Adjudication
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KEYWORDS: |
Adjudication, Housing Grants, Construction and Regeneration Act 1996, interpretation of adjudicator's decision, final and binding, set off, notice of withholding, termination, valuation, IChemE Brown Book, Clause 38, Clause 40, Judge Humphrey Lloyd QC. |
The decision of HH Humphrey Lloyd QC in Gerris Handelsgesellschaft GmbH v Les Construction Industrielles de la Mediterrannee S.A. [2005] EWHC 499 (QB) decided on 11 February 2005 is of interest because it shows the practical approach taken by the Courts in the interpretation of adjudicator's decisions. The familiar issue of the status of an adjudicator's decision in relation to the payment provisions of the Contract was also raised.
CNIM was the main contractor for the design and construction of a waste incineration plant at Marchwood in Hampshire. Geris was a subcontractor to CNIM for the design, supply and erection of a geodesic dome to cover the plant. The sub-contract was in the standard form of the Institution of Chemical Engineers, Model Form for Process Plant ("the Brown Book").
The work did not proceed as originally intended. There was delay, for which in part CNIM was responsible and, in part Geris was responsible. On 15 July 2004 before Geris had completed all its work - about 25 percent of the work by value had not been completed - CNIM terminated the subcontract under the provisions of Clause 40 for failure to proceed regularly and diligently (and indeed possibly for other defaults).
On 12 November 2004 Geris gave notice of adjudication. Geri's claim was based upon the action by CNIM being a repudiation of the subcontract. Geri claimed payment for work carried out before the alleged repudiation and for damages and loss arising from the alleged repudiation. CNIM made claims in its response in the adjudication.
The adjudicator gave his decision on 14 January 2005. Geri then applied to Judge Lloyd for summary judgment in order to enforce the decision of the adjudicator. The amount claimed was £341,176 including interest and VAT comprising four sums:
The parties agreed that the subcontract meets the requirements of s. 108 of the Housing Grants, Construction and Regeneration Act 1996.
CNIM's case was that whatever the adjudicator was asked to decide, he did not decide that any amount had then to be paid by CNIM to Geris. He decided only amounts that might be payable subject to CNIM's rights of set-off which he upheld but which he was not able to and did not quantify. Geris do not accept that reading of the decision.
Judge Lloyd considered that CNIM's case essentially depended upon the meaning to be given to the adjudicator's decision. Judge Lloyd drew the conclusion from examination of the decision that both sides were seeking decisions from the Adjudicator which would uphold their claims and which would give them money. He also concluded that in order to reach any such decision the Adjudicator was required to decide whether or not the termination under the contract was lawful, not merely because of the counterclaims and other claims which CNIM raised, but because of CNIM's attitude towards Geris' right to payment.
Judge Lloyd examined the adjudicator's decision which he observed proceeded in a clear and logical manner. Although the adjudicator was not required nor requested to give reasons, very helpfully and commendably, he provided some guidance to the parties as to the way his mind was working when he reached conclusions on the matters that he did in fact decide.
The adjudicator decided that the termination of the Subcontract by CNIM was lawful and rejected Geri's claim for loss of profit and other claims of Geris consequent on termination.
He decided that the two invoices for £124,334 and £109,166 should have been paid and that CNIM could not set off the monies from any subsequent payments without the agreement of Geris.
The adjudicator then decided the amount that might be due to Geris under the terms of the contract prior to termination as £8,100 as follows:
The adjudicator recorded that he found that CNIM was entitled to the above liquidated damages for delay (different from the additional cost of completing the subcontract works). Judge Lloyd considered that at that point the adjudicator was clearly regarding the claim for damages for delay as something to which the CNIM was entitled under Clause 38. Clause 38.12 set out the right of set-off in the following terms:
"38.12 Without prejudice to any other remedy which the Contractor may have, the Contractor shall be entitled to deduct from any payments due or becoming due to the Subcontractor under the Subcontract, any sums which are due from the Subcontractor to the Contractor under the Subcontract."
The adjudicator valued the backcharges provisionally at £168,424 "until CNIM provide more detailed information".
The adjudicator did not decide Geri's claim for loss and expense arising from delay to the subcontract works and for disruption caused to the subcontract works because he considered that he did not have jurisdiction to do so since the claim arose too late to be dealt with fairly. Judge Lloyd considered that the adjudicator took the view that no crystallised dispute had arisen at the date of the notice of reference which would have justified him treating the claim as a matter within his jurisdiction.
Similarly, the adjudicator did not decide other claims either of Geris and of CNIM. On the matter of the two sums of £6,048 and £6,250 Judge Lloyd considered that reading the decision as a whole, by this stage of the adjudicator's analysis of the claims, the disputes were being valued as part of the value of the work done by Geris at the date of termination and were subsumed in the decision as to the £8,sum of 100.
The adjudicator considered some of the counterclaims of CNIM including those for liquidated damages and the back charges but was unable to reach a firm conclusion on some. He declined to consider the costs of completion claimed by CNIM at £2,112,075 for want of jurisdiction. He declined to consider CNIM's claim for lack of productivity which amounted, it was said, to some £659,834.56. So too other claims, eg. lack of productivity (£399,932.13); prolongation etc (£365,299), loss of overheads (£959,821.64).
Judge Lloyd considered that all of these claims were ones which, although declined on the grounds of jurisdiction, were ones which, on the face of it, might well be claims to which a party in the position of CNIM might have some entitlement even if not as much as sought.
Under clause 45.9 the adjudicator was bound to
"determine and take into account any matter ("Cross -claim") raised by the respondent to the notice to refer by way of defence or set-off or counter claim, provided such matter arises under this Agreement".
The adjudicator's decision was:
"I find that CNIM is entitled to exercise its rights of set off."
The adjudicator's reason was:
"CNIM's rights of set off are protected under Clause 38.12 of the subcontract."
At the end of his decision, although the Adjudicator made certain specific decisions in relation to payment of his fees, he did not summarise the upshot of his consideration of the claims and counterclaims of the parties. Significantly he did not express them as a sum of money owing by one party to the other.
CNIM's principal reason for the resistance to Geris's application for enforcement was that the adjudicator had made no order for payment apart from his fees.
CNIM relied upon this as indicating that all the adjudicator was doing was something which the parties themselves might not have contemplated but which, in the light of his decision about not being able to deal with certain claims, principally through lack of jurisdiction, was necessarily inevitable, as he was not able to resolve all the disputes that had been presented to him. CNIM submitted that the decision should be read as the adjudicator's best decisions as to the constituent elements of the amounts of the claims and disputes which he could resolve, leaving the parties ultimately to resolve the outstanding ones themselves or to start another adjudication. One would then be able to see how the balance of the account might be struck in favour of Geris or CNIM.
Geris argued that that was not the interpretation to be given to the decisions. Each section of the decision was to be considered on its own. The first Section of the decision related to the two principal and large amounts and was a clear decision of entitlement that had arisen prior to the termination, and Geris was entitled to payment of those amounts.
CNIM argued that that was not the correct construction and that CNIM had its countervailing right of set-off in Clause 38.12. In addition once there had been a termination which might be considered to be a situation equivalent to that pertaining on a repudiation, on both a proper construction of the subcontract and of the decision, there should be no payment pending the evaluation of CNIM's set offs and counterclaims. CNIM argued that the adjudicator had in part acknowledged them as sustainable, and were themselves based upon Clause 38.12.
CNIM referred to the subcontract, and for example to whether the rights in Clause 38.12 could supplant the rights available to the subcontractor, provided by the earlier parts of Clause 38. Judge Lloyd was invited to reconsider his decision in FW Cook Ltd v Shimizu (UK) Ltd [2000] BLR 199 in the light of Ferson Contractors v Levolux [2003] BLR 118. He was also referred to Rupert Morgan Building Services v David and Harriet Jervis [2004] BLR 18.
Geri submitted that Clause 38.9 gave effect to section 108 of the Housing Grants, Construction and Regeneration Act 1996 by providing that the contractor is not allowed to deduct any amount from any payment due under the subcontract without first giving notice not later than five days before the final date for payment. Clause 38.9 provided:
"38.9 If the Contractor intends to withhold payment or make a deduction from any payment due under the Subcontract, including but not limited to any sums that may be due from the Subcontractor to the Contractor, the Contractor shall give notice to the Subcontractor not later than five days before the final date for payment as defined in Sub-clause 38.7, specifying the amount he proposes to withhold and the ground for withholding payment, or if there is more than one ground, each ground and the amount attributable to it."
Given that the terms of the subcontract in the evaluation of variation and claims by the contractor led to matters which required to be included in the subcontract price, it was said that the adjudicator could not have been intending to deprive Geri of its pre-existing and accrued rights prior to termination, since it was for the instant purposes assumed that CNIM had not complied with Clause 38.9 in a way which would enable it to resist payment.
Judge Lloyd considered that where a question arose as to the construction of an Adjudicator's decision, the claim would succeed if the construction advanced by the defendant could properly be described as being fanciful, namely it was not likely to succeed, and therefore there were no realistic prospects of success. He considered that unlike a decision on the law, it might be rather easier to arrive at that conclusion since there were limits on the extent of argument about a decision.
Judge Lloyd considered it was relevant that Clause 40 of the subcontract in dealing with the question of termination stated that if the employment of the subcontractor has been terminated then under Clause 40.4 all reasonable costs incurred by the contractor in the circumstances described in Clause 40.3(a) (i.e. the cost of completion) were recoverable from the subcontractor as damages.
Judge Lloyd held that the adjudicator's decision, read in its entirety and in context, admitted only one view, and that was that in arriving at his conclusion on the matter of set-off, the adjudicator decided CNIM had an immediate right to set off the amounts that it was claiming against any amount that would otherwise have been due to Geris under the earlier provisions of the decision or otherwise. That conclusion was reached based on
Judge Lloyd observed that in coming to any net figure, the adjudicator had to take out of account, as part of his calculation, the amounts in relation to the invoices. He held that nonetheless the adjudicator's purpose was to demonstrate the overall effect of the conclusion that he ultimately reached, namely that in truth there is nothing then due to Geris.
Judge Lloyd held that that was the apparent upshot of the adjudicator's decision.
Having reached a conclusion on the meaning of the adjudicator's decision, Judge Lloyd then considered whether he should apply that conclusion.
Judge Lloyd recognised that there were a number of competing and countervailing approaches which he had found difficult to resolve.
There were powerful arguments in favour of Geris:
Geri's argument was that accordingly, unless CNIM has complied with the requirements of Clause 38.9, which for present purposes it is to be assumed that it had not, they were not entitled to raise the set offs and counterclaims on which the Adjudicator has so far not been able to reach a decision.
On the other hand there are arguments which are at least powerful to the contrary. CNIM argued that no such conclusion would not sensible. Clause 38.12 dealt with the ordinary situation when things were going, as it were, all right or at least not terribly badly. Once there had been a termination then the situation was equivalent to repudiation, not least because, amongst other things, not only Clause 38.12 but also Clause 40 itself (which was the clause relating to termination) referred on a number of occasions to the contractor's other rights and remedies. Therefore, there was to be some consonance between what would happen if a contractor elected to treat a subcontract as repudiated, and the provisions in the subcontract where there has been a formal termination for the subcontractor's default under the provisions of Clause 40.
CNIM argued that it would not make sense in those circumstances, where the work was not being finished by the main contractor, for the contractor then to have to give notices to protect its position and to claw back the value of the work done by it.
Judge Lloyd observed that one of the reasons why the issue was essentially difficult to resolve was that Clause 40 in the Model Form was not as full as other Model Forms. Strangely, since the situation was as common as many others which are the subject of provisions in the particular Model Form, it said nothing about whether payments should or should not be made.
Geri placed considerable reliance on the decision in Ferson v Levolux.
Judge Lloyd considered that the decision was not of direct relevance to the point which he had to decide, which was solely concerned with the construction of the Adjudicator's decision. Nonetheless he considered the decision since there might be a question about the tenability of the adjudicator's decision or the interpretation of it.
He considered all three judgments in order to determine the ratio decidendi. He considered that the point there at issue turned upon the relevant clause in the contract, to which Longmore L.J. referred to expressly. Clause 38A.9 said:
"... The contractor and subcontractor shall comply forthwith with any decision of the adjudicator and shall submit to summary judgment/decree and enforcement in respect of all such decisions."
Longmore L.J. thought that the answer was primarily one of construction of the subcontract in question. That was also the view taken by Mantell L.J., who gave the leading judgment. He said that certain clauses 29.8 and 29.9 - had to be read as not applying to monies due by reason of the Adjudicator's decision. His reasoning was not elaborated on. Thus the ratio of Ferson, was that Clause 38A.9 of that subcontract was decisive of the rights and obligations of the parties.
For that reason, Geri placed weight upon the provision in the special conditions of Clause 45, which was argued as being comparable, such as clause 45.6, but notably, Clause 45.8:
"If either party does not comply with the decision of the Adjudicator the other party shall be entitled to take proceedings in the Courts to secure such compliance pending any final determination of the referred dispute or difference pursuant to Sub-clause 45.6."
Judge Lloyd considered that in one sense, that clause stated the obvious. It was perhaps in fact asserting a right to be paid notwithstanding, as it were, the arguments being advanced by CNIM. Judge Lloyd considered that Clause 45.8 was certainly capable of being given the meaning given to it by Geri, but was equally capable of being read as simply a declaratory provision that did not prevented a party going to the courts by reason of the fact that the dispute or difference may ultimately have to be decided under clause 45.6.
"45.6 The Adjudicator's decision is binding upon the parties until finally determined by legal proceedings or by agreement."
Judge Lloyd considered that the condition was certainly appropriate to a contract which was not subject to the Act (although this contract was), because otherwise it was redundant as a statement of the obvious.
Judge Lloyd decided that the language of Clause 45.8 was not to be treated as directly equivalent to the provision considered in Ferson or expressing the same intention. Judge Lloyd did not consider that Clause 45.6, in stating that the Adjudicator's decision was binding upon the parties, was decisive. The decision was binding and therefore the argument led back to the adjudicator's decision.
Judge Lloyd held that CNIM had realistic prospects of success in maintaining that the decision should not be read as giving rise to an immediate right to payment of the amounts for which Geri sought payment.
There was some argument about whether there might in all the circumstances be a right to an equitable set off.
Judge Lloyd considered that if it were necessary for him to reach a decision, he would prefer the argument that in the context of the adjudicator's decision, having regard to the policy of Parliament, that the discretion to allow an equitable set off should only be exercised, as Geri submitted, in the rarest and most exceptional circumstances.
Judge Lloyd observed that ordinarily to allow a defendant to rely upon an equitable set off to postpone or to defeat enforcement of and adjudicator's decision would be counter to the public policy as set out by the Act. He would not therefore exercise such discretion in favour of CNIM.
Despite his observations on equitable set-off, Judge Lloyd dismissed Geris' application.
It is clear from the judgment of Judge Lloyd that the adjudicator did not resolve all the matters between the parties and particularly the cost to CNIM of completing the work. He did however decide that two invoices for sizeable amounts should have been paid, and his calculation of the balance owed on the account took these amounts out of the calculation. This can only have been on the basis that payment was to be made. It is difficult therefore to understand why this part of the adjudicator's decision was not enforced.
The judgment however turns very much on the interpretation of the particular adjudicator's decision. Judge Lloyd held that the proper interpretation of the adjudicator's decision was that nothing was due. It could be that Judge Lloyd was concerned that the arbitrator did not deal adequately with CNIM's claim for the consequences of the termination, which it appears he was bound to do under the Subcontract (clause 45.9).
The judgment emphasises the importance of adjudicators stating clearly their conclusion and whether or not payment is to be made.