Adjudication
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KEYWORDS: |
Adjudication, Housing Grants Construction and Regeneration Act 1996, Construction Contracts Exclusion Order 1998 SI 1998 No 648, Section 6.2, Section 6.3(b), relevant interest in land, lease, option, HH Judge Wilcox. |
The decision in Captiva Estates Ltd v Rybarn Ltd [2005] EWHC 2744 (TCC) on 11 November 2005 by HHJ David Wilcox is of interest because it is the first considered authority on the meaning and application of The Construction Contracts (England and Wales) Exclusion Order 1998, Statutory Instrument 1998 No. 648 to exclude the right to adjudication.
Captiva was the owner of land at 45 Christchurch Road, Bournemouth and entered into a contract in writing with Rybarn, a building contractor, dated the 11 July 2002. Rybarn was to construct 28 residential flats together with underground and above ground parking for 28 bays. The consideration for payment by Captiva was a fixed sum of £1.15 million and an option to purchase granted to Rybarn to take leases in respect of seven of the 28 flats and the respective parking bays. These flats were referred to in the contract as the "consideration flats"
Rybarn commenced adjudication proceedings against Captiva but then notified Captiva that they would not be proceeding with the adjudication. There was no express provision in the contract between the parties providing for adjudication and Rybarn has relied upon the contract as being a construction contract falling within the Act by which s.108 gives parties to construction contracts the right to refer a dispute to adjudication.
The issue between the parties was whether the contract was a development agreement within the meaning of The Construction Contracts (England and Wales) Exclusion Order 1998, Statutory Instrument 1998 No. 648 (the Exclusion Order). The Exclusion Order excludes such agreements from Part 2 of the Act. Captiva argued that the contract fell within the ambit of the Exclusion Order. If Captiva was correct then the parties did not have the right to refer disputes to adjudication.
Paragraph 6.2 of the Exclusion Order was the relevant provision which defined that a contract was a development agreement if it included provision for the grant or disposal of a relevant interest in the land on which took place the principal construction operations to which the contract related.
Paragraph 6.3(b) of the Exclusion Order defined "relevant interest in land" to include a leasehold for a period which was to expire no earlier than 12 months after the completion of the construction operations under the contract.
The contract identified the "consideration flats" and at clause 3.4 gave Rybarn the exclusive right to dispose of and retain the proceeds of sale of such of the consideration flats to which Rybarn might become entitled from time to time under the terms of the contract.
Clause 3.8.2 provided that the option in respect of each of the consideration flats was to be treated as a separate option and exercisable separately at any time within the option period, which was the relevant date referred to in the third schedule or 9 years 11 months from the date of the contract, whichever was the earlier, and terminating 10 years from the date of the contract.
Clause 3.8 provided the mechanism for exercise of the option and provided that once the notice had been served upon Captiva a binding contract to grant a lease of the relevant consideration flat with vacant possession existed and the grant was subject only to the entries in the register of title.
Clauses 4 of the contract dealt with the obligations of Rybarn in relation to such matters as insurance and the mechanics of conveyancing. Clause 4.1.3 provided that Rybarn was to pay half of the expenses incurred in accordance with Part 2 of the Second Schedule to the Contract and pro rata according to the ratio which the total number of consideration flats acquired by Rybarn or to which Rybarn may become entitled bore to the total number of units or the expenses incurred in accordance with Part 2 of the Second Schedule.
Clause 5 of the contract dealt with Captiva’s obligations including depositing its land or charge certificate in respect of registered title to facilitate registration of the contract as a notice or caution and subsequent disposal of the consideration flats and to procure the consent of its Bank to the creation of the contract. Captiva was prevented from increasing its borrowing facility with its Bank without the consent of Rybarn.
Section 6 dealt with agreements and declarations and governed the resolution of disputes and matters such as the service of notices and valuations.
The third schedule laid down the commencement of the period during which the individual option must be exercised by reference to the completion of the individual stages. The schedule also provided that in each case completion of any lease to Rybarn or its nominee was to be accompanied by consent to dealing executed by the mortgagee under the first charge, or, in the alternative, production of an open consent to dealing executed by the mortgagees effectively enabling the disposal by Rybarn of the relevant consideration flat or flats to a third party in accordance with the terms of the contract.
Rybarn argued that the option provision merely provided a mechanism by which Rybarn was to receive further payment for the construction works in addition to the fixed £1.15 million sum. It was argued that the contract did not provide for the grant or disposal of a leasehold or freehold as required by the Exclusion Order. It merely granted Rybarn the option to call for a leasehold interest in respect of seven of the flats for a period of 10 years. There was no entitlement to exercise the option until the relevant stage of the construction works had been reached.
Judge Wilcox observed that Section 6.2 of the Exclusion Order set out the meaning of “development agreement” in wide terms. He emphasised the words “includes provision for”. He considered that there are many ways in which parties might arrange for or provide for the disposition of an interest in land or the grant of such an interest. It might be at some time in the future or subject to the fulfilment of some condition wholly within the control of a third party, such as a planning authority, a parent company or a lender. It might be subject to some condition within the control of one or both of the parties being satisfied, such as timely or satisfactory completion of works by the contractor, or the issue of the final certificate by an architect. Such provision or grant could be subject to the willingness of a third party to enter into the transaction or pursuant to a further document to be entered into by the parties.
Judge Wilcox held that all such agreements would make provision for the grant or disposal of a relevant interest within the Exclusion Order. There was nothing in the Exclusion Order to limit it to unconditional agreements.
Rybarn argued that even if there was a provision for the disposal or grant of land within the contract it could still not fall within the terms of the Exclusion order because the land on which took place the principal operations was the whole site. It was argued that the plain purpose of Section 6 of the Exclusion Order was to exclude contracts which provided both for the carrying out and the construction operations on the land and the grant of freehold or leasehold in excess of 12 months for the same land. Since the option was in respect of only seven of the flats it was argued that it did not relate to the relevant land which was the whole site.
Judge Wilcox held that the qualifying adjective related to the interest in land, that was relevant land. He do not accept that where the word “land” was used in Section.6.2 that it bore such a restrictive meaning. The adjective “relevant” related to interest and not to land.
Judge Wilcox held that the effect of the contractual provisions, particularly clauses 3.4, 3.8 and the Third Schedule, was to grant Rybarn options for the grant of leases for each of the seven consideration flats. Those provisions ensured that on the due exercise of the option by Rybarn, Captiva, who was liable to grant the lease to the extent of the leasehold interest granted, had its estate or interest taken away without its consent and vested in another. The provisions in the contract creating that option gave Rybarn an interest in land which, incidentally, was protected by clause 5.3 of the contract which provided for the deposit of Captiva’s land certificate in respect of the registered title to facilitate registration of the agreement as a caution or notice.
Judge Wilcox held that that was the relevant interest in land for the purposes of the Exclusion Order, and that those provisions were for the grant or disposal of that interest, and were provisions within Section 6.2 of the Exclusion Order. Furthermore, the contractual provisions satisfied the requirements of s.2 of the Law of Property Miscellaneous Provisions Act of 1989: see Spiro v. Glencrown Properties Ltd [1991] Ch.537.
Judge Wilcox declared that the contract was excluded from Part 2 of the Housing Grants Construction and Regeneration Act. It followed that the adjudication commenced was invalid and that the adjudicator nominated had no jurisdiction.
The effect of the decision of Judge Wilcox is that there will be no terms implied by Part II of the Housing Grants Construction and Generation Act 1996 where the contract not only provides for construction operations, but also includes for the disposal of a relevant interest on the land on which the construction takes place. Similarly it would appear, Section 111 will not have direct effect.
This interpretation of the Exclusion Order is not unexpected in view of the breadth of Section 6.
It is notable in the instant contract how extensive and detailed were the provisions for exercise and realisation of the option on the leases. It may be that if the right is set out in a separate agreement or possibly the mechanisms for exercise of the disposal of the interest, that the Exclusion Order will not bite.
It is suggested that if the parties expressly set out the right to adjudication in the contract that the Exclusion Order has no effect.