Adjudication
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KEYWORDS: |
Adjudication, Housing Grants Construction and Regeneration Act 1996, JCT With Contractor's Design, adjudicators fees, restitution, implied terms, Clause 41A, Clause 41C, Clause 30.9, final certificate, conclusive effect, time bar, Inner Crt Session, Lord Drummond Young. |
The opinion of Lord Drummond Young in the Outer Court of Session in Castle Inns (Sterling) Ltd v Clark Contracts Ltd [2005] CS OH178 on 29 December 2005 is an important judgment which sheds light on the nature of adjudication and the status of the adjudicator's decision including the award of his fees.
There is an incisive analysis of the relationship between the adjudicator's decisions on interim Certificates and the Final Certificate in JCT standard forms, and the effect of time-bar provisions. See the extensive commentary at the end of this article.
On 2 May 2001 Castle Inns contracted for Clark to carry out building works to provide a watertight shell accommodation for fitting out as licensed premises by others at 6-8 Methven Street, Perth. The contract was by tender and acceptance and not a formal written contract but incorporated the conditions of the Scottish Building Contract without Quantities, Contractors Design Portion (January 2000 revision), subject to certain amendments and modifications.
On 13 June 2003 Clark served a notice of adjudication on Castle Inns in relation to the sum due to be paid on interim certificate no 10. On 27 August 2003 the adjudicator issued his decision. He found that Clark was entitled to an extension of time and to payment of direct loss and/or expense and that Castle Inns had no entitlement to withhold certain sums from interim certificates nos 9 and 10. He ordered that interim certificate no 10 should be opened up, reviewed and revised, with the result that a further sum was due by Castle Inn to Clark. The adjudicator ordered Castle Inn to pay all of his fees which were paid.
On 16 September 2003 Castle Inns served a notice of adjudication for recovery of sums either under the contract or as damages for breach of contract, for alleged defects in the works and for sums paid as loss and expense to the contractor fitting out the premises. The same adjudicator was appointed adjudicator and issued his decision on 7 November 2003. He decided the value of the claim which was marginally less than the amount that had already been withheld and accordingly ordered Castle Inns to pay the balance. The adjudicator ordered that Castle Inn was liable for all of his fees in that second adjudication. Castle Inn did not pay.
On 8 October 2003 during the second adjudication, the architect issued a final certificate declaring the value of the contract sum as finally adjusted which taking into account the amounts in previous interim certificates left a balance of £249,781.06 plus value added tax to be paid by Clark to Castle Inns.
Castle Inns commenced the instant court proceedings before Lord Drummond Young and sought:
The above claim raised four issues, each of which are set out below.
Castle Inns claim for repayment of the adjudicator's fees was based on the situation where the Court determined the incidence of liability different to that decided by the adjudicator. In that case, it was argued, Clarke would have financially benefited from
"the erroneous allocation of liability in the adjudication to the extent of the amount paid by the Pursuer as a proportion of Adjudicator's fees, and as such has been unjustly enriched to the extent of that portion of Adjudicator's fees and expenses".
The main basis of the claim was therefore unjustified enrichment. Lord Young therefore proceeded to decide in principle the question whether a party which was unsuccessful in an adjudication but was subsequently successful in court in "unwinding the adjudication" was able to recover sums that he had paid towards the adjudicator's fees and expenses.
Lord Young held that any benefit obtained in consequence of a contractual entitlement cannot be challenged on the ground that it involved unjustified enrichment - the existence of a contractual right provides clear legal justification for the enrichment. He referred to and relied upon the judgment of Lord Hope of Craighead in Dollar Land (Cumbernauld) Ltd. v. C.I.N Properties Ltd. (Scotland) [1998] SC (HL) 90:
"An obligation in unjustified enrichment is owed where the enrichment cannot be justified on some legal basis arising from the circumstances in which the defender was enriched. There can be no better justification for an enrichment than that it was obtained and is being retained in the exercise of a contractual right against the party who seeks to invoke the remedy".
Lord Young considered therefore that it was necessary to examine the instant contractual scheme to discover whether it had a bearing on the ultimate liability to pay the adjudicator's fees and outlays.
Lord Young observed that Section 108(1) allowed a party to refer a "dispute" arising under the contract for adjudication. He observed that "dispute" was a word of wide significance. He observed that a dispute was something that existed prior to the reference to adjudication.
Crucially Lord Young held that that meant that liability to pay the adjudicator's fees and outlays could not be a "dispute". Subsection 108(3) made the adjudicator's decision binding until the dispute was finally determined by legal proceedings, arbitration or agreement. Clause 41A (and particularly Clause 41A.8.1) of the contract gave effect to the legal requirements of section 108.
Lord Young observed that the decision of the adjudicator was provisionally binding on the parties, but clause 41A.8.1, following section 108(3), contemplated that the court or an arbiter or the parties by agreement could in effect undo the adjudicator's decision on a dispute or difference and substitute another decision, which would thereafter be binding on the parties. When the court was involved, the mechanism that was used was an ordinary action to enforce the parties' contractual rights. Any such proceedings before the court were not an appeal. The court proceedings did not involve any reconsideration of the adjudicator's decision, but were entirely free-standing.
Clauses 41A.7.1 and .2 provided for the adjudicator to determine liability for his own fee and expenses.
Lord held that although any finding by the adjudicator on his fees formed part of his decision, nevertheless, any such finding did not relate to the dispute that was the subject of adjudication; it was merely an ancillary finding. The "dispute" that was contemplated by Section 108 and Clause 41A was something that predated the reference to adjudication, and formed the substantive subject matter of the adjudication; the finding relative to the adjudicator's fees and expenses, by contrast, was something that could only be determined at the end of the adjudication process.
Lord Young held that the adjudicator's decision on fees could not be reconsidered by the court or, presumably, by an arbiter. Such reconsideration would be contrary to the contractual scheme found in clause 41A. He gave three reasons.
The three reasons why an adjudicator's decision on his fee and expenses could not be reconsidered by the court all related to the contractual structure of clause 41A. There was a fourth practical reason based on considerations which appear to relate to the administration of justice.
Lord Young foresaw the practical difficulty of reconsidering the adjudicator's decision on matters of his fees.
He identified that Adjudication was a distinct process, with its own peculiar features which might compel an adjudicator to come to a relatively hasty decision. In court proceedings the judge had a significantly better opportunity to come to a carefully reasoned decision. It was accordingly impossible to conclude merely from the fact that the court reached a different decision that the adjudicator's decision was wrong. The decisive factor in the court's decision might not have been presented to the adjudicator, or might have been presented in such a way that its significance was obscured. Matters may be argued before the adjudicator that were not argued before the court.
Lord Young observed that any apportionment was an extremely difficult task for a tribunal that had not heard the same arguments as the adjudicator. So for sound practical reasons he held that an adjudicator's decision on liability for his fee and expenses could not be reopened in any proceedings before the court.
Castle Inns raised two additional arguments which allowed Lord Young to further develop his analysis: .
Finally, Castle Inns argued that the court had power to alter the adjudicator's decision on liability for his fee and expenses by virtue of clause 41C.2 of the contract which provided:
"When any dispute or difference is to be determined by court proceedings, then insofar as the Conditions provide for the issue of a certificate, or the expression of an opinion or the giving of a decision, requirement or notice such provision shall not prevent the Court, in determining the rights and liabilities of the parties hereto, from making any finding necessary to establish whether such certificate was correctly issued or opinion correctly expressed or decision, requirement or notice correctly given on the facts found by the Court; nor shall such provision prevent the Court establishing what certificate ought to have been issued or what other opinion should have been expressed or what other decision, requirement or notice should have been given as if no certificate, opinion, decision, requirement or notice had been issued, expressed or given".
Lord Young observed that Clause 41C.2 was introduced into the JCT forms of contract to deal with the decision in Northern Regional Health Authority v Derek Construction Co. Ltd [1984] QB 644, where it was held that a court had no power under the earlier JCT forms to open up, review and revise certificates issued by the contract architect. Crouch had been overruled by Beaufort Developments (N.I.) Ltd. v Gilbert-Ash (N.I.) Ltd [1985] AC 191 and the practical significance of the clause was reduced in consequence. The clause was designed to remove a disability from exercising the court's normal powers; it was not designed to confer an additional power on the court.
Lord Young observed that Clause 41C.2 applied in particular to any "dispute or difference" that was to be determined by court proceedings. The adjudicator's decision as to liability for his fee and expenses did not form part of a dispute or difference
Lord Young accordingly concluded that Clause 41C.2 had no bearing on the instant case.
Castle Inns did not adequately state the basis on which payment was sought of the amount paid in the first adjudication. Lord Drummond Young considered that the defect could be rectified fairly easily and had the case put out to order to enable an appropriate motion to be made. In doing so he examined the possible legal basis for repayment and came to a logical and expected conclusion.
Lord Young considered that if the court's decision on the dispute was at variance with the adjudicator's decision, any sums that have been paid pursuant to the adjudicator's decision should obviously be repaid. Neither section 108 nor clause 41A stated the legal basis for such repayment. Two possible theories were, either an implied term of the parties' contract or a restitutionary obligation based on unjustified enrichment.
He considered that where the parties' contract remained in full force and effect the use of an implied term of the contract was a more natural mechanism than a restitution, which was necessarily an extra-contractual obligation. The ground for the implication of a contractual term was that it was necessary to give business efficacy to the parties' agreement. That would achieve a repayment of any sums that had been wrongly paid, in the sense that the court had ultimately found those sums not to be due.
He considered that what is contemplated by section 108(3) and clause 41A.8.1 was an "unwinding" of the adjudicator's decision which should not be based on principles of unjustified enrichment The parties' rights and obligations following a successful unwinding of the adjudicator's decision were better analyzed using an implied term rather than restitution because the obligation to repay monies arose very squarely from the operation of the parties' contract, and in particular clause 48A.8.1.
Nonetheless he considered that where the payment was made on grounds that were not ultimately held to be justified, then an error existed, albeit on the part of a third party, the adjudicator, rather than the party making the payment. There was ultimately no justifiable cause for the payment. In that case if restitution had been appropriate, Lord Young considered that a restitutionary remedy would be available, even if it could not be fitted into the defined categories already explicitly recognized.
Castle Inns claimed the balance due under the Final Certificate. In issuing the final certificate on 8 October 2003, the architect made certain decisions and awarded certain sums on a basis that was different to the determination of the adjudicator in the second adjudication, which was issued on 7 November 2003.
Lord Young identified that one of the critical issues in the instant case was whether an adjudicator's decision on a dispute arising under an interim certificate was binding on the architect at the time when he issued the final certificate, and proceeded to establish an important proposition of law.
Castle Inns primary argument was that the effect of the final certificate was to re-evaluate the position arising between the parties on a comprehensive basis and that the final certificate reflected the correct position between the parties. Castle Inns argued that there was no challenge to the second adjudication in the instant action, because the final certificate was independent both of the interim certificates issued by the architect and of any adjudication in respect of those certificates. The second adjudication had arisen out of an interim certificate, and was accordingly of no relevance to the final certificate.
Castle Inns secondary argument was that the criteria for decisions on an interim certificate were quite different from those that applied to the final certificate. Consequently the Court would require to be satisfied on the evidence that the decision in the second adjudication involved issues that were the same as those that arose in the final certificate.
Lord Young observed that it was not clear on the pleadings which parts of the final certificate might be affected by the decision in the second adjudication, but the parties agreed that at least some of the matters determined in the second adjudication were matters that also arose for decision in the preparation of the final certificate. He therefore proceeded to find on the basis of legal principle and not fact.
Lord Young also observed that there were certain important differences between interim certificates and the final certificate:
Importantly and crucially, Lord Young considered that despite these differences, there were substantial similarities in the tasks that the architect had to perform in preparing an interim certificate and in preparing a final certificate. In both cases the architect was calculating the sum that was due to be paid to the contractor on the relevant date. In both cases the architect was concerned with such tasks as valuing items of work or ascertaining direct loss and expense caused by particular relevant events in terms of clause 26. By the time of the final certificate it was a common occurrence that extra work or omissions or errors would come to light, or defects would have emerged, with the result that the figures in the interim certificates had to be corrected. Nevertheless, much of the calculation would typically be the same at the stages of interim and final certificates, and the general approach to calculation would normally be the same, even though the figures might have to be altered or refined. For this reason Lord Young held that an adjudication decision relating to an interim certificate might be relevant to the final certificate.
Lord Young observed that the decision of an adjudicator could be undone, but only in the three ways contemplated by section 108(3) and clause 41A.8.1, that is, by court proceedings, by arbitration or by the agreement of the parties. The architect had no power to undo the decisions of an adjudicator, and accordingly had to comply with those decisions so far as they were relevant to any of his tasks. Lord Young relied on and referred to the requirements of Clause 41A.8.2 that the parties were to comply with decisions of the adjudicator immediately on delivery of the decision, and that the employer and the contractor "shall ensure that the decisions of the Adjudicator are given effect". He held that that wording contemplated that the parties to the contract would ensure that the adjudicator's decision was implemented not only by themselves but also by any other person to whom they can give instructions. Lord Young considered that that would include the architect, who was the agent of the employer. Consequently, the effect of clause 41A.8.1 and .2 was to oblige the employer to ensure that the architect complied with decisions of the adjudicator.
Lord Young held that to the extent that the adjudicator had decided a matter that was relevant to the final certificate, the architect was bound by the adjudicator's decision. There was one important qualification. He held that if new material had emerged since the date of the adjudicator's decision, the architect was entitled to take that into account in preparing the final certificate, or indeed any interim certificate, and to make any appropriate modification to the adjudicator's decision.
Lord Young distinguished two types of case:
The first type of modification was permissible; the second was not. Lord Young recognised that distinguishing the two cases was a matter of degree, and might involve difficult questions of judgment in marginal cases. Nevertheless it was a distinction that had to be drawn on a case-by-case basis.
Lord Young gave an example of the valuation of loss and expense. Where the adjudicator had assessed direct loss and expense under clause 26 but more exact figures for the loss and expense were available at the time when the final certificate is prepared, the architect was entitled to take those more exact figures into account. Lord Young held that what the architect could not do, in the example, was to refuse a head of direct loss and expense that had been allowed by an adjudicator, or to go against the basic principle on which the adjudicator proceeded in awarding a sum for such loss and expense.
Lord Young observed that the above proposition of law was supported by the express terms of the instant contract:
Clark argued that by virtue of clause 30.9.4, a challenge to an adjudicator's award given after the date of the final certificate could be made only within 28 days after the award was made. In the instant case the final certificate was issued on 8 October 2003 and the adjudicator's second award was made on 7 November of that year. Consequently clause 30.9.4 applied. Clark argued that since the instant proceedings were not started until March 2004, well beyond the period of 28 days, the second award could not be challenged.
Lord Young observed that Clause 30.9.1 provided that the final certificate was to have effect as conclusive evidence of a number of matters, including standards of workmanship and conformity to the contract.
Clause 30.9.3, as amended by the Scottish Supplement, provided that if any adjudication, arbitration or other proceedings have been commenced within 60 days after the final certificate, the final certificate was to have effect as conclusive evidence save only in respect of all matters to which those proceedings relate.
Any such
adjudication decision might be undone by court or arbitral proceedings. In
order to ensure that the final certificate could be given effect at the
earliest opportunity, however, a strict time limit was imposed on the
commencement of such proceedings; otherwise the final resolution of the
parties' liabilities could remain in limbo for an unnecessarily long
period.
Clause 30.9.4 imposed a strict
contractual time bar on proceedings to have any matter decided by an
adjudicator after the final certificate finally determined by arbitration
or court proceedings. If such proceedings were not begun within the 28-day
period specified in the clause the time bar operated, then the
adjudicator's decision became final and was binding for the purposes of
the final certificate.
Lord Young considered that there was a practical
reason for imposing such a time limit. If the architect in issuing a final
certificate was bound by all adjudication decisions so far as they were
material to the certificate, and was further obliged by clause 30.9.2 to
have regard to any adjudication decisions made after the date of the final
certificate, he had to know within a short period whether any such
decision was to be attacked by means of court proceedings or arbitration.
That explained why the relatively short period of 28 days was selected as
a time bar in clause 30.9.4 (in the versions used both in Scotland and in
England and Wales).
Castle Inns argued that the above construction of Clause 30.9.4 would
prevent any part of the final certificate that was dealt with in an
adjudication decision issued after the date of the final certificate from
being challenged unless the adjudication decision were attacked within 28
days. It was argued that that would fetter the court's power to review and
revise the final certificate, as contemplated by clause 41C.2 and the
decision in Beaufort Developments (N.I.) Ltd. v Gilbert-Ash (N.I.) Ltd.
Lord Young held that all that clause 30.9.4 did was to impose a time bar on challenge is to adjudication decisions issued after the date of the final certificate. That did not fetter the court's powers; it only meant that the exercise of those powers had to be invoked relatively quickly.
Lord Young held that Castle Inns was barred from challenging the decisions of the adjudicator in the second adjudication by legal proceedings or arbitration of the sort contemplated by section 108(3) of the Housing Grants, Construction and Regeneration Act 1996.
It is suggested that the analysis and the propositions of law of Lord Drummond Young apply equally in English Law. It is likely that they will also apply to other standard forms of contract, although this may be affected by the express terms.
The judgment is consistent with common sense.
It must be the case that where the Court "unwinds" an adjudicator's decision, that the sums paid on that decision are required to be re-paid. The legal mechanism of an implied terms should apply, but if not then it is to be noted that Lord Young was prepared to adopt the theory of restitution if necessary.
As for the adjudicator's fees, the judgment again accords with common sensible and will help to avoid unnecessary litigation. Simply because the Court decides differently to the adjudicator on the substantive issue does not mean that the adjudicator was wrong on the case before him. If, as the many cases show, the Court is willing to enforce a decision if it is wrong in law and on the facts, it is difficult to see why the Court would wish to enter into opening up his decision on the apportionment of his fees. The matter might be different if it is decided that the adjudicator's decision is a nullity because he lacked threshold jurisdiction. More interesting is the case where the adjudicator rendered his decision unenforceable due to his unacceptable conduct of the adjudication proceedings.
As to the inter-relation between an adjudicator's decision on an interim certificate and the architect's decision on the final certificate, that part of the judgment is to be considered in the light of a number of other judgments.
There is a similarity of purpose of an adjudicator's decision and the final certification process under the contract. Interim certificates on remeasurement contracts (as opposed to lump sum instalment contracts) are not conclusive. They are not a wholly exact exercise and involve elements of assessment and judgment - see The Secretary of State for Transport v Birse-Farr Joint Venture (1993) 62 BLR 36. Although interim certificates establish a cause of action including for matters which should have been certified, this is different to the cause of action under the final certificate - see Court of Appeal in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] BLR 437. The reasoning is based on the difference in inquiry in the interim certificate process and the final certificate process. That same approach has been adopted by Lord Young. The basis for his judgment is that the nature of the inquiry of an adjudicator is the same as that required by the process for the final certificate. On that basis Lord Young considered that the adjudicator's decision on interim certificates trumped those of the architect in the final certificate.
The logic must be correct as was the qualification. If new material had emerged since the date of the adjudicator's decision, it must be right that the architect should be able to that into account as a refinement of the adjudicator's decision, but not as a challenge to the issue of principle in the adjudicator's decision.
It could be argued that the short period allowed to an adjudicator to decide issues makes the inquiry indistinguishable from the process of interim certification. It could also be argued that the process involved in the final certificate allows considerably more time and therefore inquiry.
It is suggested that such arguments are unlikely to succeed. The parties have agreed a process of adjudication for deciding disputes, with all the safeguards of such a judicial process. Recent decisions show that an engineer making a decision under the contract is not embarked on a judicial process and is not subject to the same requirements of natural justice - see the Court of Appeal in Amec Civil Engineering Ltd v Secretary of State for Transport [2005] EWCA Civ 291 [2005] BLR 227. The parties have therefore agreed to determine their rights, provisionally, by adjudication and this should be taken into account in the final certificate subject to Lord Young's qualification.