Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, adjudicator's decision, status of decision, Third Parties (Rights against Insurers) Act 1930, Judge Behrens. |
The decision by His Honour Judge Behrens on 12th May 2003 in Galliford (UK) Ltd v Markel Capital Ltd [2003] QBD involved consideration of the effect of an adjudication under the Housing Grants Construction and Regeneration Act 1996 ("the 1996 Act") against an insolvent insured party. The case is of general importance to the construction industry particularly where insolvent consultants are involved with professional indemnity insurance. The decision provided useful confirmation of the status of the adjudicator's decision in relation to other legal rights.
Galliford was the Main Contractor for the conversion of the Wellesley Hotel in Leeds into flats. Michael Heal Associates Ltd ("MHA") was the consulting structural engineers appointed by Galliford to advise and prepare a detailed design on behalf of Galliford. Galliford alleged that part way through the construction the existing roof slab was found to be inadequate to support the additional floors safely. Galliford alleged that the amendments to the design resulted in a critical 24 week delay to the project and £2,118,332 additional direct and time related cost. Galliford sent a letter of claim to MHA on 2nd July 2001. On 31st July 2002 MHA passed a resolution for voluntary winding-up and the liquidator was appointed.
On 15th August 2002 Galliford commenced adjudication proceedings under the 1996 Act. In addition to challenging the application on its merits, MHA disputed the jurisdiction of the adjudicator to make an award. In particular MHA challenged the jurisdiction on the grounds that no written contract was ever concluded.
The adjudicator determined that he had jurisdiction and then decided that MHA was liable to Galliford for the changes to the roof slab design and for the changes to the infill steelwork design but not in respect of other matters. He assessed Quantum in the sum of £722,586 inclusive of interest. He ordered MHA to pay that sum to Galliford within 14 days of the decision and he directed that MHA should pay his fees.
MHA did not pay Galliford any part of the sum awarded by the adjudicator. Galliford did not seek to apply to the court to enforce the adjudication award.
Galliford commenced proceedings in January 2003. The heart of the claim was the allegation that the effect of the resolution for voluntary winding-up was to transfer and vest in Galliford MHA's rights to be indemnified against any liability arising from the claim. Galliford alleged that the syndicate represented by Markel was indebted to Galliford in the sum of £730,675, being the adjudication award less the policy excess plus the adjudicator's fee. Interest was claimed over an above that sum.
Galliford contended that the adjudication award itself was sufficient to enable the insured to claim an indemnity under the policy. Galliford contended that it was bound to succeed under the Third Parties (Rights Against Insurers) Act 1930 ("the 1930 Act").
The terms of the policy provided that the syndicate would indemnify MHA against "Loss" arising from any claim or claims made against MHA during the period of insurance by reason of a wrongful act committed by MHA in or about the conduct of the MHA's business. "Loss" was defined as MHA's legal liability for damages awarded against MHA. By an Endorsement, MHA's cover was extended to certain payments which might be required from MHA under adjudication procedures. The Endorsement provided that the indemnity was extended to include loss consequent upon an adjudicator's award under a procedure complying with the 1996 Act. The endorsement also provided that MHA may be required by the syndicate in their absolute discretion to contest any adjudication process under the 1996 Act whether or not Counsel so advised, as a condition precedent to the right to payment or indemnity.
Galliford submitted that the policy was specifically extended to cover an adjudication award. Galliford submitted that it was quire unnecessary to require Galliford to take proceedings against MHA to enforce the adjudication award. The terms of the policy entitled the Syndicate to require MHA to contest the adjudication process. There was no such requirement in relation to proceedings to enforce the adjudication award. Galliford submitted that this demonstrated that it was not envisaged that enforcement of the award by action was a condition precedent to a right of indemnity under the policy.
Markel submitted that the adjudication award was not sufficient to establish a loss under the policy and give rise to a right of indemnity as between the insurer and the insolvent insured. Markel contended that in order to establish such a loss Galliford had to take steps to enforce the adjudication award. Until that was done the liability of the insured was not established with the result that its rights under the 1930 Act were not transferred to Galliford. Markel submitted that the CIC Adjudication Procedure terms which applied to the adjudication procedure created a contractual obligation enforceable summarily to comply with the adjudication award even though the award was necessarily a provisional award. Markel submitted that an adjudication award was not equivalent to a judgment or an arbitration award. It was no more or less than a contractual obligation to pay. Furthermore, although it was enforceable summarily it was a defence to an application to enforce the award that the adjudicator exceeded his jurisdiction.
Markel relied on the wording of the Endorsement. The extension provided was to include Loss consequent upon an Adjudicator's Award under a procedure complying with the 1996 Act. It was not an indemnity as to the adjudication award itself but as to loss consequent upon such an award. Markel referred to the definition of Loss as being MHA's legal liability for damages awarded against MHA. Markel submitted that until MHA's legal liability for (debt or) damages was established by action, arbitration or agreement there was no loss within the policy and MHA could not have sued the Syndicate under the policy. MHA had contested the jurisdiction of the adjudicator in the adjudication proceedings and it would have been open to MHA to have repeated the challenge in any attempt to enforce the adjudication award. Markel submitted that until such challenge was determined either summarily or otherwise there was no loss under the policy.
It was common ground that if Markel was right, that Galliford had no cause of action at the date of issue of proceedings and the claim must fail.
Accordingly Markel submitted that, as at the date when the proceedings were issued, there was no loss under the policy with the result that the proceedings were bound to fail.
Judge Behrens first examined Section 1 of the 1930 Act. This provides that where a voluntary wind-up is passed with respect to an insured company, insured against liabilities to third parties, then its rights against the Insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred.
Judge Behrens referred to the reasoning of Lord Denning and Salmon LJ in Post Office -v- Norwich Union [1967] 1A11ER577 approved by Lord Brandon in the House of Lords Bradley -v- Eagle Star [1989] 1A11ER961. The principle in Post Office was that the insured acquired only a right to sue for the money when their liability to the injured person has been established so as to give rise to a right of indemnity. Their liability to the injured person must be ascertained and determined to exist, either by judgment of the court or by an award in arbitration or by agreement. Judge Behrens held that, subject to consideration of the effect of the Endorsement, the definition of "Loss" in the policy was indistinguishable from the definition in the Post Office case. It followed that the principles applied. On that basis Judge Behrens held that there was no transfer of MHA's rights against the Syndicate at the date of the resolution for voluntary winding up. At that date the adjudication procedure had not been commenced. In no sense could it be said the liability of MHA to Galliford had been established either by judgment, arbitration or otherwise.
Judge Behrens then examined the 1996 Act. He observed that the nature of the adjudication procedure had been the subject of a number of decisions both at first instance and in the Court of Appeal. There was a helpful summary of those decisions in paragraphs 7-9 of the decision of Mantell LJ in Levolux v Ferson [2002]. Reference was made to Macob Civil Engineering Ltd v Morrison Construction Ltd [1999], Bougues -v- Dahl-Jensen [2000] and C B Scene Concept Design Ltd -v- Isobars Ltd [2002]. Judge Behrens concluded that although the procedure is provisional the adjudication award gave rise to an immediate payment obligation. That payment obligation may be enforced through the Courts normally by means of a claim followed by an application for summary judgment. The application for summary judgment was likely to succeed if the adjudicator had not exceeded his jurisdiction and had answered the right question even if it could be shown he had made an obvious and fundamental error in giving the answer. Judge Behrens held that it was thus a defence to the application for summary judgment to show a real dispute as to whether the adjudicator has exceeded his jurisdiction but not a defence to show that he had given the wrong answer to the question.
Judge Behrens observed that at the time of the Post Office decision the adjudication procedure did not exist. Thus the question was whether the adjudication award was the establishment of MHA's liability to Galliford and was equivalent to a judgment of the Court, agreement or an arbitration award. Judge Behrens held that the adjudication award created a contractual obligation on MHA to pay Galliford but it was not an absolute obligation. In particular it would not be enforced by the Court if the adjudicator had exceeded his jurisdiction. Liability under the policy was not established until the adjudication award was enforced by a judgment of the court or agreement. It followed that the proceedings were issued prematurely and fell to be dismissed.
One final matter was referred to but not decided. Markel, for the purpose of the hearing, had not taken any point on the distinction between liability for debt or for damages although it was recognized that a failure to pay a contractual sum could give rise to an action for damages in the same sum. It was observed that if there was force in the argument it would mean that the endorsement was devoid of any meaning at all. It is by no means clear that the observation is correct.
It was recognized that the issues raised by the case were of some general importance and permission to appeal was given.