HGCR Act 1996
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, JCT Intermediate with Contractor's Design, natural justice, interim payment, Section 111, withholding notice, Gilliland J. |
It has often been stated that Adjudicator’s decisions will be enforced even if they contain errors of law and fact. In English Law it appears to have been accepted that the construction industry prefers a quick decision even if it is the wrong decision.
That assumption is simply not correct. The construction industry requires a rapid means of dispute resolution which does not suffer from the inadequacies apparent in litigation and arbitration.
The excuse often stated is that adjudicators are appointed for skills other than those of lawyers, with the presumption that they are likely to make errors in deciding the law and the facts. That excuse is not borne out by the standard required from nominating bodies before accepting persons on to their list and the numerous dually qualified lawyer/engineers or lawyers/quantity surveyors who act as adjudicators. The excuse is undetermined by the readiness of the industry to refer even the most complex disputes to adjudication many with high values. Of course the parties require the adjudicator not to make errors of law.
Another excuse is that a rapid decision is required to ensure cashflow to subcontractors. It is difficult to see how that purpose is served by enforcing decisions that are wrong in law or fact.
The only safeguard presently available to the parties is the requirement for fairness which provides limited protection against errors of law and fact. There is presently no means for the Courts to consider the merits of the case other than by the blunt instrument of natural justice.
The recent decision of HH Judge Gilliland QC in Humes Building Contracts Ltd v Charlotte Homes (Surrey) Ltd [2007] provides a summary of the law. The judgment emphasizes the need for adjudicators to carefully consider the legal basis of any claim made and ensure that their decision logically follows from that legal basis. That of course requires the skills of a construction lawyer with knowledge of construction and experienced in construction disputes, particularly given the short timescale and the fact that many parties act without legal representation.
In 2005 Charlotte engaged Humes as contractor under the JCT Intermediate Building Contract with Contractors Design 2005 Edition for the construction of a 4 bedroom detached house and 2 ground floor offices with flats above at two sites at Milford in Surrey. Work started in October 2005 but was not completed by the contract completion date of March 2006. Charlotte purported to terminate the contract by notice in July 2006.
Shortly after the notice Humes submitted its Valuation No 10 for the value of all work up to the date of the notice comprising some £385,000 for measured works and some £180,000 for variations. Its position was that Charlotte had wrongfully terminated the contract and that it was entitled to be paid for work it had carried out. Charlotte’s position was that the contract had been validly determined, the relevant contract provisions applied and that it was also entitled to deduct sums for alleged defects and for liquidated damages.
Humes commenced adjudication on the basis that Valuation No 10 was the proper assessment of the work to the purported determination, that practical completion had already occurred and that the purported termination was unwarranted. The Scheme for Construction Contracts applied to withhold and set off £45,000 liquidated damages for delay and £135,916.48 for defects.
The adjudicator decided that practical completion had not been achieved before the notice of determination. He also decided that the determination was wrongful because none of the alleged defaults had been established. He gave the full extension of time claimed but awarded only part of the prolongation costs because of concurrent delays.
The Adjudicator observed that the architect had not certified any sum in respect of valuation No 10 and that no notice of withholding had been provided. He decided that he could only decide the value based on the information provided by the parties but could not take into account any possible set-off or liquidated damages. He referred to Charlotte’s report submitted in relation to defects and commented upon by Humes in adjudication, but stated that he could not take it into account because the issue of defects did not form part of the dispute.
The Adjudicator decided that the total due, after taking into account previous payments, for valuation No 10 and that no notice of withholding had been provided. He decided that he could only decide the value based on the information provided by the parties but could not take into account any possible set-off or liquidated damages. He referred to Charlotte’s report submitted in relation to defects and commented upon by Humes in the adjudication, but stated that he could not take into account because the issue of defects did not form part of the dispute.
The Adjudicator decided that the total due, after taking into account previous payments, for valuation No 10 was £158,486 including deduction of 5% for retention. The Adjudicator decided that Valuation No 10 was an interim payment and not a final account, practical completion had not been attained and the 5% retention was still operative.
Charlotte did not make payment as ordered by the Adjudicator and Humes commenced the enforcement proceedings before Gilliland J.
Gilliland J referred to the judgment of the Court of Appeal in Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2005] EWCA Civ 1358, [2006] BLR 15 where it was held that the Act and the Scheme required the Court to respect and enforce an Adjudicator’s decision unless it was plain that the question he had decided was not the question referred to him or the manner in which he had gone about his task was obviously unfair. It was held that the task of an adjudicator was not to act as arbitrator or judge, but to find an interim solution which met the needs of the case. It was observed that the need to have the “right” answer had been subordinated to the need to have an answer quickly and that the scheme of adjudication was not enacted to provide answers to complex questions.
Gilliland J held that the Adjudicator had not acted in excess of jurisdiction in deciding that the termination was wrongful. The issue was raised in the Notice of Adjudication and had been wrongful. The issue was raised in the Notice of Adjudication and been the subject of submissions in the adjudication.
Gilliland J held that the Adjudicator had given answers to the very matters set out in the notice of adjudication.
It was argued that the Adjudicator should have asked himself what was due to Humes at the determination of the contract, but instead he had treated the dispute as the valuation of the interim application in the form of Valuation No 10. As a result it was argued, he was misled into thinking that a withholding notice was required if he was to consider Charlotte’s claims for defects and liquidated damages.
Gilliland J considered that since there was no certificate from the architect for Valuation No 10, the Adjudicator could not have properly have concluded that anything was payable on Valuation No 10. No issue of withholding could arise until monies became due under any interim application. Accordingly his jurisdiction was to decide the amount due on determination. Gilliland held that the rejection of the claims for defects and liquidated damages was at the most an error of law by the Adjudicator within that jurisdiction.
The Adjudicator had failed to characterize the legal basis of the claim and to make clear what h considered was the legal status of Valuation No 10. If he had applied the provisions of the contract properly when making his valuations, his valuation may have been different. If as seemed more probably he treated the claim as one for damages, then his view of that a notice of withholding was required was wrong. In both cases there were errors of law within his jurisdiction. Reaching a wrong decision because he misunderstood and/or misapplied the law was not a valid ground for refusing enforcement.
Gilliland J held that the Adjudicator had not ruled the report on defects as irrelevant, but rejected its contents as irrelevant because of the absence of a notice of withholding for defects. That was an error of law. Even if he did treat the report as inadmissible, that was a procedural matter. In both cases the treatment of the report was within his jurisdiction even though it may have been wrong.
That effectively disposed of the arguments on the merits of the Adjudicator’s decision. Gilliland J clearly considered that the Adjudicator’s decision was wrong in not considering the issues of defects and liquidated damages, which would likely have made a considerable difference to his award. Gilliland J then considered the issue of natural justice.
The main objection was that neither of the parties had raised the issue of notice of withholding in the adjudication and that the point was taken by the Adjudicator himself. The parties had not been given the opportunity to make submissions on the point.
Gilliland J held that if a court had acted in that way then the decision would have been open to challenge on the grounds of natural justice. The issue was the extent to which those principals applied in adjudication.
Gilliland referred to the propositions of Jackson J in Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2005] BLR 310 broadly approved by the Court of Appeal.
Gilliland J considered the cases in which the adjudicator’s decision had not been enforced due to lack of jurisdiction and held that the question was whether what the adjudicator did was so unfair that the Court should refuse to enforce the decision in a summary manner. The following two propositions can be derived from his judgment.
Applying the above propositions, Gilliland J held that what the Adjudicator had done was manifestly and seriously unfair to Charlotte. The failure of the adjudicator to raise the point with the parties and to invite their comments before issuing his decision was so unfair to the defendant that the court should not enforce the decision summarily. The following facts were decisive.
That was sufficient to dispose of the case consistent with the requirements of natural justice. However Gilliland J made the comment that it was a strong thing to hold a party to a decision which was obviously wrong on an important part of the defendant’s case when the defendant had not had the opportunity to address the adjudicator on the point.
The judgment of Gilliland J emphasizes the absolute requirement for adjudicators to identify clearly and early in the process, the legal basis of claims and defences and the essential logic of the legal analysis required. Claims under the contract provisions and claims for damages for breach of contract may need to be distinguished for instance. It is usually helpful to identify those preliminary issues that need to be decided which may alter the enquiry or investigation necessary. The adjudicator does not need to do this in isolation – he can after always invite comment and submissions from the parties on these points. The parties will often have considered the matters for some time. A meeting is an efficient method of dealing with such points. Another method is to identify the main issues to be decided as a preliminary view, for comment and submissions by the parties.
If the adjudicator allows the parties the opportunity to participate in the legal analysis, then he may derive significant assistance in the process and that assistance may help avoid significant errors of law.
The judgment of Gilliland J suggests a movement to consideration of the merits of the analysis by the adjudicator. There was no question in this case of the adjudicator’s errors being outside his jurisdiction, but the nature of the errors was sufficient to combine with the lack of opportunity for the parties to make submissions to make the process sufficiently unfair to prevent enforcement.