Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, Jurisdiction, Section 107(2)(c), Section 107(3), variation, oral agreement, evidence in writing, dispute, Judge Bowsher. |
In Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2002] Judge Bowsher considered two issues. The first issue was whether Section 107 of the 1996 Act and particularly Sections 107(2)(c) and 107 (3) and the requirement for contracts to be in writing, limited the jurisdiction of an adjudicator to consider a contract varied by oral agreement. He distinguished variations under a contract from radical/fundamental changes to the contract. The second issue was the meaning of "dispute" in adjudication. Judge Bowsher based his decision on arbitration cases.
Devonport owned and occupied Devonport Royal Dockyard. In 1997 the Ministry of Defence engaged Devonport, effectively as a main contractor, to upgrade the dockyard.
Devonport retained Carillion as subcontractor to upgrade No. 9 dock and provide new buildings with associated infrastructure. The contract was contained in two documents, a form of Sub-Contract Agreement and an Alliance Agreement, both dated the 10th March 1999 with a target cost payment mechanism and a "Gainshare" arrangement..
Carillion proceeded with their work, but the cost went substantially above the Target Cost and the Target Cost was amended six times between September 2000 and December 2001 up to £100 million.
A meeting of the Alliance Board took place on the 30th October 2001 to revise the payment mechanism. Carillion stated that at that meeting there was a binding oral agreement changing the payment mechanism to cost reimbursable without the "Gainshare". The parties could not agree on the fee but did agree to leave it to the Star Chamber, to which differences were to be brought. The Star Chamber did not agree on the level of fee to be allowed and it was never agreed.
After the alleged oral agreement Carillion submitted its Application No. 33 on the 16th April 2002 to Devonport in respect of Costs and Fee following achievement of Milestone 33 of £121,522,511.29.
Devonport questioned the application and no payment was made, although on earlier applications Devonport had paid £110 million.
Carillion gave notice of adjudication on the 6th August 2002 seeking the sum outstanding on Application No. 33.
The adjudicator was appointed on the 12th August 2002. The adjudicator issued his decision on the 24th September 2002 deciding that
The Adjudicators decision was not honoured.
Carillion applied for summary judgment before Judge Bowsher in the amount awarded by the Adjudicator. Devonport applied for summary judgment on their counterclaim and for declarations that
The agreement between the parties contained no provision for adjudication, and so if there was any provision for adjudication it was under the Scheme. Devonport submitted that the Adjudicator did not have power to decide his own jurisdiction and the question whether there was an oral agreement was a step in deciding his jurisdiction, though not decisive. Devonport contended that the Adjudicator's decision was not binding because the adjudicator had no jurisdiction to make it.
There were therefore two issues to be decided by Judge Bowsher
The dispute about the meeting of the 30th October 2001 was that
Judge Bowsher found that the documents to which he had been referred:
Judge Bowsher observed that by Section 107, for the purposes of the relevant part of the Act a construction agreement must be in writing.
In order to decide the issue, Judge Bowsher assumed that there were an oral agreement to the effect found by the adjudicator, and asked would it be, within the meaning of the Act, an agreement in writing? He observed that Section 107 provided that an oral agreement may be treated as an agreement in writing
Judge Bowsher held that the judgment by the Court of Appeal in RJT Consulting v. D.M. Engineering [2002] BLR 217 was authority for the following propositions:
Judge Bowsher observed that the judgment of Auld L.J. differred in terms from the judgments of Ward and Walker L.J.J., but it was unnecessary to consider whether Auld L.J. was actually differing from his brother judges or merely explaining and elaborating on what they said. The difference, if any, was immaterial for the instant cae. The whole point of the alleged agreement was that the contract would become cost reimbursable. Judge Bowsher held crucially that within the context of Auld L.J's judgment, it was a material term and therefore must be evidenced in writing.
Judge Bowsher referred to Grovedeck Ltd. v. Capital Demolition Ltd. [2000] BLR181, which he observed was approved by both Ward L.J. and Walker L.J. in RJT Consulting v. D.M. Engineering [2002] in which it was held that disputes as to the terms, express and implied, of oral construction agreements were not readily susceptible of resolution by a summary procedure such as adjudication and Parliament intended that such disputes should not be determined by Adjudicators under the Act.
Judge Bowsher referred to the judgment of Walker L.J. in RJT Consulting v. D.M. Engineering [2002] in which he held that it was inappropriate for an Adjudicator to have to deal with the disputes which arose as to the terms of an oral contract.
Judge Bowsher held that these considerations were particularly important in the instant case where the adjudicator formed a view about the disputed oral agreement vital to his decision on the basis of conflicting documents without hearing oral evidence though, in fairness to him, the parties had agreed that there should be no hearing.
Judge Bowsher held that the agreement found by the adjudicator was not evidenced in writing within the meaning of s.107(2)(c).
Judge Bowsher then turned to consider s.107(3) which provides that where parties agree otherwise than in writing by reference to terms that are in writing they make an agreement in writing. Judge Bowsher held that Section 107(3) had to be read in conjunction with the whole of the first section of s.107(1) of the Act which stated that the provisions of that Part applied only where the construction contract was in writing, and any other agreement between the parties as to any matter was effective for the purposes of this Part only if in writing.
Judge Bowsher was unsure what situation was envisaged by s.107(3), unless it be a rare situation where party A approaches party B with a draft written agreement containing all the vital terms, they read it, and then shake hands on it as an agreed deal. He observed that seemed to be covered by s.107(2)(a). Judge Bowsher held that the Act did not provide for adjudication in relation to an alleged fundamental variation of a construction contract made orally and without writing. Any contention to the contrary was directly inconsistent with s.107(1) of the Act.
Carillion relied upon the judgment of Judge Thornton in R G Carter Ltd. v. Edmund Nuttall Ltd 21st June 2000
"Thus so long as it is either established or agreed that there is a contract in existence between the parties, that it is a construction contract ... any other dispute as to the terms of the construction contract is as much a dispute arising under the contract as would be a dispute as to the working through of any terms as to the valuation machinery."
The Court of Appeal in RJT Consulting v. D.M. Engineering [2002] supported that judgment stating that
"Once jurisdiction to refer the matter to arbitration was established the Judge held, and in my judgment rightly held, that it was proper within that adjudication to decide whether or not a particular term had been incorporated into the contract. The scheme would be emasculated if a party were able to deprive the Adjudicator of his power to decide simply by putting up an argument that some term was or was not incorporated into an agreement that otherwise was accepted to be in writing."
Judge Bowsher observed that once a construction agreement in writing was before an adjudicator he had the jurisdiction to construe its express terms and to decide what, if any, terms were to be implied or incorporated by reference. He held that it was quite different to suggest that once a construction agreement was before an adjudicator he had jurisdiction to decide on the existence of an oral agreement not evidenced in writing just because it followed and amended the written agreement.
Judge Bowsher held that the oral agreement did not come under the heading referred to in the construction industry as "Variations made pursuant to a term of the contract". He held that what was in issue was an alleged oral agreement that radically changed the written agreement (if it was made). Judge Bowsher held that the citations from the judgments of Judge Thornton and the Court of Appeal were not intended to and did not apply to the sort of agreement in the instant case. Judge Bowsher held that the adjudicator did not have jurisdiction to enter on the adjudication.
Judge Bowsher expressed no view as to whether there was or was not an oral agreement in the terms alleged. To determine that question required oral evidence and cross-examination.
The next issue on jurisdiction was whether a relevant or adjudicable dispute in relation to the claim sought to be enforced had arisen by the 6th August 2002, the date of Carillion's notice of adjudication.
Judge Bowsher considered that whatever his final decision on this point, it would not affect the overall result having regard to the finding he had already made on lack of jurisdiction.
Devonport argued that although there had been a refusal to pay on Application 33, subject to the giving of further information, it was not until the 25th July 2002 that Carillion put forward anything like the basis on which they claimed in the adjudication, and on the 1st August 2002 Devonport asked for further information that was not given before the notice of adjudication. Until that information was given Carillion could not know whether or what to pay. Carillion, it was said, served its notice on the 6th August 2002 without providing the clarification, information and time requested by Devonport, and therefore without affording Devonport any proper opportunity of considering and accepting or rejecting the claims first made on the 5th July 2002.
Judge Bowsher referred to the judgment in Ellerine Bros. (Pty.) Ltd. v. Klinger [1982] 1 W.L.R.1375 at 1381where Lord Justice Templeman said, in reference to s.1(1) of the Arbitration Act 1975
"... if letters are written by the plaintiff making some request or some demand and the defendant does not reply, then there is a dispute. It is not necessary for a dispute to arise that the defendant should write back and say 'I don't agree'. If on analysis what the plaintiff is asking or demanding involves a matter on which agreement has not been reached and which falls fairly and squarely within the terms of the arbitration agreement, then the applicant is entitled to insist on arbitration instead of litigation."
Then at p.1383 Lord Justice Templeman quoted the statement of Mr. Justice Kerr in Tradax International S.A. v. Cerrahogullari T.A.S [1981] 2 Ll.Rep.169 at 163, and said
"... as I understand it, the judge is saying--and I agree--that silence does not mean consent. If you can point as was the case in London & North Western & Great Western Joint Railway Cos. v. J.H. Billington Limited [1899] A.C.79, to an express or implied agreement to pay a particular sum then there is no dispute and the action can proceed. But the fact that the plaintiffs make certain claims which if disputed would be referable to arbitration and the fact that the defendant then does nothing--he does not admit the claim, he merely continues a policy of masterly inactivity-- does not mean that there is no dispute. There is a dispute until the defendant admits that the sum is due and payable as Kerr J. said in the Tradax case."
Judge Bowsher considered that the instant case was obviously different. Devonport did not just ignore Application 33, they asked for further information. That was an every day occurrence in the construction industry and if every request for information was regarded as a dispute leading to adjudication there would not be enough adjudicators to go round.
The decisions in Tradax and Ellerine were considered by Judge Gilliland Q.C. in Cruden Construction Ltd. v. Commission for the New Towns [1995] 2 Ll.Rep.387 in which he said
"... where a person has not in fact been told and is unaware in what respects he is alleged to have broken his obligations, it is in my judgment quite impossible to say that the matter is one on which agreement has not been reached, at least where further information about the matter is being sought. .... No details had been given by the defendant to enable the plaintiff to make any kind of informed decision in relation to any of the matters which were being alleged by the housing association let alone how those allegations affected the plaintiff.
I accordingly hold that no dispute or difference existed between the plaintiff and the defendant within the meaning of cl.35 when the notice of arbitration was served and accordingly that notice was in my judgment ineffective to commence a valid arbitration."
Judge Bowsher agreed with Judge Gilliland's statement of principle and with his application of principle to the facts of that case. He then considered how the principle should be applied to the facts of the instant case. He considered that it would be most undesirable if a practice grew up of examining in minute detail the terms of letters between the parties to ascertain the precise details of any dispute there set out, and then compare those details with the details of what was put before the adjudicator.
Judge Bowsher considered that a broader approach was required. Application No. 33 was made and it was not paid. In one sense there was a dispute. The paying party was denying that payment was due at least until some verification was forthcoming. But Devonport were not denying the claim outright, nor were they ignoring it; they were asking for clarification. The best approach to clarification that they got was so close in time to the notice of adjudication that they had no opportunity to respond to it. The conduct of the adjudication indicated that, if given a reasonable opportunity to respond, there would have been a dispute, but that was not the point.
Judge Bowsher took the view that this was a case where Devonport at the date of the adjudication notice
"... has not in fact been told and is unaware in what respects it is alleged to have broken his obligations."
Judge Bowsher therefore found that on this additional ground the adjudicator was lacking in jurisdiction. Judge Bowsher expressed considerable sympathy with the adjudicator on this point. He could only have discovered lack of jurisdiction by a great deal of reading, which could only have taken place after he had embarked on the adjudication and, in any event, he had no power to decide his jurisdiction.
Judge Bowsher rejected Carillion's application for summary judgment. He did not make the declarations as he viewed them as unnecessary. Judge Bowsher considered, subject to further argument, that the action as a whole ought to be dismissed. The action was founded on the adjudicator's decision, not on the underlying facts. Dismissal of the action would not prevent a further action based on those underlying facts.
The requirement for a construction contract to be in writing continues to create problems. Adjudicators are generally capable of hearing, and deciding on the basis of, oral evidence. The restrictions of the 1996 Act are artificial.
The situation based on the judgment of Judge Bowsher is that an agreement which fundamentally or radically changes a contract introduces a material term and must therefore be "in writing" as defined in the 1996 Act. The situation may be different for variations pursuant to the terms of the contract.
As to the definition of "dispute" in adjudication, Judge Bowsher's commonsense approach must be correct. A party must be aware of the substantial allegation and in addition have sufficient opportunity to make an informed decision. There may be a dispute however through "masterly inactivity" in dealing with the claim.