Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, Adjudicators jurisdiction, dispute, DOM/1 1980, termination, breach of contract, damages, final account, contractual machinery, Judge Frances Kirkham. |
In Orange EBS Ltd v ABB Limited Judge Frances Kirkham had to consider whether or not a dispute had arisen. There were different disputes to be considered - first the dispute as to whether the termination of a subcontract was lawful and the second dispute as to the amount due to be paid. Judge Kirkham applied both the tests as set out in Halki and the test in Solland for when the dispute as to payment crystallised. Although Judge Forbes in Beck Peppiatt appeared to consider that both tests could be reconciled and that this was accepted by Judge Kirkham, it is clear from Judge Kirkham's approach that they are different tests and may lead to different conclusions. In this case Judge Kirkham reached the same conclusion applying both tests.
Oxford Radcliffe Hospital NHS Trust contracted with Bovis Lend Lease Ltd for work at the Trauma Centre at the John Radcliffe Hospital. Bovis sub-contracted work to ABB who in turn sub-contracted mechanical services work to Orange in December 2001. The sub contract price was £98,227. The form of contract was DOM/1 1980 edition.
In March 2002, Orange submitted their penultimate application for payment of a gross sum of £81,399.05 based on approximately 75% of work having been completed.
Orange withdrew from site on 28 May 2002. ABB issued a notice in early June 2002 contending that Orange had failed to complete their work. ABB refused Orange access to site.
The relevant correspondence was as follows:
On 10 July 2002 Orange replied referring to the contractual dispute that existed between ABB and Orange.
On 2 December 2002, Orange wrote to ABB, contending that ABB had wrongfully denied Orange access to site and/or terminated the sub contract. Orange enclosed its final account, seeking a gross valuation of £270,417 and listed claims for remeasured work, variations, prolongation, materials supplied (extra to contract scope) disruption, head office overheads, profit for the extended contract period, loss of profit on remaining work and financing costs. The cost of remaining work at the date when access was denied and payments made to date were deducted giving a net total of £203,930.04 excluding VAT. Orange enclosed a formal notice of intention to refer to adjudication.
On 12 December 2002 ABB wrote to Orange contending that there was no extant dispute between the parties at that stage capable of adjudication because ABB had not had an opportunity to consider Orange’s final account. ABB stated that it was actively looking at Orange's final account but would not complete that exercise until 20 January 2003. ABB stated that it was willing to agree that should the parties have not reached agreement within seven days of the date of ABB's substantive response to Orange’s final account that it would agree to [the first adjudicator] being appointed adjudicator to determine the dispute that would then exist. [An adjudicator had been appointed on 9 December 2002 but had resigned on 11 December 2002]. ABB gave notice that should Orange proceed with issuing a further notice of adjudication that ABB would dispute jurisdiction on the grounds that there was no extant dispute between the parties.
Orange commenced the adjudication.
On 9 January, the parties were advised that the second adjudicator had been appointed.
On 14 February 2003, the Adjudicator gave his first decision and decided that:
On 4 March 2003 the Adjudicator gave his second and final decision and decided that:
Orange sought to enforce payment of the sums awarded together with the adjudicator’s fees it had paid by application for summary judgment to Judge Frances Kirkham.
ABB objected to the adjudicator’s decisions on the ground that the adjudicator lacked jurisdiction to make decisions because there was no dispute between the parties within the meaning of the Act at the time that Orange commenced the adjudication.
ABB accept that the adjudicator had jurisdiction to determine whether ABB were in repudiatory breach of the sub-contract (as he did by his first decision) and to decide that Orange were entitled to damages of £194.78 (as he did by his final decision). Save to that extent, ABB’s case was that the adjudicator did not have jurisdiction to decide how much ABB should pay Orange pursuant to Orange’s final account claim.
The essential question therefore was whether or not a dispute as to how much was due to be paid had arisen for the purpose of the Act.
Judge Frances Kirkham was referred to a number of judgments including
Judge Kirkham was also referred to the judgment of Forbes J in Beck Peppiatt Ltd -v- Norwest Holst Construction Ltd [2003] EWHC 822 (TCC) in which he stated that the decision of the Court of Appeal in Halki was fully binding on judges deciding whether a dispute has arisen in the context of adjudication and that the word "dispute" should not be given some specialised meaning for the purposes of adjudication. Judge Forbes also considered that the law was satisfactorily stated by His Honour Judge Lloyd QC in Sindall -v- Solland in which he held that for there to be a dispute for the purposes of exercising the statutory right to adjudication it must be clear that a point had emerged from the process of discussion or negotiation that had ended and that there was something which needed to be decided.
Judge Kirkham considered that the statement of principle by Judge Lloyd was easily understood and was not in conflict with the approach of the Court of Appeal in Halki. She stated that, as observed in Halki, "dispute" was an ordinary English word which should be given its ordinary English meaning. This meant that there would be many types of situation which can be said to amount to a dispute. Each case would have to be determined on its own facts. She considered that attempts to provide an exhaustive definition of "dispute" by reference to a number of specified criteria were best avoided.
Judge Kirkham reject the suggestion that the word "dispute" should be given some form of specialised meaning for the purposes of adjudication.
Judge Kirkham held that Judge Lloyd’s definition was simple and easily applied and accorded with the ordinary meaning of the English word "dispute", did not in conflict with Halki and was the approach to be followed in the instant case.
Judge Kirkham observed that the test for the meaning of dispute adopted in Halki was that there was a dispute once money was claimed unless and until the defendants admitted that the sum was due and payable.
It is clear from the judgment of Judge Kirkham that different disputes can crystallise at different times.
The first dispute was whether or not ABB was entitled to terminate the subcontract (although this did not appear to be an issue to be decided by Judge Kirkham since ABB accepted that the Adjudicator had jurisdiction to decide that issue).
Judge Kirkham found that the parties corresponded in June and early July 2002 on the questions whether Orange’s work was defective, whether Orange was in breach of contract, and whether ABB were entitled to terminate the sub contract and recover the cost of completing work. Orange had made clear in that correspondence, culminating in its letter of 8 July 2002, that it refuted ABB’s allegations as to defects and that Orange had abandoned work. Judge Kirkham observed that termination of a contract before completion was usually a serious matter and it was understandable that it did not take Orange long to decide that it did not accept that ABB had the right to terminate.
Judge Kirkham considered that a dispute arose by 8 July at the latest as to whether ABB had been entitled to terminate the sub contract.
The second dispute was whether or not Orange was entitled to damages for breach of contract for wrongful termination (although this did not appear to be an issue to be decided by Judge Kirkham since ABB accepted that the Adjudicator had jurisdiction to decide the issue of damages for breach of contract).
Judge Kirham considered that although ABB made clear in its letter of 6 July 2002 that an accounting was needed to decide what sums were due to Orange under the sub contract, there was no suggestion that ABB would be willing to pay Orange any damages for breach of contract. That was not surprising, given that ABB denied that it had breached the sub contract.
Judge Kirkham considered that a dispute arose on receipt by Orange of ABB’s letter of 6 July, at the latest, as to whether or not Orange were entitled to payment for damages for ABB’s breach in terminating early. By the time Orange wrote its letter of 8 July 2002, the issue was live and to be decided.
The third dispute related to quantum - the amount Orange were entitled to be paid on its final account. Orange submitted two cases on this matter, arguing alternative dates of July 2002 and December 2002 for when the dispute crystallised.
Orange’s primary case was that the material dispute had arisen on or before 8 July at the latest. Orange's argument comprised three submissions:
Judge Kirkham did not accept the first submission by Orange that ABB’s letter of 6 July constituted a denial of Orange’s entitlement to any further payment. She held that the letter indicated that ABB’s position was that no sum was immediately payable to Orange; an accounting was needed to calculate what, if anything, was due to Orange. Judge Kirkham held that the reference by Orange in its letter of 10 July 2002 to "the contractual dispute which now exists between us" referred to issues concerning ABB having refused to allow Orange back on to site. In the background was the dispute as to whether Orange’s work was defective.
As to the third submission, Judge Kirkham held that it was a startling proposition (which she did not accept) that a dispute arose in July 2002 in relation to matters which Orange admitted had not been claimed at all until December 2002. It was not until 2 December that Orange submitted its final account. Orange claimed 39 variations of which 31 were first claimed in the final account. The first time that Orange claimed for prolongation, disruption, head office overheads and financing costs was in the final account. There was no blanket denial of Orange’s right to any payment. ABB had not refused to pay any sums properly due but had simply said that, at that time, it considered that no sum was immediately payable. ABB invited Orange to submit an account. When Orange did submit their final account, some five months later, they claimed a gross sum of £270,417.04, and net payment of £203,930.04 excluding VAT. Even on Orange’s case, the final account sum was well over twice their previous application; it was over three times the March 2002 application. Orange accepted that ABB had not seen figures of this magnitude until 2 December 2002 or indeed some of the items claimed. Judge Kirkham held that if ABB had not even seen these sums, it could not be said that they had failed or refused to pay them.
As to the second submission, Judge Kirkham did not accept that claims which arose under the sub-contract (for variations, extension of time, prolongation, loss and expense, head office overheads) could be categorised as damages payable for ABB’s repudiatory breach. She rejected the submission that because damages for breach are payable immediately on breach, it followed that what were obviously sums due under the contract took on a different guise, as damages for breach, and were thus in some way related back to the date of ABB’s breach. Judge Kirkham held that sums which were obviously sums due under the contract (eg claims for variations or additional work, claims for prolongation of the contract period) could not be re-categorised in that way. She held that there was a difference between sums payable as a result of Orange’s accrued rights under the sub contract and damages for breach of the sub contract. In the final account, almost all of the sums claimed fell into the first category. Only the very small sum of £ 194.78 claimed in the final account was a sum which was directly related to the breach of contract claim. Even that sum was not claimed until the final account submitted in December 2002.
Judge Kirkham held that there was no dispute as at 6 July 2002 as to the amount payable to Orange, whether as damages for ABB’s breach of contract or as sums due under the sub contract.
Orange’s alternative case was that the material dispute arose on or about 2 December 2002 when Orange delivered its comprehensive final account statement and ABB neither admitted that the sum claimed was due nor did they pay it.
ABB’s first submission on Orange's alternative case was based on the contractual machinery as follows:
Judge Kirkham held that the effect of repudiation was to bring the sub-contract to an end. There was thus no longer a mechanism by which Orange could pursue claims according to contractual procedures. Orange was entitled to what would have been due to them but for ABB’s repudiatory breach. Orange's entitlement should be calculated in accordance with the contractual mechanism (e.g. variations should be valued as the sub-contract required) but the contractual requirements as to the timing for dealing with such matters was no longer applicable once the sub contract had terminated. Orange had to prove an entitlement under the sub contract but, by reason of termination by ABB’s repudiatory breach, were no longer bound to comply with the provisions of the clauses to pursue such claims.
Judge Kirkham held that if she applied the simple test in Halki, she had to decide whether ABB had refused to admit or failed to pay Orange’s final account by the time Orange issued its notice to adjudicate on 6 January 2003. Orange made its claim on 2 December 2002. By 6 January 2003, ABB had not admitted the claim nor had they paid it. Judge Kirkham held that on this test a dispute had arisen.
ABB's second submission on Orange's alternative case was that the delivery of a final account on 2 December 2002 and service of a notice to adjudicate on 6 January was an incredibly short period of time. Orange took no steps for five months (from July until December) then filed its final account and expected immediate response. ABB was faced with a much bigger claim than had previously been intimated and had to do so over the Christmas and new year period when the industry shuts down. ABB immediately instructed an investigator to assist. ABB suggested a reasonable timetable: they would respond by 20 January, if no agreement had been reached within seven days, they were willing to submit to adjudication to the first adjudicator to decide what sum was due to Orange. Orange had said in a letter dated 13 December 2002 that they would revert on ABB’s request, but did not do so; instead, they simply served the notice to adjudicate. ABB submitted that it would be bizarre, unreasonable, absurd and unworkable to conclude that a dispute had arisen before 20 January, the date which ABB had put forward as the date by which they would have completed their evaluation or would submit to adjudication.
Judge Kirkham held that in view of Forbes J’s approval of the test in Sindall, she had to consider whether, as at 6 January 2003 when Orange served its notice to adjudicate, the process of discussion or negotiation had ended and whether there was something which needed to be decided.
Judge Kirkham stated that she had found this aspect of the application difficult. She held that on balance by 6 January 2003, sufficient time had elapsed for evaluation then any discussion or negotiation of Orange’s claim. She held that holidays at any time of year were a practical problem which companies had to deal with and it was not fair that a company should be stood out of substantial sums of money simply because some in the industry did not work over the Christmas and new year holiday. Judge Kirkham recognised that Orange had not let ABB know that it did not accept the latter’s suggestion to consider matters by 20 January. On the other hand, there was no agreement between the parties that Orange would hold off until 20 January. Judge Kirkham held (if it was right to apply the approach in Sindall) that, by 6 January 2003, the process of negotiation and discussion of Orange's claim had come to an end so that a dispute then arose. She recognised that ABB's appointed investigator was already familiar with the project and that ABB had by then been in possession of the final account for about a month.
Judge Kirkham held that the Adjudicator had jurisdiction to decide as he did in both decisions, and Orange was entitled to judgment.