Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, enforcement, restrictions on timing of enforcement, judicial review, S108(3), construction of the contract, Scots Doctrine of Retention, Lord Young. |
The Scots decision in A v B (2002)Crt of Session by Lord Drummond Young on 17 December 2002 is of general interest since it examines the effect of contractual provisions which attempt to restrict the timing of the enforcement of an adjudicator's decision. The case is also of interest in Scots law since it explores further the Scottish doctrine of retention.
The parties are not named in the judgment, but referred to as A and B. B engaged A as subcontractors to carry out the design and installation of proprietary roofing and wall cladding to certain buildings. The subcontract terms were based on the SBCC Scottish Building Contract with Contractor's Design September 1995 Revision as amended by a standard form of sub-contract produced by A.
Disputes arose and were decided by an adjudicator who awarded A an extension of time under the subcontract, and also awarded A reimbursement of loss and expense totalling £639,151.82, inclusive of value added tax. A commenced the instant action in order to enforce the latter part of the adjudicator's award.
B raised two defences which they argued prevented immediate enforcement of the adjudicator's decision. The defences raised the following two issues:
B relied on paragraph 2.1(f) of Appendix 8 to the Construction Sub-Contract. Paragraph 2.1(f) provided that no party would make any application whatsoever to a competent court in relation to the conduct of the Adjudication or the decision of the Adjudicator until the earlier of the Actual Completion Date of the last Phase or termination of the Sub-Contract unless and until the prior written consent of both the Sub-Contractor and the Contractor has been obtained. It was common ground that actual completion of the last phase of the main contract had not yet been achieved.
Paragraph 2.1 of Appendix 8 provided that if a dispute was referred to adjudication the procedure was to be governed by the Official Referees Solicitors Association ("ORSA") Adjudication Rules - 1998 Version 1.2, but subject to a large number of amendments. B relied on Rule 28A, which was inserted into the ORSA Rules by Appendix 8. Rule 28A provided that every decision of the Adjudicator was to be implemented without delay. It provided that the parties were entitled to such reliefs and remedies as were set out in the decision, and entitled to summary enforcement thereof, regardless of whether such decision was or was to be the subject of any challenge or review. Rule 28A also provided that no party was entitled to raise any right of set-off counterclaim or abatement in connection with any enforcement proceedings. Rule 28A also recorded the agreement that they would docquet every decision with their consent and to registration of the Adjudicator's decision in the Books of Council and Session for execution. B submitted that Rule 28A was of limited scope and dealt with what was to happen only when an action relating to an adjudication came into existence. B submitted that the purpose of Rule 28A was to ensure, at that stage, that enforcement was possible immediately, and not held up by either counterclaims or proceedings for judicial review of the adjudicator's decision.
Lord Young held that A were entitled to enforce the adjudicator's decision on the date when it was issued. A was not obliged to wait until the actual completion date of the last phase of the main contract before doing so. Lord Young stated that that conclusion was based both on Section 108(3) of the 1996 Act and on the construction of the parties' contract, read in the light of that Section.
Lord Young held that an adjudicator's decision was legally binding on the parties when pronounced. Until undone by subsequent litigation or arbitration the decision created binding legal rights and obligations, which had to be given effect. That result was clear from the terms of Section 108(3) of the 1996 Act. He held that if an obligation arising out of an adjudicator's decision was binding, then it must be capable of enforcement. Consequently the party in whose favour an adjudicator's award was made must be entitled to enforce that award. That was an inevitable consequence of Section 108(3) of the Act. The legal position was summarised by Lord Macfadyen in The Construction Centre Group Limited v The Highland Council, in which he held that not to allow enforcement of an adjudicator's award when the date for payment had passed would obstruct the attainment of the purpose of Section 108.
Lord Young held that any attempt to delay the enforcement of an adjudicator's award by more than a short period was prohibited by Section 108(3). Surprisingly, and without reference to any legal principles which might apply, Lord Young considered that any such delay had to be justified by practical considerations, such as the need to find the necessary funds to meet the award. Lord Young stated that on that basis, a delay of perhaps four weeks or thereby might be justified. Beyond that, however, the policy of the Act was that a party against whom an adjudicator's award was made should make immediate payment in terms of the award. Section 108(3) was mandatory in its terms.
Lord Young held that any provision of a contract that was incompatible with the binding nature of an adjudicator's award was legally ineffective. Any attempt to prevent enforcement of an adjudicator's award was in essence a denial of the binding nature of that award. If, therefore, paragraph 2.1(f) of Appendix 8 had the effect contended for by B, and prohibited enforcement of an adjudicator's award until the actual completion of the last phase of the main contract, it was incompatible with Section 108(3), and was accordingly of no legal effect.
Lord Young held that a distinction was to be drawn in Scotland between the two types of court proceedings of judicial review and enforcement of an adjudication decision. In judicial review, essentially, the issue was the jurisdiction of the adjudicator, whether he had acted within the terms of the reference that had been made to him, and to misconduct on the part of the adjudicator. Judicial review was not possible on the ground that the adjudicator has made an error of fact or law provided that his decision could not be considered irrational. In enforcement proceedings as described by Lord Macfadyen in The Construction Centre Group Limited v The Highland Council [2002] the pursuers did not ask the Court to endorse the correctness of the adjudicator's decision on the merits of the dispute referred to him, but merely asked the Court to recognise that the parties had bound themselves contractually to implement the adjudicator's decision.
Lord Young held that paragraph 2.1(f) of Appendix 8 was to be construed as relating only to judicial review of an adjudicator's decision, and not to proceedings to enforce such a decision. This construction of the contract was based on two considerations.
First, the provisions of a building contract must be interpreted so far as possible in a manner that was consistent with Section 108. Section 108 had no bearing on the availability of judicial review, and it would be open to parties to a contract to allow proceedings for judicial review to be delayed until the conclusion of the contract, provided that immediate enforcement is available. Lord Young held that the reference in paragraph 2.1(f) to the conduct of the adjudication clearly related to judicial review rather than enforcement, since the adjudicator's conduct could be challenged by way of judicial review but would have no bearing on the right to enforce an award, at least in the absence of successful judicial review. The reference in paragraph 2.1(f) to the decision of the adjudicator was wider, and if it had stood by itself, without the context provided by Section 108(3), would have been construed as relating to enforcement as well as adjudication. In the ORSA Rules the word "decision" was used to designate an adjudicator's award, and the enforcement of an award by legal proceedings amounted to an application in relation to such a decision. Lord Young held that in the context of Section 108(3) the reference to the decision of the adjudicator in paragraph 2.1(f) had to be restrictively construed, and confined to proceedings for judicial review of such a decision. In that way any conflict with Section 108(3) could be avoided. That was not an unnatural construction of the wording used. Lord Young observed that judicial review extended beyond the conduct of the adjudicator in the narrow sense, and could extend to the decision itself, if for instance the decision was ultra vires of the remit to the adjudicator, or was ambiguous or unclear. Lord Young held that against the background of Section 108, a restriction of paragraph 2.1(f) to judicial review was the most obvious and natural construction of the provision.
Second, Rule 28A of the ORSA Rules negatived any argument that paragraph 2.1(f) prohibited immediate enforcement. Rule 28A began by stating that every decision of the adjudicator was to be implemented without delay. It was an elementary principle of construction that the provisions of a contract were, so far as possible, to be read together. Lord Young held that there was no incompatibility between Rule 28A and paragraph 2.1(f) provided that the latter provision was construed in the way suggested above, by restricting it to judicial review and excluding enforcement.
B's second argument was that the Scots Doctrine of Retention applied.
English Law does not have any equivalent to the Scots Doctrine of Retention, although it is an important feature of the Scots law of contract. The Scots Doctrine of Retention involves a bar on the raising of legal proceedings. It relates to actions on mutual contracts. The doctrine is that every action on a mutual contract implies that the pursuer either has performed, or is willing to perform, his part of the contract, and it is therefore always open to the defender to demand performance of the contract before the pursuer can insist in his action Johnston v Robertson [1861] and Turnbull v McLean & Co [1874].
B argued that the adjudicator had rejected a contention that A was entitled to an extension of time of 112 weeks, and awarded them an extension of only 46 weeks, which represented a delay of 66 weeks. The SubContract provided for liquidate and ascertained damages which in this case amounted to a sum of £4,950,000 due by A to B. B argued that the obligation to pay that sum arose out of the adjudicator's award relating to extension of time. B argued that A was not entitled to enforce the part of the decision in its favour without fulfilling its obligation to pay liquidate and ascertained damages.
Lord Young held that since the principle of retention involved a bar on the raising of legal proceedings. Once legal proceedings had reached the stage of decree the principle had no application. Lord Young recognised three types of decree for the purpose of the Doctrine of Retention:
Lord Young observed that the position was different while the adjudication process was still continuing. A party could take any pleas or defences that were relevant to the claim made against him during the adjudication proceedings, including a plea of retention, if the conditions for the application of the principle existed. Lord Young agreed with the views expressed by Lord Macfadyen in The Construction Centre Group Limited v The Highland Council that an employer who claimed to be entitled to liquidate damages and sought to retain a sum that would otherwise be due to the contractor against that claim, was in principle entitled to put that contention forward before the adjudicator. An adjudicator who held otherwise, and declined to permit the responding party to raise the issue of retention would be misdirecting himself.
Lord Young applied the statement of law to the instant case. B could, had they wished, have asserted that they were entitled to liquidate and ascertained damages if the adjudicator failed to award the pursuers the full extension of time that they claimed in the adjudication. B contested the extension of time claimed by A, but disputing entitlement to an extension of time was not the same thing as making a claim for liquidate and ascertained damages. A claim to such damages raised distinct issues, including the question of whether the sum of liquidate damages was a penalty. The issue of liquidate and ascertained damages was not raised before the adjudicator. Nor was a right of retention put forward as a defence to A's claim. Lord Young held that in these circumstances B could not assert a right of retention in proceedings for enforcement of the adjudicator's award.
That disposed of the matter, but Lord Young made further observations obiter dicta:
Lord Young also dealt briefly with the argument by A that a failure to pay liquidate and ascertained damages timeously, was not a breach of contract and consequently could not give rise to a right of retention. Lord Young held that if one party completed late, in breach of its obligations under the contract, and is in consequence liable to pay liquidate damages, that was sufficient to entitle the other party to plead retention in respect of a claim for the contract price, Johnston v Robertson, and Macbride v Hamilton and Son [1875]. It was not necessary to decide whether failure to pay liquidate damages amounted to a breach of contract in Scots law and whether the decision in the House of Lords in President of India v Lips Maritime Corporation apparently to the contrary and relied upon by A, applied to Scots Law in view of the authority of the above two Scots cases.
Lord Young also dismissed A's argument that Rule 28A were sufficient to prevent B from asserting a right of retention. Lord Young held that the right of retention could not be categorised as a right of "set-off counterclaim or abatement" the terms used in Rule 28A. Retention was a mere defence to a claim, and did not involve the extinction of any debt. The expression "set-off" accordingly did not apply to it. Nor could retention be regarded as a counterclaim; a counterclaim was a claim actively pursued, by a defender against a pursuer. Nor could retention be considered an "abatement". The effect of a defence of retention was not to reduce the amount of the pursuer's claim, rather it suspended the defender's obligation to meet the pursuer's claim until such time as the pursuer implemented or indicated willingness to implement its own contractual obligations. It followed that the expression "abatement" did not adequately describe the principle of retention. The right of retention could only be excluded by clear and unequivocal words in a contract Redpath Dorman Long v Cummins Engine Company Limited [1981].
Lord Young held that the question of law which was raised in the instant case admitted of a clear and obvious answer in A's favour, which was the test applied by Lord Macfadyen in The Construction Centre Group Limited v The Highland Council, and therefore pronounced decree against B in favour of A declarator that A was entitled to payment of the amount of the adjudicator's award.