Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, CIC Model Adjudication Procedure, retention, jurisdiction, mistake, insolvency, stay, Court of Appeal. |
The judgment of the Court of Appeal in Bouygues UK Ltd v Dahl Jensen UK Ltd [2000] dealt with two separate issues. The first was the characterisation of a mistake by the Adjudicator and when this may prevent enforcement of his decision. The main judgment on this issue was given by Lord Justice Buxton. The second issue was whether it was appropriate to seek to enforce a decision of an adjudicator when one of the parties was in liquidation. The main judgment on that issue was given by Lord Justice Chadwick.
The appeal arose from the judgment of Dyson J in Bouygues UK Ltd v Dahl Jensen UK Ltd [1999] on an application by Dahl-Jensen for summary judgment under Part 24 of the CPR to enforce an award of an Adjudicator.
Lord Justice Buxton observed that the adjudication procedure under section 108 of the Housing Grants and Reconstruction Act 1996 provided that the parties may at any time refer disputes to adjudication and, by section 108(3), the decision of the adjudicator shall be binding until the dispute was finally determined by legal proceedings or arbitration.
Lord Justice Buxton considered that the purpose of the adjudication procedure was to enable a quick and interim, but enforceable, award to be made in advance of the final resolution of what was likely to be complex and expensive disputes. That feature was reinforced by the provisions of the Construction Industry Model Procedure, by which the adjudication in the instant case was governed. Rules 4 and 5 of that procedure provide that the Adjudicator's decision was to be binding until the dispute was finally determined by legal proceedings, by arbitration or by agreement and the Parties were required to implement the Adjudicator's decision without delay whether or not the dispute was to be referred to legal proceedings or arbitration.
Lord Justice Buxton approved the statement by Dyson J in Macob v Morrison [1999] BLR 93 at page 97:
"It is clear that Parliament intended that the adjudication should be conducted in a manner which those familiar with the grinding detail of the traditional approach to the resolution of construction disputes apparently find difficult to accept. But Parliament has not abolished arbitration and litigation construction disputes. It has merely introduced an intervening provisional stage in the dispute resolution process. Crucially, it has made it clear that decisions of adjudicators are binding and are to be complied with until the dispute is finally resolved."
Bouygues was the main contractor for building works under a PFI contract. Dahl-Jensen was the mechanical sub-contractor. The sub-contract contained both an arbitration and an adjudication clause, and also provided for retention of 5% of the contract price, pending certification under the main PFI contract. In due course Bouygues, being dissatisfied with Dahl-Jensen's work, determined Dahl-Jensen's employment and arranged for the subcontract work to be completed by others.
Dahl-Jensen issued a notice to adjudicate, claiming payment for work done but allegedly not valued under extensions of the sub- contract, and also damages for breaches by Bouygues of the sub-contract and for its wrongful repudiation. Bouygues shortly thereafter issued its own notice to adjudicate, claiming the refund of payments already made in respect of work allegedly overvalued under the sub-contract, damages for delayed completion, and damages for costs incurred by the termination of Dahl-Jensen's employment. Both notices were referred to the same adjudicator. It was agreed that he should treat Bouygues' claim as a counter-claim to the claim by Dahl-Jensen.
Much of the dispute concerned the valuation of work performed under the sub-contract before its termination, Dahl-Jensen claiming in respect of extensions of the works and Bouygues claiming that work within the contract had been overvalued. That meant that the Adjudicator had to review the whole of the progress of the sub-contract, and not just the items specifically arising out of its termination. The Adjudicator set out his conclusions in more than one form in his very detailed award.
The Adjudicator made no award on Bouygues's claim in respect of overpayment based on excessive valuation, subject to Bouygues right to set-off against payments already made any losses caused by breaches by Dahl-Jensen in the performance of the contract. The Adjudicator valued the contract works, the original tender sum plus extensions, at a sum of £7,240,000 "gross" - without any deduction of the retention monies. At the date of the award the retention monies had not yet become due for payment. The Adjudicator then took three further steps:
The Adjudicator's award was therefore that Bouygues should pay that sum of £208,000 to Dahl-Jensen.
Bouygues protested and pointed out that the effect of the award was to require Bouygues to pay the 5% retention to Dahl-Jensen, even though it was not yet due under the contract.
It was not challenged in the appeal that the Adjudicator was wrong to make an actual award requiring payment under that contract without taking account of the fact that the 5% of the contract sum that represented the retention monies was not yet due for payment.
The award was wrong. The issue was whether or not that was a ground on which its enforcement could be resisted.
Lord Justice Buxton observed that Dyson J had directed himself that he should approach that question according to the same principle as applied in the case of an expert valuer as stated by Knox J in Nikko Hotels (UK) Ltd v MERPC Plc [1991] 2 EGLR page 103, at page 108B, that if he has answered the right question in the wrong way, his decision would be binding. If he had answered the wrong question, his decision would be a nullity.
Bouygues argued that the concept of answering the wrong question extended to the instant case where the Adjudicator had in fact decided something that fell outside his jurisdiction, namely the release of the retention monies. Bouygues argued that the Adjudicator's award therefore could not stand, even if it was clear, at least on the face of the documents used in the award, that he did not intend or purport to rule on the retention monies.
Lord Justice Buxton held that he was satisfied that Dyson J was right in rejecting Bouygues' argument. Although the effect of the Adjudicator's award was as Bouygues said, that was not because he answered a question about the release of the retention monies. No such question was put to him by the parties, and he did not pose any such question to himself. The case was quite different from, for example, that hypothesised by Dillon LJ in Jones v Sherwood [1992] 1 WLR at page 287A, where an accountant instructed to value a parcel of shares valued the wrong parcel, either by extent or by identity.
Lord Justice Buxton held that in the instant case the Adjudicator answered exactly the questions put to him. What went wrong was that in making the calculations to answer the question of whether the payments so far made under the sub-contract represented an overpayment or an underpayment, he overlooked the fact that that assessment should be based on the contract sum less the retention, rather than on the gross contract sum. That was an error, but an error made when he was acting within his jurisdiction. Provided that the Adjudicator acted within that jurisdiction his award stood and was enforceable.
Bouygues contended that such an outcome was plainly unjust in a case where it was agreed that a mistake had been made, and particularly in the instant case where Dahl-Jensen was in insolvent liquidation, and therefore the eventual adjustment of the balance by way of arbitration would in practical terms be unenforceable on Bouygues' part.
Lord Justice Buxton held that Dyson J was quite right when he pointed out that the possibility of such an outcome was inherent in the exceptional and summary procedure provided by the 1996 Act and the CIC Adjudication Procedure.
Lord Justice Buxton held that in any event unfairness in a specific case could not be determinative of the true construction or effect of the scheme of adjudication in general.
When Bouygues suggested to the Adjudicator that an arithmetical error had been made in the award and invited him to correct what was described as a slip, the Adjudicator replied that the calculations correctly reflected his intention and did not contain a clerical mistake or error arising from an accidental slip or omission.
Bouygues contended that, by saying that the calculations set out in the award correctly represented his intention and contained no clerical error or accidental slip, the Adjudicator was asserting that he indeed had intended, and had intended to rule, that Bouygues should pay Dahl-Jensen the retention monies. Accordingly, whatever might be collected from the adjudication documents read on their own, it was in fact the case that the Adjudicator had answered a question that had not been put to him and which did not therefore fall within his jurisdiction.
Lord Justice Buxton doubted whether it could ever be appropriate to look outside the objective evidence provided by the terms of the award in order to determine what question the Adjudicator had in fact answered. Bouygues disclaimed any possibility of, for instance, requiring the Adjudicator to file evidence explaining any statements made by him outside the terms of the award and then cross-examining on that evidence. Lord Jusice Buxton considered that it would be difficult to exclude such a step if investigation of the Adjudicator's subjective intentions were to be taken seriously.
Lord Justice Buxton did not consider any need to rule on that point, since he was of the opinion that the Adjudicator's letter went nowhere near to establishing the conclusion that Bouygues sought to draw from it. The Adjudicator simply replied to the contention put to him, that he had made a clerical error or slip. He said that he had not. That was a long way away from any admission or assertion that he had taken it upon himself to award the retention money to Dahl-Jensen when no claim had been made for that retention money.
Lord Justice Buxton considered that Dyson J was right both in his statement of the relevant law and in his application of it to the instant case. He therefore dismissed the appeal.
The second question raised by the appeal was whether Dyson J was right to give summary judgment to Dahl-Jensen for the amount which the adjudicator had decided Bouygues should pay.
Lord Justice Chadwick considered that in the ordinary case an adjudicator's determination under section 108 of the 1996 Act, or under contractual provisions incorporated by that section, ought to be enforced by summary judgment. The purpose of the Act was to provide a basis upon which payment of an amount found by the adjudicator to be due from one party to the other (albeit that the determination was capable of being re-opened) could be enforced summarily.
Lord Justice Chadwick observed that the instant case was not an ordinary case. At the date of the application for summary judgment - indeed at the date of the reference to adjudication - Dahl-Jensen was in liquidation.
Lord Justice Chadwick held that in those circumstances rule 4.90 of the Insolvency Rules 1986 had effect. The rule applied where, before the company went into liquidation there had been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation. An account had to be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party had to be set off against the sums due from the other. Only the balance (if any) of the account was provable in the liquidation. Alternatively (as the case may be) the amount had to be paid to the liquidator as part of the assets.
That rule was made under section 411 of the Insolvency Act 1986. Subsection (2) of that section - and Schedule 8, paragraph 12 - provided that the Lord Chancellor may make provision by rules or regulations as to the debts that may be proved in the winding up. There was no doubt that the rule had statutory force. It applied wherever there had been mutual dealings, giving rise to mutual obligations and mutual credits, between a company which subsequently went into liquidation and another party.
The effect of the rule was explained by Lord Hoffman in his speech in the House of Lords in Stein v Blake [1996] 1 AC 243. In that appeal Lord Hoffman was addressing the provisions of section 323 of the Insolvency Act 1986, which is applicable in an individual insolvency or bankruptcy.
Lord Justice Chadwick held that the provisions of section 323 of the Act and Rule 4.90 of the Rules were indistinguishable. The rule-making body, in 1986, incorporated into corporate insolvency provisions which had, for many centuries, been part of the law in relation to individual bankruptcy. What Lord Hoffman had to say about section 323 of the Act was equally applicable to corporate insolvency; to which rule 4.90 applied. At page 251 D-F Lord Hoffman explained the difference between bankruptcy set-off and legal set-off outside bankruptcy. Bankruptcy set-off affected the substantive rights of the parties by enabling the bankrupt's creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he could set off pound for pound what he owed the bankrupt and prove for or pay only the balance. So in Forster v Wilson (1843) 12 M & W. 191, 204, Parke B said that the purpose of insolvency set-off was to do substantial justice between the parties.
Lord Justice Chadwick observed that the importance of the rule was illustrated by the circumstances in the instant case. If Bouygues was obliged to pay to Dahl-Jensen the amount awarded by the adjudicator, those monies, when received by the liquidator of Dahl-Jensen, would form part of the fund applicable for distribution amongst Dahl-Jensen's creditors. If Bouygues itself had a claim under the construction contract, as it asserted, and was required to prove for that claim in the liquidation of Dahl-Jensen, it would receive only a dividend pro rata to the amount of its claim. It would be deprived of the benefit of treating Dahl-Jensen's claim under the adjudicator's determination as security for its own cross-claim.
Lord Hoffman pointed out, at page 252 in Stein v Blake that the bankruptcy set-off required an account to be taken of liabilities which at the time of the bankruptcy may be due but not yet payable, or which may be unascertained in amount or subject to contingency. Nevertheless, the insolvency code required that the account shall be deemed to have been taken, and the sums due from one party shall be set off against the other, as at the date of insolvency order. Lord Hoffman pointed out also that it was an incident of the rule that claims and cross-claims merged and were extinguished; so that, as between the insolvent and the other party, there was only a single claim - represented by the balance of the account between them.
Lord Justice Chadwick held that in those circumstances it was difficult to see how a summary judgment could be of any advantage to either party where, as the 1996 Act and paragraph 31 of the Model Adjudication Procedure made clear, the account could be reopened at some stage; and had to be reopened in the insolvency of Dahl-Jensen.
Lord Justice Chadwick observed that Part 24, rule 2 of the Civil Procedure Rules enabled the court to give summary judgment on the whole of a claim, or on a particular issue, if it considered that the defendant has no real prospect of successfully defending the claim and there was no other reason why the case or issue should be disposed of at a trial. He held that in the instant circumstances, where there were latent claims and cross-claims between parties, one of which was in liquidation, there was a compelling reason to refuse summary judgment on a claim arising out of an adjudication which was, necessarily, provisional. All claims and cross-claims had to be resolved in the liquidation, in which full account could be taken and a balance struck. That was what rule 4.90 of the Insolvency Rules 1986 required.
Lord Justice Chadwick held that those matters ought to have been considered on the application for summary judgment. But the point was not taken before Dyson J and his attention was not drawn to the provisions of the Insolvency Rules 1986. Nor was the point taken in the notice of appeal. Nor was it embraced by counsel for the appellant with any enthusiasm when it was drawn to his attention by the Court of Appeal. In those circumstances - and in the circumstances that the effect of the summary judgment was substantially negated by the stay of execution which would be imposed - Lord Justice Chadwick considered it not right to set aside an order made by the judge in the exercise of his discretion and considered that he too would dismiss the appeal.
The appeal was dismissed with costs and a stay granted.