-off rights to dispute invoiced amounts for non-performance etc.
His Honour Judge Richard Seymour QC held that Clause 4.7 of the purchase framework agreement provided what was in the nature of a guarantee by MCI. When properly demanded, MCI would pay the amount in question subject to there being served upon it a written demand by Hitec. In the event that the written demand was served, payment was due within 10 days.
Hitec sent letters to MCI in relation to each of the four projects. Each letter was dated 13th June 2002 and was sent by registered post. The letters set out the history of applications for payment and demanded in default of payment by each affiliate, payment of the amounts outstanding and interest.
The letters were each sent by registered post, and the effect of Clause 9 of the purchase framework agreement was that they were deemed to have been delivered two working days after despatch. As despatch was on Thursday 13th June 2002, they were deemed to have been delivered on Monday 17th June 2002.
On 14th June 2002 Hitec wrote to MCI giving notice of an intention to refer a dispute to adjudication under the contract between Hitec and MCI seeking payment in full of the amount of £792,069.65. Hitec stated that the letter was MCI's notice of adjudication. Hitec also stated in the letter that it had applied to the Institute of Electrical Engineers for the appointment of an adjudicator. The letter was marked as having been sent by facsimile transmission. By Clause 10 of the conditions incorporated in the purchase framework agreement, the letter was deemed to have been received immediately upon transmission which was 14th to June 2002.
In its letter dated 14th June 2002, Hitec claimed that MCI and its affiliates were in breach of contract in that they had failed to properly value the contract work, and failed to give notices of withholding. There was no reference to Clause 4.7 of the framework agreement. Judge Seymour observed that the terms of the letter dated 14th June 2002 were extremely odd. Under the purchase framework agreement, MCI had no obligation whatsoever to make any evaluation of the worth of any work. It had no obligation to give any notice in relation to the withholding of any amount from Hitec. It had no obligation to give any notice in relation to withholding payment after receiving an application for payment/invoice from Hitec. What appeared to have happened was that Hitec treated MCI as indistinguishable from its affiliates and as being under the obligations which a particular affiliate might have under the purchase orders placed with Hitec. The letter dated 14th June 2002 did not contain any assertion that there was any dispute in relation to Clause 4.7. It did not contain any assertion that MCI had failed wrongfully, after demand, to make payments which might have been due under Clause 4.7. The letters were copied to MK International Ltd, MK International SRL and MK International SA, but equivalent letters were not sent to those parties.
The effect of the provisions as to service was that the letter dated 14th June 2002 giving notice of adjudication was deemed to have been received by MCI on the Friday which was before the Monday when the demands under Clause 4.7 were deemed to have been received.
To confuse matters, a director of MK International Ltd had written to the President of the Institute of Electrical Engineers on 12th June 2002. The letter referred to MK International Ltd being an affiliate of the Purchaser MCI and gave notice in its capacity as affiliate of the Purchaser, of reference of disputes to adjudication under the purchase framework agreement between Hitec and MCI. It was not immediately clear what was meant by the references to MK International Ltd acting as affiliate over MCI. It seemed that the intention was that MK International Ltd acted as agents of MCI.
After the appointment of an adjudicator, by letter dated 18th June 2002 MK International Ltd objected that the dispute which was the subject of Hitec's notice was virtually identical to the dispute identified in MCI's notice. MCI referred to the conditions which provided that when either party had given notice to refer a dispute to adjudication under Clause 52 the other party would not be entitled to make a separate reference under Clause 52 in relation to that dispute unless the first reference was discontinued for any reason.
On 20th June 2002, MK International Ltd reserved its right to pursue further proceedings as appropriate but withdrew it notice of adjudication of 12th June 2002 and called upon Hitec to pursue its adjudication in accordance with its notice.
On 21st June 2002 Hitec issued four documents each described as "referral notice to adjudicator ".
On 25th June 2002 MK International Ltd wrote to Hitec indicating how it proposed to deal with the adjudication. MCI stated that the letter of 21st June 2002 consisted of four separate referral notices which were concerned with four separate disputes and the parties to those notices appeared on their face to include not only MCI but also MK International Ltd, MK International SA and MK International SRL. MCI stated that it was prepared in the interest of avoiding yet further delay, to treat Hitec's so called referral notices as relating to a single dispute with MCI and to treat all references and the notices accordingly.
MCI first raised its objection to jurisdiction in its Response to the Referral dated 8th July 2002. MCI relied upon the decision of his Honour Judge Thornton QC in the leading case of Fast Track Contractors Ltd v Morrison Construction Ltd. MCI repeated Judge Thornton's decision in that case that a dispute can only arise once the subject matter of the claim, issue or other matter had been brought to the attention of the opposing party and that party had had an opportunity of considering and admitting, modifying or rejecting the claim or assertion. MCI stated that that was not the case in the instant situation.
Faced with the above facts, it would appear that the parties had agreed that there was indeed a dispute between them, or at least there had been a waiver of the conditions precedent under Clause 4.7 . The issue then, was whether such agreement or waiver was sufficient to establish the jurisdiction of the adjudicator. That in essence was the approach taken by the adjudicator in deciding whether he had jurisdiction. The adjudicator, an experienced Queen's Counsel, seemed to have proceeded on the basis that the issue he was being asked to decide, was whether MCI was liable to pay the sum claimed by Hitec in the adjudication, under Clause 4.7 of the purchase framework agreement. He stated that Clause 4.7 set out the circumstances in which MCI became liable, namely, where a participating affiliate failed to pay an amount due under a purchase order. He stated that in such circumstances, such amount should be paid by MCI, on behalf of a participating affiliate, within 10 days of a written demand by the Contractor to MCI. He accepted Hitec's contention that where an affiliate would be unable to rely upon a set-off because of its failure to serve a withholding notice, MCI could not rely on the set-off when a demand was made against MCI under Clause 4.7. The adjudicator rejected any contention to the contrary, since otherwise this would permit a party to benefit from his own wrong doing. He stated that an affiliate could refuse to pay so that Clause 4.7 became operational, so that MCI could take advantage of its different status.
Crucially, the adjudicator rejected MCI's contention first made in its Response that no dispute existed between Hitec and MCI in respect of clause 4.7 because Hitec's notice of adjudication was premature. The adjudicator stated that MCI had relied on the notice of adjudication issued on the 14th June 2002 only one day after letters were issued to MCI alleging liability under Clause 4.7 of the purchase framework agreement. He rejected the contention that the adjudication commenced by MCI and discontinued related to a different dispute to that which was the subject of the adjudication. He referred in this regard to MKI's letter of 17th June 2002 which stated in the clearest terms that it considered that Hitec's adjudication notice was dealing with precisely the same dispute as the adjudication notice issued by MKI. The adjudicator accepted Hitec's contention that MCI had waived any condition precedent that there might be to its liability under the purchase framework agreement Clause 4.7 - that there must first be a written demand and/or that 10 days must elapse thereafter. He decided that a dispute had arisen between Hitec and MCI at the point when - if not before - MKI, on behalf of MCI, produced its notice of adjudication which it subsequently described on 17th June 2002 as relating to the same dispute as that raised in Hitec's adjudication notice.
Judge Seymour did not accept the reasoning of the adjudicator in his decision on jurisdiction. Judge Seymour appeared to consider that the issue of whether a not there was a dispute is such a fundamental matter that it cannot be decided by reference to the parties' agreement or to principles of waiver.
Judge Seymour approached the matter in two steps. First he considered whether there had been an objection to the jurisdiction of the adjudicator during proceedings and in the case of a submission that there was no dispute, whether such an objection was necessary. Second, if the issue of lack of jurisdiction was before him, then whether are not there was any substance in the submission.
On the first issue of objection to jurisdiction, Judge Seymour observed that in the context of adjudication the question whether or not there was a dispute arose only in relation to whether the adjudicator had jurisdiction to determine a dispute. Unless there was a dispute, there was nothing for the adjudicator to decide. So when a party submitted to an adjudicator that there was no dispute, it was plain that what that party was thereby doing, was to raise an issue as to whether the adjudicator had any jurisdiction to decide anything at all. Judge Seymour held that it was clear from the adjudicator's decision that the adjudicator was addressing exactly that question of jurisdiction.
Judge Seymour then considered the reasoning of the adjudicator in his finding that he had jurisdiction. Judge Seymour stated that he found it impossible to understand how, in relation to the question whether there was a dispute, the adjudicator considered it relevant to ask and answer the question whether MCI - by the terms of MKI's letter of 17th January 2002 - had waived reliance upon the terms of clause 4.7. Judge Seymour held that the adjudicator's analysis was that if MKI, on behalf of MCI, had waived reliance upon the terms of Clause 4.7 of the purchase framework agreement, the effect of not being able to rely upon a written demand, and 10 days for payment, was to create a dispute at the point before a demand had ever been made. In effect Judge Seymour gave full effect to the deeming provisions in the purchase framework agreement, overriding the actual facts.
Judge Seymour held that the adjudicator's approach was as follows:
Judge Seymour held that the above was an impossible analysis.
Hitec submitted that it was not open to MCI to object to jurisdiction and relied upon the decision on of Mr Justice Devlin (as he then was) in the case of Westminster Chemicals and Produce Ltd v Eikhaussen Nuersa [1954]. Hitec drew attention in particular to a passage in the judgment of Mr Justice Devlin in which he said that if there is an agreement and if one of the parties had studied it beforehand and thought that the dispute was outside it, he could then go before the arbitrator, if he so wished, and protest. If the party protested against the jurisdiction of the arbitrator, then it could take part in the arbitration without losing its rights. Mr Justice Devlin stated that it was well settled that an objecting party entered into no agreement to abide by the Award. Mr Justice Devlin stated that the fundamental doctrine flowed from the principle that if a man does not protest, but if he submits to the jurisdiction of the arbitrator, he is then bound by the award. The general principle is that by appearing before an arbitrator and submitting his case for settlement, his conduct necessary leads to the inference that there is an agreement consenting to the award unless there is something, such as a protest, to negative that agreement.
The statement of Mr Justice Devlin was considered by the Court of Appeal in the case of Furness Withy (Australia) Proprietar Ltd v Metal Distributors (United Kingdom) Limited (1990). The leading judgment in that case was that of Lord Justice Staughton who considered and endorsed the statement of Mr Justice Devlin. Lord Justice Staughton stated that the rule ought to be that if a person wished to preserve his rights by taking part in an arbitration under protest, he must make his objection clear at the start, or at least at a very early stage.
Hitec submitted that the principle ought by analogy to be applied in cases of adjudication. Hitec submitted that a party which wished to challenge the jurisdiction of an adjudicator should make that challenge clear at the earliest practicable opportunity. If a party participated without doing so, that party would confer jurisdiction on the adjudicator, or would wave or would be stopped from challenging jurisdiction on any subsequent enforcement.
Hitec relied on the facts for its assertion that there had not been an objection to jurisdiction during the adjudication proceedings. Hitec submitted that the correspondence between the parties showed: first, that MCI positively asserted that the dispute between it and Hitec was one and the same; second, that there was a positive assertion by MCI that the adjudicator would determine issues in the adjudication and that the parties would be bound; and, third, that from MCI's perspective, the only jurisdictional issues raised were those raised by Hitec in relation to the attempt of MCI to rely upon the late set-off.
MCI relied upon the provisions of the contract which required a demand to be made and a ten-day period for payment. MCI submitted that the matters set out in the notice of adjudication of 14th June 2002 identified issues between Hitec and the affiliates which had placed purchase orders, and not between Hitec and MCI. in any event, MCI had 10 days in which to consider its position in relation to the demands and to respond to them, and that period had not elapsed at the date of the service of the notice of adjudication.
MCI also relied on the deeming provisions and a contract. MCI submitted, that there was no dispute between the parties in relation to the demands made under Clause 4.7 of the purchase framework agreement because the notice of adjudication was to be taken as having been served before the demands were to be taken as having been served.
MCI submitted that in cases of adjudication, it was necessary to bear in mind that the process was a speedy one, and that it might, therefore, be the case that the process of adjudication had got significantly under way before the time at which it was possible for a reluctant responding party to take the point that the adjudicator had not jurisdiction.
MCI submitted that it had indeed, in a response to the referral notice, and in a further response to the Reply, raised the issue of the jurisdiction of the adjudicator.
Judge Seymour held that it was quite plain from the passages in the response to the referral notice and to a further response to the Reply that MCI was seeking to rely upon the absence of any relevant dispute as an objection to the jurisdiction of the adjudicator. There was no other purpose in raising those points. It was plain from a consideration of the adjudicator's decision, on proper construction, that he did recognise that the significance of the point was that it went to his jurisdiction.
Judge Seymour held therefore that it was open for MCI to take the jurisdiction point.
Judge Seymour then proceeded to make comment on an interesting aspect of jurisdiction, namely when the objection is that there is no dispute at all. Judge Seymour held that the question of jurisdiction of the adjudicator was a fundamental one - although it may well be possible for a party so to conduct itself as to be prevented after a decision had been made from relying upon a jurisdictional objection. He stated that that was a particularly difficult analysis in a case in which the objection to jurisdiction was that there was no dispute to be referred. If there was in fact no dispute, but a party was prevented from asserting that there was no dispute, then there was the difficulty of identifying what on earth it was that the adjudicator was supposed to decide. Judge Seymour stated that it was difficult to resist the conclusion that, in those circumstances, the adjudicator was entrusted to determine the issue which he had to determine. Judge Seymour was firmly of the view that that was a profoundly unsatisfactory state of affairs.
It is not clear therefore from this part of the decision, whether the absence of an objection to jurisdiction during adjudication proceedings, in a case where there is no dispute, will prevent a party in further proceedings from raising that objection. This part of Judge Seymour's decision is obiter dicta, but no doubt will be expanded in the future.
The next issue was whether in fact the objection to jurisdiction had any substance.
Hitec relied upon a number of authorities to support it submission that there was a dispute between the parties. In particular Hitec relied upon the approach adopted by the Court of Appeal in Halke Shipping Corporation v Sopex Oils Ltd [1998]. In that arbitration case it was apparent from the passages in the judgments that the question which arose was whether it could be said that there was a dispute in circumstances in which one party asserted that the other party had no answer to a claim. Judge Seymour held that that was a different issue from the issue which arose before him. It was the same as the issue which had to be considered by Mr Justice Saville in Hayter v Nelson and Home Insurance [1990]. Hitec relied heavily upon a Scottish decision Karl Construction (Scotland) Ltd v Sweeney Civil Engineering (Scotland) Ltd a judicial review case, subsequently subject of an appeal to the Inner House of the Court of Session. Hitec relied upon Lord Caplan’s decision (the appeal against which was rejected). Lord Caplan decided that a question might arise as to whether, during the course of an adjudication, parties can adjust or change their contentions. It was important to distinguish between a dispute and the contentions and support of each Party’s stance over the material issue which might be adjusted in the course of communications between them.
Hitec relied upon the decision of Lord Caplan in support of the analysis that a dispute between the parties was in relation to what sums were payable by MCI to Hitec and it was immaterial, by analogy with Lord Caplan's analysis, that when the dispute started, it was a dispute as to what sums were payable under the purchaser order; and by the time it finished it had become a dispute as to what sums were payable under Clause 4.7 of the purchase framework agreement.
Judge Seymour held that this was not a correct analysis. He held that what one was concerned with in the circumstances of the instant case, was not a refinement of arguments in support of a claim which was and remained throughout the same; but rather, putting a claim against MCI on a completely different contractual basis by the time the matter was determined by the adjudicator as compared with how matters stood at the time the notice of adjudication was given.
MCI submitted that for there to be something which sensibly could be termed a dispute, there needed to have been a claim which had been made by one party which had been the subject of an opportunity by the other party to consider it and react to it. MCI relied upon a number of decisions, including a decision of the instant Judge Seymour in Edmund Nuttall Ltd v RG Carter Ltd in which he reviewed a number of the earlier authorities. In the course of his earlier decision Judge Seymour made reference to an observation of Lord Denning in Monmouthshire County Council v Costello and Kemple Ltd in which Lord Denning stated that in order for a dispute or difference to arise on the contract, there must, in the first place, be a claim by a party. Until that claim was rejected you could not say that there was a dispute or difference. There must be a claim and a rejection in order to constitute a dispute or difference.
MCI also relied upon the judgment of Judge Thornton QC in a Fast Track Contractors Ltd v Morrison Construction Ltd [2000].
Judge Seymour held that the system of adjudication, whether established by contract between the parties or under Part II of the Housing Grants Construction and Regeneration Act 1996, had a number of imperfections. Parliament had prescribed that in the wider interests, speed of adjudication was important; and it was largely in the quest for speed, that one was likely to find such imperfections in the system of adjudication as there were. Judge Seymour considered that whilst recognising that there were imperfections, and that such imperfections were - to a degree - an inevitable feature of the system, it was no part of the function of the court to multiply them. Judge Seymour held that whatever may be the correct approach to the determination of the question what amounted to a dispute fit to be referred to a arbitration under an arbitration clause, in the context of adjudication, a dispute was something more than simply a rejection baldly of a claim, or a failure to respond to a claim. He held that, in the context of adjudication, a dispute amounted to a situation in which a claim had been made, there had been an opportunity for the protagonists each to consider the position adopted by the other and to formulate arguments of a reasoned kind.
Judge Seymour considered that it may be that there is a dispute in a case in which a party which has been afforded an opportunity to evaluate rationally the position of an opposite party, and has either chosen not to avail itself of that opportunity, or has refused to communicate the results of its evaluation. Judge Seymour held, however, that in the instant case, where the period permitted by Clause 4.7 of the purchase framework agreement for MCI to consider its position and react following a demand, had not elapsed - it could not sensibly be said to be a dispute which was fit to be referred to adjudication.
Judge Seymour held that on a proper analysis of the correspondence between the parties there was no foundation for a submission that there was a dispute between the parties and that there was a dispute related to sums which were payable by MCI to Hitec.
Judge Seymour held that the adjudicator exceeded his jurisdiction in making the decision he did that MCI was liable to pay the sum will £792,000 which he found under Clause 4.7 of the purchase framework agreement.
Hitec submitted, as an alternative to its main case, that in relation to the claim under the Dublin project, the position was different from that which obtained in relation to the other projects. It was accepted - or at any rate the adjudicator had found - that the purchase order on the Dublin project was placed on behalf of MCI as principle. Hitec submitted that since an element in respect of the Dublin project of £261,187.80 could be identified from the way in which the adjudicator arrived at his total figure payable of £792,000, the court should give judgment for Hitec against MCI for that amount.
MCI submitted that the adjudicator's award was for a single lump sum of £792,069.65; that, if an award in that amount was an excess of the adjudicator's jurisdiction, the application for summary judgment should simply be dismissed. MCI submitted that the court had no power to revise the adjudicator's award and that it would be wrong in principle for the court to seek to do so. MCI submitted that it was no part of the court's function to seek to salvage from the debris of the unenforceable award, or an award unenforceable in total, something for the benefit of the party seeking to enforce. MCI submitted that this would involve revisiting the reasoning process adopted by the adjudicator without affording the party against whom enforcement was sought, an opportunity to challenge that part of the reason.
Judge Seymour accepted MCI’s submission. He held that it would be quite wrong for the court if it finds - as it had found - that an award had been made in excess of jurisdiction, to enter upon the path of seeking to find for the benefit of the enforcing party and to the prejudice of the Party against which enforcement was sought, something which could be salvaged to the benefit of enforcing party.
Judge Seymour dismissed the application for summary judgment. He considered that in view of the issues which he had been invited to consider and which he had determined that the action was bound to fail. He stated that subject to the opportunity for counsel to address him on this question he was minded not merely to dismiss the application but to dismiss the action.