Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, Section 105(2), primary activity, primary purpose, Section 110, Final Date for Payment, payment of adjudicators decision, Section 111, withholding notice, liquidated damages, Recorder David Blunt QC. |
In Conor Engineering Limited v Les Constructions Industrielles de la Mediterranie (CNIM) SA [2004] TCC decided on 5 April 2004, Recorder David Blunt QC was required to examined the meaning of "primary activity" in Section 105(2) of the 1996 Act. He was also required to decide whether liquidated damages could be set-off against an adjudicator's decision.
CNIM was the main contractor employed by Hampshire Waste Services Ltd to design, build and deliver a plant at Chineham, Hampshire for the incineration of waste and the generation of electricity.
CNIM, sub-contracted certain elements of these works to CEL under two contracts. The first contract (the "Boiler Contract") was for the installation of certain boiler works and incorporated CIM's general terms and conditions for construction works. The second contract (the "Pipework Contract") was for installation of pipework and incorporated CNIM's contract for Piping works. The terms of the Pipework Contract was in all material respects identical, or very similar, to the terms of the Boiler Contract.
The Boiler Contact was completed on 8 July 2002 and the Pipework Contract was completed on 11 November 2002. On 25 November 2003, CEL served Notices of Adjudication in both Contracts. The appointment of the Adjudicator was agreed. Claims for liquidated damages advanced by CNIM were referred to the Adjudicator. The Adjudicator declined to address them on ground that they had not previously been notified to CEL and that accordingly that they were not then in dispute.
In his Decisions both dated the 16 January 2004, the Adjudicator directed inter alia payment by CIM to Conor of £105,814.35 and payment by CNIM to Conor of £69,339.16, both within 14 days of the date of the Decision.
According to the Adjudicator's letter dated 17 January 2004, the Adjudicator sent the Decisions to the parties by special delivery post on Saturday 17 January 2004. CNIM received the Decisions by fax on 19 January and by courier on 20 January 2004.
CNIM did not comply with the directions for payment but sent to CEL notices claiming a right to withhold payment on the grounds of an entitlement to liquidated damages and a right of set-off. The Notices were sent under letters dated 26 January 2004, sent as attachments to an email on 26 January 2004 and by post on the 27 January 2004. CNIM's claim for liquidated damages were £134,227.76 in the Boiler Contract and £84,367.18 in respect the Pipework Contract.
CEL commenced proceedings before Recorder Blunt to enforce the two Adjudication Decisions. CNIM resisted on the basis of an entitlement to set off cross-claims for liquidated damages, which CEL disputed.
CEL's primary case was that pursuant to section 111(2) of the Act CNIM had to serve withholding notices in respect of its claims for liquidated damages, "not later than the prescribed period before the final date for payment". Section 111(3) enabled the parties to agree what the prescribed period should be. There being no such agreement, Part II paragraph 10 of the Scheme prescribed that the period was not later than 7 days before the final date for payment., CEL submitted that the Adjudicator had decided that the final date for payment was 14 days of his decision, namely 30 January 2004.
CEL's secondary case was that even if the Act did not apply, the Contracts imported the provisions of Section 111 of the Act, and that accordingly the same timetable applied, so that the result would be the same.
CNIM's case was that the Contracts, being concerned with power generation, fell outside the ambit of the Act by virtue of the exclusionary provisions of Section 105(2)(c). CNIM submitted that the Adjudications were governed exclusively by the terms of Contacts which set no time limits for notices for withholding liquidated damages and no sanctions for failure to give notice of the kind prescribed by Section 111 of the Act.
CNIM submitted that notices to withhold liquidated damages were valid and served in time because the dates of payment directed by the Adjudicator were not the final dates for payment within the meaning of Section 111(2) and in any event, time did not begin to run from, until CNIM had actually received the Decisions.
CNIM also submitted that CEL extended the date for due payment or waived the right to insist on the period, by CEL sending invoices to CNIM which were dated 31 January 2004 and provided a payment period of 30 days from that date.
Accordingly, three Issues had to be decided by Recorder Blunt:
The first issue was whether the operations being undertake by CEL for CNIM were being carried out "on site where the primary activity is....power generation" Section 105(2) of the Act.
It was common ground that "the site" meant the whole of the Chineham Incinerator site, and that "the site" could not be limited to the area were CEL's operations were actually performed - ABB Zantingh Limited v. Zedal Business Services Limited [2001] BLR 66
Recorder Blunt considered the effect of the word "is" in Section 105(2) "on site where the primary activity is....power generation". The site had been previously used for waste disposal. That use had ceased to enable the new waste incinerator and electricity generation plant to be built. The question therefore was whether it could be said that the site was one where the primary activity was waste disposal or power generation.
Recorder Blunt observed that Judge Humphrey Lloyd considered the point in ABB Power Construction Ltd v Norwest Holst Engineering 77 Con L 20. ABB had argued that it would make little sense if work done to improve an existing complex would be exempt whilst work for a new project would not. Judge Lloyd had endorsed that argument, stating that such a result would be an absurdity. Recorder Blunt agreed with that conclusion. Recorder Blunt held that "is" meant "is, or will be".
Recorder Blunt observed that in Zantingh, where diesel power generation stations were being built on sites principally dedicated to printing, Judge Bowsher had stated:
"... To make any sense of the Act, one has to look to the nature of the whole site and ask what is the primary purpose of the whole site? Is the primary purpose power generation, or, in this case, printing?"
Recorder Blunt observed that the wording in Section 105(2) was "the primary activity". What was "the primary activity" at a particular site was a question of fact. Recorder Blunt held that whilst the primary purpose of a site would always be a relevant consideration in deciding what was its primary activity, it was possible to imagine situations which could give rise to an argument that an activity embarked upon for only secondary reasons was in fact the primary activity.
The plant was built for Onyx UK as part of an integrated waste management strategy called "Integra".
CEL's case was that the primary activity on site was the incineration of domestic waste and not power generation. Some energy was generated through the production of electricity as part of the incineration process but this was a "spin off" or by-product of the incineration. It was not the primary activity on the site. CEL relied on the description given to the main contract works and the site in both contracts as "Waste Incineration Plant", "Chineham Incinerator site", the client as "Hampshire Waste Services Ltd" and the identification of the site in the technical specification as "Incinerator Site". CEL submitted that that the primary activity of the site was the burning of domestic waste and that the size of turbines for generation of electricity was such that the income generated from the sale of energy to the National Grid would not cover the cost of operating the plant. CNIM relied on the Project Integra website descriptions.
CNIM's case was that CNIM had contracted with CEL to install the boiler and piping in order to achieve power generation. If power generation had not been the primary purpose, the plant would have been fitted as a simple furnace, without the boiler and piping. The Contract was stated to be for the energy recovery achieved through the production of electricity and the liquidated damages provisions related to lack of electricity production and failure to reach a certain level of processing capacity. CNIM stated that the generation of electricity was not a mere "spin off" since the sale price of electricity production covered the cost of the investment of the energy recover plant and operational costs and the revenue was approximately £3 million a year. CNIM relied on the information on the Project Integra website which referred to the new Chineham facility as an energy recovery incinerator and stated that it was an Energy Recovery Facility and that steam produced was used to drive generators which produce electricity". CNIM submitted that the Integra website did not leave the reader in any doubt as to the primary purpose of the facilities; the purpose of the plant was to transform the waste into electricity. CNIM also referred to various extracts from Hansard and argued that it was the intention of Parliament to exclude operations associated with power generation and because such activity is concerned with precision engineering and specialist scientific plant and that a power generation facility could not cease to fall within Section 105(2)(c) simply because it was fuelled by domestic waste.
Recorder Blunt held that he was not concerned with any issue as to the primary purpose of CEL's works or as to the primary activity, on site, of CEL.
Recorder Blunt held that the extracts from Hansard were not admissible aids to construction. The wording of Section 105(2)(b) of the Act was clear. The stipulations in the speeches in the House of Lords in Pepper v Hart [1999] 1 ALL ER 42 was that Hansard should not be referred to except in the case of genuine ambiguity.
Recorder Blunt found as a fact, based on the information contained in the extracts from the website and the Contracts,
Recorder Blunt found that the plant was developed principally as a means of finding alternatives to landfill sites for the purpose of disposing of waste. The sheer volume of waste incinerated annually at the Chineham site was to be contrasted with the modest output of electricity which was generated. He accepted CEL's assertions that the generation of electricity was simply "a spin off" from the incineration process. It might be appropriate to refer to the plant as an "Energy Recovery Incinerator", but this does not lead to the conclusion that its principal purpose was power generation.
Recorder Blunt found as a fact that power generation was not the "primary activity" on the site within the meaning of Section 105(2)(c)(i) of the Act.
There were two alternatives for the final date for payment of the Adjudicator's Decisions. The first was based on the terms of the Contracts and the Scheme and the second was based on the Adjudicator's directions as to payment in his Decision.
Recorder Blunt observed that the relevant provisions of Section 110 of the Act required that every construction contract shall provide an adequate mechanism for determining what payments become due under the contract, provide for a final date for payment in relation to any sum which becomes due. The parties were free to agree how long the period was to be between the date on which a sum becomes due and the final date for payment. If and to the extent that a contract did not contain such provisions the Scheme applied. The relevant provisions of Part II of the Scheme were paragraphs 8 and 10 which stated that
CEL's primary submission was that dates for the payments specified by the Adjudicator in his two Decisions were "final" dates for payment within the meaning of Section 110 of the Act. Clause 31.13 in each of the Contracts empowered the Adjudicator
CNIM submitted that the contracts did not spell out a mechanism for calculation of a final date for payment of sums due so that Part II of the Scheme applied. The final date for payment in relation to each of the Contracts was 17 days from the date of the Adjudicator's Decisions, and that accordingly CNIM issued withholding notices in time:
Recorder Blunt held that although the Adjudicator was not requested to make and did not make any explicit findings as to the final dates for payment, he must be taken to have done so.
The adjudication provisions in the Contracts did not confer any special powers upon an adjudicator, Accordingly, the Adjudicator's powers were essentially declaratory of the parties' rights. He could not give CNIM time if it was liable to make payment to CEL.
Recorder Blunt held that the Contracts did spell out a mechanism for calculation of a final date for payments of sums due thereunder. Clause 23.3 required all payments to be made a specified number of days after the end of the month in which any invoice, prepared as required in clause 22, was received. Clause 23.3, therefore, provided a mechanism for the calculation of a final date for payment.
Recorder Blunt found that in the notice referring its claims to the Adjudicator, CEL advanced claims for payments of sums allegedly due and for interest thereon. There was only a limited reference to invoices in the Decisions, and the Adjudicator made no findings as to when specific sums which he ordered to be paid had become due. He directed that CNIM should make the payments which he found to be due to CEL within 14 days of the date of his Decisions. Recorder Blunt held that the Adjudicator must be taken to have decided, rightly or wrongly, that that was the final date under the terms of Contracts when those payments fell to be made. Even if he was erroneous in fact and law the Adjudicator's Decision would not be invalidated.
Recorder Blunt held on this basis that any withholding notice should have been served at the latest not later than 7 days before the expiry of the 14 days. It was common ground that if the 7 day period for the service of an effective withholding notice ran from the date when the Decisions were made, CNIM needed to serve such a notice on the 23 January 2004 at the latest. It was common ground that this was not done.
CNIM's second submission was based on the assumption that that the date by which the Adjudicator ordered payment was "the final date for payment". CNIM submitted that the effective date of a Decision was the date when it was received, that in the instant case the Decisions were not received until the 19th January 2004, that accordingly the last date for the service of effective withholding notices was the 26th January 2004, and that the notices emailed on that date were sufficient and in time. Recorder Blunt did not accept that argument. In each of the Decisions the Adjudicator ruled that "CNIM shall pay CEL the following sums within 14 days of his decision "; and stated that decision was made on the 16th day of January 2004.
CEL had also submitted that attachments to emails were not an appropriate form of notice for the purpose of Section 111 of the Act, but it was unnecessary to consider that submission in view of the rejection of CNIM's submissions.
CNIM submitted that CEL subsequently extended the date for due payment of the Decisions by invoices dated 31 January 2004 sent to CNIM by fax on 16 February 2004 or alternatively thereby waived the right to insist upon any shorter period. The invoices provided a payment period of 30 days from 1 January 2004. CNIM submitted that CEL thereby agreed to an extension of time for the final date of payment of the sums due under the Decisions until 1 March 2004, that consequently, the time by which notices to withhold would need to be served under the Act was, at a minimum, 7 days before the final date for payment, i.e. 23 February 2004, and that accordingly, the notices to withhold served on 26 January 2004, were served well within time.
Recorder Blunt held that these submissions were faced with the insurmountable obstacle that the instant proceedings were commenced on the 6 February 2004, having been threatened in letters dated the 28 January and 3 February 2004. These events were inconsistent with the implication of any agreement by CEL to extend the date for payment or of any representation by CEL or belief by CNIM that CEL did not intend to reply upon its strict legal rights. Recorder Blake rejected these submissions.
Recorder Blunt held that CEL was entitled to enforce the Adjudicators Decisions.
This is a further decision on the "temporal" problem of the status of a site whilst it is a construction site. Recorder Blunt dealt with this by reading in "is, or will be," into the meaning of "is" into Section 105(2) of the Act. This must be correct.
Recorder Blunt also identified the difference between primary purpose and primary activity of a site. In this case he found that the primary purpose was waste incineration and the primary activity was also waste incineration. This again is a vital distinction which may in future be an area for further consideration by the Courts. What is clear is that the Court is not concerned with the primary purpose of the construction works or the primary activity on site of the contractor.
There was no issue in this case whether CNIM was entitled to deduct liquidated damages from an Adjudicator's decision at all. Recorder Blunt observed that CEL advanced claims for payment of sums allegedly due and for interest thereon. This suggests that CEL's case was that the final date for payment had passed and with it the right to withhold payment without a notice of withholding. There was limited reference to invoices in the Decisions, and the Adjudicator made no findings as to when specific sums which he ordered to be paid had become due. If the Adjudicator had decided that the final date for payment had passed, then the issue of withholding would not have arisen subject to enforceable express terms otherwise. Recorder Blunt held that the Adjudicator must be taken to have decided the final date for payment, which was a date after his decision. It is not clear why this should be read in to the Adjudicator's Decision. He was not asked and did not make an explicit finding as to the final dates for payment. There would appear therefore no reason to characterize his order for payment as a decision on the final date for payment. Clause 25.1 however did provide that CNIM was entitled to set off liquidated damages against any payment due.
Relevant cases on the withholding issue are Parsons Plastics (Research and Development) Ltd -v- Purac Ltd [2002] CA and Bovis Lend Lease Limited v Triangle Development Limited [2002].