Adjudication
David McLean Housing Contractors Limited v Swansea Housing Association Limited (2001)

© Daniel Atkinson 2002 07 January 2002

In David McLean Housing Contractors Limited v Swansea Housing Association Limited (2001) the main issue was whether a party required to pay on an Adjudicator’s decision could raise a counterclaim for payment of liquidated damages and have this taken into account in any enforcement proceedings. The judgment is of particular interest because it re-states the legal status of the Adjudicator’s decision. The judgment also provides practical guidance on the characterisation of a dispute, important under the Scheme which allows only one dispute to be referred unless consent id given.

The contract was on the standard form JCT 81 with Contractor's Design. It concerned the redevelopment of the former head Post Office in Wind Street, Swansea, to provide housing for the defendant Housing Association as well as commercial and other uses. The standard form had been amended to take account of the Housing Grants, Construction and Regeneration Act 1996. The contract was also amended to provide for sectional completion.

McLean (the contractor) made an Application for Payment No 19, after practical completion, which included a claim for direct loss and expense, money in respect of the valuation of variations, money in respect of measured work, and also certain adjustments in relation to the expenditure of provisional sums. The contract had finished late and there was an argument about the entitlement to an extension of time.

Notice of adjudication was issued by McLean describing six heads of dispute comprising direct loss and/or expense pursuant to Clause 26 of the Contract, entitlement to extensions of time pursuant to Clause 25 of the Contract, valuation of variations pursuant to Clause 12 of the Contract, valuation of measured work, release of retention and expenditure of provisional sums.

The Adjudicator made his decision and Swansea paid the amount ordered less an amount for liquidated damages. McLean sought summary judgment on the Adjudicator’s decision and Swansea also sought summary judgment on its counterclaim of liquidated damages. McLean sought to have the application by Swansea struck out and later applied for a stay of the counterclaim to arbitration under Section 9 of the Arbitration act 1996.

An initial issue was the validity of the appointment of the Adjudicator. This was dealt with shortly. It was held that the Scheme took effect as the contract did not meet the requirements of section 108 of the HGCRA and the Adjudicator was rightly appointed.

The next issue was whether more than one dispute had been referred. His Honour Judge Lloyd QC held that in dealing with adjudications the approach was to interpret any document in a sensible manner and to try to give effect to its intentions, whilst bearing in mind the purposes of adjudication and the presumed intentions of the parties to be inferred from the contract, including the Scheme as it is part of the contract (see section 114 of the Act). Adjudication was fundamentally a contractual form of dispute resolution.

Paragraph 8(1) of the Scheme precluded the reference of more than one dispute, without the requisite consent of the other party or parties. Such consent was not given in this case as the defendant's participation in the adjudication proceedings was subject to its protest about the jurisdiction of the adjudicator on this and other grounds. On the face of it, the notice given by the McLean referred to six separate matters.

It was held that a notice of adjudication had to be put in its context. Reference was made to the decision in Fastrack Contractors Ltd v Morrison Construction Ltd [2000] BLR 168 by His Honour Judge Thornton QC (at page 176). In this case Judge Lloyd characterised the dispute referred as what payment ought to have been made as a result of the Application for Payment No 19. The Application contained various elements which were reflected in the notice of adjudication. The notice was therefore valid in referring the dispute about the payment to be made which could not be decided without considering each such element.

The claim for "loss and expense" under the JCT forms is part of a dispute about an interim or progress payment and may not properly be ascertainable until any right to extension of time is also determined. If only prolongation is being claimed, as opposed to disruption, the right to an extension of time may run hand in hand with the right to loss and expense, provided that each stems from the same relevant event and no other cause.

It was held that in this kind of notice, the entitlement to extension of time is included as a necessary and indispensable precursor to the direct loss or expense and, as it may be, the establishment of a proper or new rate or price, to enable the rules for valuation of variations to be properly applied, or indeed, perhaps, for the adjustment of rates of prices for measured work. Accordingly the notice did not refer more than one dispute. It referred a single dispute, namely, "How much should I be paid?" Had the notice not been directed to such a single question then it would have referred more than one dispute. A notice that refers more than one dispute is invalid. The appointment of an adjudicator in consequence of it is similarly invalid, unless the other party has nonetheless clearly and knowingly accepted the notice or the appointment as valid so that there is consent for the purposes of paragraph 8(1) of the Scheme.

It was held that the adjudicator in arriving at his conclusions on the various elements was saying, in effect: "That is what you should have been paid in response to application 19". Within a few days after the issue of the decision, either in its original form on 21 March, or in the corrected form of 22 March, certificate 20 was issued on 23 March which met the requirements of the decision in relation to payment. McLean got the certificate to which it was entitled, in the opinion of the adjudicator.

The next point was the legal nature of the adjudicator's decision and was central to the main issue, the right to deduct liquidated damages. Reference was made to the decision of His Honour Judge Hicks QC in the case of VHE Construction plc v. RBSTB Trust Co. Ltd. (2000) 70 Con LR 51 at para.65. Judge Hicks said, in relation to a claim of a residual right to set off liquidated damages, that there was no such right against an adjudication decision.

"In the first place the right under cl.24.2.1 is to deduct from moneys due or to become due 'under the contract'. The money in question here was not payable under the contract, in the sense contemplated by that clause, but by way of compliance (albeit contractually required) with the adjudicators' decisions."

It was argued that Judge Hicks had held that the adjudicator's decision itself created a debt, and that was the cause of action upon which a claimant can claim.

His Honour Judge Lloyd does not appear to have accepted that argument but instead referred to his decision in Glencot Development and Design Co Ltd v Ben Barrett & Son (Contractors) Ltd [2000] BLR 207 where he held (without having been referred to VHE) that the cause of action was the right or obligation in dispute. In this case it was held to be the unmet claim for payment on application 19 and the right to a further certificate. That was the right under the contract which has or had not been honoured by Swansea, thereby giving rise to the dispute about a cause of action for a sum due under the contract.

It was held that the Scheme does not confer on an adjudicator a right to adapt, vary or otherwise modify a contract. Under the statutory Scheme an adjudicator has to decide a dispute under the contract. It is a decision about to the rights and liabilities of the contract which are questioned. Thus paragraph 20 of the Scheme expressly provides for the review of a certificate that has been issued (sub-para (a)) and for the adjudicator to decide a person "is liable to make a payment under the contract ... [emphasis supplied] and, subject to section 111(4) of the Act, when that payment is due and the final date for payment". His decision does not create or modify a right or liability except, perhaps, in one respect.

The adjudicator's decision may alter the time within which, for example, a payment might otherwise have had to have been made, where an adjudicator decided that there had been an under-payment or under-certification. The Scheme permits the time within payment is to be made to be altered. If the decision does not set a time, compliance is immediate which it was held shows that the decision does not affect or create a new cause of action. The Scheme is an implied term of the contract. As part of the contractual scheme it therefore modifies the ordinary contractual relationship. It was held that only to that extent might it be said that there has to be compliance with the adjudicator's decision other than in accordance with what would otherwise be the strict terms of the contract. The Scheme and the other contractual terms have to be read together.

The decision establishes what is due under the contract. The parties have agreed to accept the decision as binding (section 108(3)of HGCRA and paragraph 23(2) of the Scheme) so, unless otherwise agreed by them or determined by a court or arbitral tribunal, each agrees that the amount to be paid is and was due, and each must act accordingly and accept any assumptions upon which the decision must have been based. Reference was made to the judgment of Chadwick LJ in paragraph 26 in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 522 at page 525 in which he held that the adjudicator's decision is a method of providing a “summary procedure for the enforcement of payment provisions due under a construction contract”.

Ultimately the claimant will, if necessary, have to establish its right and cause of action. If the decision was itself a cause of action then it would supplant any cause of action. The decision is not an arbitral award nor can it be equated to one. An action to enforce an adjudicator's decision is an action to enforce the right or liability which has been upheld by the decision.

This analysis of the legal status of the Adjudicator’s decision led to the main point in issue – whether McLean was entitled to the full sum stated in the adjudicator's decision, or whether Swansea was entitled to the amount for liquidated damages.

The Adjudicator’s original decision was corrected on 22 March 2001. Certificate 20 was issued following the Adjudicator’s decision on 23rd March 2001. Also on 23rd March 2001 Swansea wrote a letter to McLean stating that it would deduct liquidated damages from certificate 20. Swansea in fact paid the amount decided by the Adjudicator less the amount in dispute on liquidated damages. On 16th May 2001 Swansea again wrote to McLean stating that McLean was liable to pay or allow liquidated and ascertained damages, that no payment had been made, no notice under Section 110 (2) of the 1996 Act had been served and no withholding notice conforming with Section 111 (2) of the 1996 Act had been served.

The first point was the amount of the liquidated damages. It was held that since the amount of liquidated damages reflected the adjudicator’s view about the extension of time sought, that McLean was bound to accept that conclusion in the summary proceedings since it was part of the dispute which it referred.

The second point was whether Swansea had complied with the provisions of the contract for the deduction or payment of liquidated damages. The relevant provision was Clause 24 which required two notices, one under Clause 24.1 and the other under Clause 24.2 before liquidated damages could be deducted. Swansea had issued a valid notice under clause 24.1, so the issue was whether it had issued a notice under Clause 24.2. Two types of notice were envisaged under Clause 24.2. Clause 24.2.1.1 required Swansea to inform McLean that it required McLean to pay liquidated damages. Clause 24.2.1.2 required Swansea to give notice that it would deduct from monies due to McLean liquidated damages. Either notice was required to be issued not later than five days before the final date for payment of the debt due under clause 30.6.

It was held that the letter of 23rd March 2001 satisfied Clause 24.2.1 even though it stated that liquidated damages would be “deducted” and instead of “paid”. Judge Lloyd held that there was nothing in that point. The letter expressed a clear intention to recover liquidated damages. If money was or would be due then clause 24.2.2 would be appropriate but if money was not due then the clause 24.2.1 was appropriate. It was held that it did not matter whether the word "recover" or "deduct" was used since a misapprehension as to the true position in fact or law would not stand in the way of a clear intention. It was held that in any event, for all practical purposes, the letter of 16 May 2001 satisfied the requirements of Clause 24.2.1.

As to the requirement for notice to be given within the five days mentioned in clause 24.2, it was held Swansea had realistic prospects of success in maintaining that it gave an effective notice, particularly having regard to the fact that all along it had made it very clear that it wanted to recover liquidated damages. It had served its notices under cl.24.1, and as required by cl.24.2.1 and it would be manifestly unjust to deprive Swansea of an opportunity of maintaining that it was not obliged to pay the full amount of the adjudicator's decision.

Judge Lloyd held that even if the letter of 23rd March 2001 did not satisfy the requirements of cl.24.2.1 so that the adjudicator's decision became payable in full, nevertheless the letter of the 16th May 2001 satisfied the requirements of cl.24.2.1.1 so that the counterclaim was a viable counterclaim. No defence to it has been shown and there was in any event, given the adjudicator’s view on the extension of time, no realistic prospect available to the claimant for resisting payment on that counterclaim in the summary proceedings. Swansea was entitled to summary judgment dismissing the claim so that it could safely keep the liquidated damages. Even if McLean was entitled to judgment, Swansea would be entitled to a stay of execution or it would be entitled to set off the amount due on the counterclaim against the debt due on the claim so that, in practical terms, McLean would not get the money that it is seeking.

That disposed of the matter, but one procedural point remained, the question of the stay of the counterclaim sought by McLean. It was held that McLean had taken a step in the proceedings for the purpose of s 9(3) of the Arbitration Act 1996 sufficient to preclude McLean from maintaining that the dispute on the counterclaim should be referred to arbitration. The actions taken by McLean to invoke the assistance of the court to enforce the adjudicator's decision which was intimately connected with the subject matter of the counterclaim and to have the counterclaim struck out were not taken without prejudice nor in the latter case, at the same time as an application under s.9, which followed later. On the established authorities, particularly the case of Turner & Goudy v. McConnell (1985) 30 B.L.R.108, if filing an affidavit in reply to an application for summary judgment is a step then, a fortiori, the application to invoke the assistance of the court to dispose of a claim or counterclaim must be a step. It was inconsistent with the right to have a dispute arbitrated and must be regarded as a step in the proceedings. The application for a stay was dismissed.

McLean's application for summary judgment on its claim was dismissed as the defendant had realistic prospects of success. The defendant's application for summary judgment on the counterclaim was allowed but not to be enforced as already satisfied by the defendant having deducted the amount from the sum due pursuant to adjudicator's decision and/or certificate 20. The application for a stay was dismissed.