Adjudication
Shepherd Construction Ltd v Mecright Ltd (2000) TCC

© Daniel Atkinson 2001     17 January 2001

The decision in Shepherd Construction Limited v Mecright Limited (2000) TCC is useful guidance for those giving advice and those representing parties in adjudications. The decision states the standard to be adopted in presenting adjudication notices. The decision also examines whether an adjudicator has jurisdiction if there is a settlement agreement dealing with the very dispute referred and even if it is argued that the settlement agreement in voidable for duress.

Shepherd was the main contractor for the Walsall Bus Station and Mecright was a specialist steelwork subcontract. In October 1998 Mecright was awarded the contract for the supply, delivery and installation of the steel trees, steel posts, rain water pipe work and rails and paint for the bus station for the sum of £93,995.00. The work was to be carried out in the early part of 1999.

Following the award of the contract, the work was changed. Applications and payment were made in the usual way, but there developed a large gap between the applications and the Shepherd’s valuations. On 15^th March 2000 a meeting took place between Shepherd and Mecright in which an agreement was reached. It was not for the amount which either party had originally offered at the start of discussions but both sides moved towards a compromise. Agreement was ultimately reached on a figure for the gross agreed valuation of the measured work, dayworks and variations. The agreement was recorded and signed on 15^th March. The terms of the agreement were "We, Mecright Limited accept the sum of £366,600 in respect of manufacture, supply, delivery and installation of steel trees, steel posts, assembly, handrails and sundry metal work carried out by us in full and final settlement of all our claims under the above contract but without prejudice to our outstanding obligations."

The agreement resulted in an immediate payment to Mecright by Shepherd which was promptly banked.

On 3^rd July 2000 notice of adjudication was sent to Shepherd by Mecright in which the dispute was stated to be the failure to make proper payment on the above project. The notice was presented on the basis that there had been a breach of the subcontract on the part of Shepherd duly to notify Mecright of the sums to be paid and how they were to be calculated and to evaluate and pay Mecright the value of the subcontract works. £277,567.62 was claimed including VAT. Neither in the letter describing the dispute nor in the subsequent referral notice dated 6^th July was there any mention of the fact that there had been an agreement on 15^th March which was obviously intended to settle the dispute which had existed about the valuation of Mecrights work. The referral notice stated only that Mecright made its 10^th application in January and no payment notice was received in relation to it. Nothing was said about the circumstances leading to the payment as a result of the settlement agreement.

The adjudicator was appointed on 5^th July, and on 11^th July Shepherd replied to the request for an adjudication pointing out that there had been the agreement whereby the disputes had been settled. Mecright wrote to the adjudicator on 12^th July 2000 in which it was maintained for the first time that the agreement reached had been under duress, namely that Shepherd had taken advantage of Mecrights straightened financial circumstances by compelling it to take effectively what it was being offered. This submission was quite long. His honour Judge Lloyd QC stated that it appeared that the request for adjudication was lacking in candor and was misleading as to what was in reality Mecright’s real complaint, a dispute which had not apparently existed at the date of the request for adjudication. This manoeuvre, as well as the casual approach to the preparation of the main witness statement, called into question the way in which a party such as Mecright was being served.

It was held that if the purpose of adjudication was to provide a swift and summary decision about matters in dispute, then a party seeking adjudication would be expected to present its case in full, not to hold anything back and to be open and honest in its presentation. This was all the more so, if there was no provision for a statement in reply.

Shepherd argued that the settlement agreement of 15^th March meant that there was no dispute under the subcontract capable of being referred to adjudication and that the claim that the agreement was entered into under duress was not a dispute capable of referral to adjudication.

It was common ground that there was an agreement. Equally, the settlement agreement was an agreement which but, for the plea of economic duress, would have the effect of extinguishing all the disputes that then existed on 15^th March so that there could be no dispute capable of being referred to adjudication thereafter in relation to valuation. It was held that where parties had reached an agreement which settled their disputes there can thereafter be no dispute about what had been the subject matter of the settlement capable of being referred to adjudication. The prior disputes had gone and no longer existed. Therefore on 3^rd July there was no dispute about any of the matters which were the subject for the notice of adjudication, just as there was no disputes about whether the agreement had been entered into under duress. Thus Mecright had no right to apply for adjudication and the adjudicator had no authority or jurisdiction to deal with the notice of 3^rd July.

It was held that a dispute about a settlement agreement of this kind could not be a dispute under the subcontract since the effect of a settlement agreement is one which replaces the original agreement to the extent to which it applies. The agreement had the effect of replacing Shepherds obligations to value and to pay Mecright under the subcontract the value of the work. So there could be no dispute under the subcontract. The effect of the settlement agreement was that a dispute about it is outside Section 108 since the settlement agreement is not a construction contract within the meaning of Section 108. Reference was made to the judgment by his Honour Judge Mackay in Latham v Cross which was of the same view. A dispute about an agreement which settles a dispute or disputes under a construction contract is not a dispute under that contract. The word "under" in the act was plainly chosen deliberately. It was not nor was it accompanied by words such as "in connection with" or "arising out of" which have a well established wider reach.

The issue therefore was if the effect of the agreement is that there is no dispute, whether it meant that unless and until it has been decided by a court or arbitrator that the settlement agreement is to be avoided on the grounds of economic duress, the adjudicator may still continue.

It was held that this issue is to be resolved by the application of basic principals. The agreement was not inherently unenforceable and invalid, that is to say it was not void. It could be avoided at the option of Mecright if it was able to establish that the agreement was entered into under economic duress. Unless and until a court or arbitrator reached a decision to that effect the agreement stood. It could not be deprived of its effect simply because one party elects to avoid it. In any case no election was made by Mecright until 12^th July. Since the settlement agreement of 15^th March stood and given the relationship of the parties on 3^rd July it must follow that a purported reference to an adjudicator relating to a failure to value and pay the works properly prior to the 15^th March 2000 was invalid or of no effect since there was no dispute on 3^rd July capable of being referred to an adjudicator about any such matter.

It was held that any disputes that existed on 15^th March had been extinguished by the settlement agreement, and no new dispute had arisen thereafter, and certainly not the dispute that was the subject of purported notice of 3^rd July. The settlement agreement plainly bound both parties. Mecright had no right to seek adjudication and acted in breach of the subcontract in doing so.

The philosophy which underlies the 1996 Act is that adjudication should be concerned about matters which are of immediate practical effect. It should not be concerned questions that might prove to be academic but should result in a decision which one party will be obliged to comply with and which will not then be subject to some nullifying mechanism other than by the ultimate arbitration or litigation. It was appropriate for Shepherd to seek a declaration that they had a valid agreement and that the effect of the valid agreement was to preclude a reference of the kind that was made on 3^rd July. It was the right course to take. If the issue of whether the agreement ought to be put aside was determined in favour of Mecright, it might then be entitled to seek adjudication on what would or should have been the final account. That was entirely consistent with the Act, that the adjudicator should only be concerned with matters under the subcontract. The word "under" in the Act limits the type of dispute that a party has to a right to refer to adjudication. Matters which proceed the making of the subcontract, such as questions as to whether a contract was entered into on a false basis, or as a result of a false misrepresentation or on the basis of promises which did not materialise were not within the jurisdiction of the adjudicator. By the same token, an adjudicator was not to be concerned about matters which fell outside the subcontract, such as the settlement agreement.

It was held that it was wrong of Mecright to seek adjudication until it had established that the settlement agreement was not only voidable but was of no effect. When it sought adjudication on 3^rd July it was bound by the settlement agreement. Accordingly it was held that Shepherd was entitled to the declaration sought.