The Scots decision in A v B (2002)Crt of Session by Lord
Drummond Young on 17 December 2002 is of general interest since it examines
the effect of contractual provisions which attempt to restrict the timing of the
enforcement of an adjudicator's decision. The case is also of interest
in Scots law since it explores further the Scottish doctrine of retention.
The parties are not named in the judgment, but referred to as A and
B. B engaged A as subcontractors to carry out the design and
installation of proprietary roofing and wall cladding to
certain buildings. The subcontract terms were based on the SBCC Scottish
Building Contract with Contractor's Design September 1995 Revision as
amended by a standard form of sub-contract produced by A.
Disputes arose and were decided by an adjudicator who awarded A an
extension of time under the subcontract, and also awarded A reimbursement
of loss and expense totalling 639,151.82, inclusive of value added tax. A
commenced the instant action in order to enforce the latter part of the
adjudicator's award.
B raised two defences which they argued prevented immediate enforcement
of the adjudicator's decision. The defences raised the following two issues:
- The Effect of Contractual Restrictions on Court Proceedings and
- The Scottish Doctrine of Retention.
The Effect of Contractual Restrictions on Court Proceedings
B relied on paragraph 2.1(f) of Appendix 8 to the Construction Sub-Contract.
Paragraph 2.1(f) provided that no party would make any
application whatsoever to a competent court in relation to the conduct of
the Adjudication or the decision of the Adjudicator until the earlier of the
Actual Completion Date of the last Phase or termination of the Sub-Contract
unless and until the prior written consent of both the Sub-Contractor and
the Contractor has been obtained. It was common ground that
actual completion of the last phase of the main contract had not yet been
achieved.
Paragraph 2.1 of Appendix 8 provided that if a
dispute was referred to adjudication the procedure was to be governed by the
Official Referees Solicitors Association ("ORSA") Adjudication
Rules - 1998 Version 1.2, but subject to a large number of
amendments. B relied on Rule 28A, which was inserted into the ORSA
Rules by Appendix 8. Rule 28A provided that every decision of the
Adjudicator was to be implemented without delay. It provided that the parties
were
entitled to such reliefs and remedies as were set out in the decision, and entitled to summary enforcement thereof, regardless of whether such
decision was or was to be the subject of any challenge or review. Rule
28A also provided that no party was entitled to raise any right of set-off counterclaim or abatement in
connection with any enforcement proceedings. Rule 28A also recorded
the agreement that they would docquet every decision with their consent and to
registration of the Adjudicator's decision in the Books of Council and
Session for execution. B submitted that Rule 28A was of limited scope
and dealt with what was to happen only when an action
relating to an adjudication came into existence. B submitted that the purpose
of Rule 28A was to ensure, at that stage, that enforcement was possible immediately, and not
held up by either counterclaims or proceedings for judicial review of the
adjudicator's decision.
Lord Young held that A were entitled to enforce the adjudicator's decision
on the date when it was issued. A was not obliged to wait until the actual completion
date of the last phase of the main contract before doing so. Lord
Young stated that that conclusion was based both on Section 108(3) of the 1996 Act and on the construction of
the parties' contract, read in the light of that Section.
Section 108(3)
Lord Young held that
an adjudicator's decision was legally binding on the parties when
pronounced. Until undone by
subsequent litigation or arbitration the decision created
binding legal rights and obligations, which had to be given effect. That
result was clear from the terms of Section 108(3) of the 1996
Act. He held that if an obligation arising out of
an adjudicator's decision was binding, then it must be capable of enforcement.
Consequently the party in whose favour
an adjudicator's award was made must be entitled to enforce that award. That
was an inevitable consequence of Section 108(3) of the Act. The legal position
was summarised by Lord Macfadyen in The Construction Centre Group Limited v
The Highland Council, in which he held that not to allow enforcement of an adjudicator's
award when the date for payment had passed would obstruct the attainment of the purpose
of Section 108.
Lord Young held that any attempt to
delay the enforcement of an adjudicator's award by more than a short period
was prohibited by Section 108(3). Surprisingly, and without reference
to any legal principles which might apply, Lord Young considered that any such delay had to be justified by
practical considerations, such as the need to find the necessary funds to
meet the award. Lord Young stated that on that basis, a delay of perhaps four weeks or thereby
might be justified. Beyond that, however, the policy of the Act was that a party against whom an adjudicator's award
was made
should make immediate payment in terms of the award. Section 108(3) was
mandatory in its terms.
Lord Young held that any provision of a contract that was incompatible with the
binding nature of an adjudicator's award was legally ineffective. Any attempt to
prevent enforcement of an adjudicator's award was in essence a denial of the
binding nature of that award. If, therefore, paragraph 2.1(f) of Appendix 8
had the effect contended for by B, and prohibited enforcement of
an adjudicator's award until the actual completion of the last phase of the
main contract, it was incompatible with Section 108(3), and was accordingly of
no legal effect.
Construction of the SubContract
Lord Young held that a distinction was to be drawn in Scotland between
the two
types of court proceedings of judicial review and enforcement of an
adjudication decision. In judicial review, essentially, the issue was
the jurisdiction of the adjudicator, whether he had acted
within the terms of the reference that had been made to him, and to
misconduct on the part of the adjudicator. Judicial review was not possible on the ground that the adjudicator has made an error of fact or law
provided that his decision could not be considered irrational. In
enforcement proceedings as
described by Lord Macfadyen in The Construction Centre Group Limited v The
Highland Council [2002] the pursuers did not ask the Court to endorse the correctness of the
adjudicator's decision on the merits of the dispute referred to him, but merely asked the
Court to recognise that the parties had bound
themselves contractually to implement the adjudicator's decision.
Lord Young held that paragraph 2.1(f) of Appendix 8 was to be construed as relating only to
judicial review of an adjudicator's decision, and not to proceedings to
enforce such a decision. This construction of the contract was based
on two considerations.
First, the provisions of a
building contract must be interpreted so far as possible in a manner that was
consistent with Section 108. Section 108 had no bearing on the availability
of judicial review, and it would be open to parties to a
contract to allow proceedings for judicial review to be delayed until the
conclusion of the contract, provided that immediate enforcement is
available. Lord Young held that the reference in paragraph 2.1(f) to the conduct of the adjudication clearly related to
judicial review rather than enforcement, since the adjudicator's conduct
could
be challenged by way of judicial review but would have no bearing on the
right to enforce an award, at least in the absence of successful judicial
review. The reference in paragraph 2.1(f) to the decision of the adjudicator
was wider, and if it
had stood by itself, without the context provided by Section 108(3), would
have been construed as relating to enforcement as well as adjudication.
In the
ORSA Rules the word "decision" was used to designate an
adjudicator's award, and the enforcement of an award by legal proceedings amounted to an
application in relation to such
a decision. Lord Young held that in the context of Section 108(3)
the reference to the decision of the adjudicator in paragraph
2.1(f) had to be restrictively construed, and confined to proceedings for
judicial review of such a decision. In that way any conflict with Section
108(3) could be avoided. That was not an unnatural construction
of the wording used. Lord Young observed that judicial review extended beyond the conduct of the
adjudicator in the narrow sense, and could extend to the decision itself, if
for instance the decision was ultra vires of the remit to the adjudicator, or
was ambiguous or unclear. Lord Young held that against the
background of Section 108, a restriction of paragraph
2.1(f) to judicial review was the most obvious and natural construction of
the provision.
Second, Rule 28A of
the ORSA Rules negatived
any argument that paragraph 2.1(f) prohibited immediate enforcement. Rule 28A
began by stating that every decision of the adjudicator was to be
implemented without delay. It was an elementary principle of construction that the
provisions of a contract were, so far as possible, to be read together.
Lord Young held that there was no incompatibility between Rule 28A and paragraph 2.1(f)
provided that the latter provision was construed in the way suggested above,
by restricting it to judicial review and excluding enforcement.
The Scottish Doctrine of Retention
B's second argument
was that the Scots Doctrine of Retention applied.
English Law does not have any equivalent to the Scots Doctrine of
Retention, although it is an important feature of the Scots law of
contract. The Scots Doctrine of Retention involves a bar on the
raising of legal proceedings. It relates to actions on mutual
contracts. The doctrine is that every action on a mutual contract implies that the pursuer either has
performed, or is willing to perform, his part of the contract, and it is
therefore always open to the defender to demand performance of the contract before the pursuer
can insist in his action Johnston v Robertson [1861] and Turnbull v McLean &
Co [1874].
B argued that the adjudicator had rejected a
contention that A was entitled to an extension of time
of 112 weeks, and awarded them an extension of only 46 weeks, which
represented a delay of 66 weeks. The SubContract provided for liquidate and ascertained damages
which in this case amounted to a sum of 4,950,000 due by A to B. B
argued that the obligation to pay that sum arose out of the adjudicator's
award relating to extension of time. B argued that A was
not entitled to enforce the part of the decision in its favour without fulfilling
its
obligation to pay liquidate and ascertained damages.
Lord Young held that since the principle of retention involved a bar on the raising of legal
proceedings. Once legal proceedings had reached the stage of decree the principle
had no application. Lord Young recognised three types of decree for
the purpose of the Doctrine of Retention:
- Decree of a Court: A Court decree was obligatory in its own right, without reference to the
contract or other legal ground on which it proceeded. Consequently there is
no room for invoking a failure to perform a term of the contract as a reason
for refusal to implement the decree.
- Arbitration Award: A decree arbitral was referable to the underlying
contract, in that the jurisdiction of the arbiter is based on an arbitration
clause in the contract. An arbitration clause was not normally affected by a breach of contract
and arbitration could be invoked by a party
who was, or was alleged to be, in breach of contract Heyman v
Darwins [1942]. It would
normally be impossible to plead retention as a defence to the invocation of
an arbitration clause, because the right of retention was founded on a breach
of contract. It followed that when decree arbitral was pronounced, a plea of
retention could not be taken against the decree. The result was the
same as with a Court decree.
- Adjudication Decision: Lord Young held that the decision of an adjudicator
was in exactly the same position as a decree arbitral. Adjudication was
based on a term of the parties' contract, in the form of either an express
term or the terms of the Scheme for Construction Contracts, as applied by
Section 108(5) of the 1996 Act. The major difference between the functions of an adjudicator
and an arbiter was that an
adjudicator's decision was only provisional. Section 108(3) required the
parties' contract to provide that decisions of the adjudicator were binding
until the final determination of the dispute, which gave such
decisions the same force as the awards of an arbiter for the purpose of the
application of the principle of retention. Lord Young held that accordingly a plea of
retention could not be taken against the decision of an adjudicator once the
decision was pronounced.
Lord Young observed that the position was different while the
adjudication process was still continuing. A party could take any pleas or defences that
were relevant to
the claim made against him during the adjudication proceedings, including a plea of retention, if the
conditions for the application of the principle existed. Lord Young agreed with the views expressed by Lord Macfadyen in
The
Construction Centre Group Limited v The Highland Council that an employer who claimed to be entitled to liquidate damages and
sought to retain a sum that would otherwise be due to the contractor against
that claim, was in principle entitled to put that contention forward before
the adjudicator. An adjudicator who held otherwise, and declined
to permit the responding party to raise the issue of retention would be
misdirecting himself.
Lord Young applied the statement of law to the instant case. B could, had
they wished, have asserted that they were entitled to liquidate and
ascertained damages if the adjudicator failed to award the pursuers the full
extension of time that they claimed in the adjudication. B contested
the extension of time claimed by A, but disputing entitlement to an
extension of time was not the same thing as making a claim for liquidate and
ascertained damages. A claim to such damages raised distinct issues,
including the question of whether the sum of liquidate damages was a
penalty. The issue of liquidate and ascertained damages was not raised
before the adjudicator. Nor was a right of retention put forward as a
defence to A's claim. Lord Young held that in these circumstances B
could not assert a right of retention in proceedings for enforcement of the
adjudicator's award.
That disposed of the matter, but Lord Young made further observations
obiter dicta:
- There was some force in A's submission that a notice under Section 111
of the 1996 Act was required if a party to a construction contract was to be entitled to
withhold payment after the final date for payment of a sum due under the
contract relying on the defence of retention.
- Lord Jauncey in Bank of East Asia Limited v
Scottish Enterprise [1997] did not challenge the proposition that the
obligations of one party and the obligations of the other are presumed to be
reciprocal in the absence of an indication to the contrary.
Lord Young also dealt briefly with the argument by A that a failure to pay
liquidate and ascertained damages timeously, was not a
breach of contract and consequently could not give rise to a right of
retention. Lord Young held that if one party completed late, in breach of its obligations under the
contract, and is in consequence liable to pay liquidate damages, that was
sufficient to entitle the other party to plead retention in respect of a
claim for the contract price, Johnston v Robertson, and Macbride v Hamilton and Son
[1875]. It was not necessary to decide whether failure to pay
liquidate damages amounted to a breach of contract in Scots law and whether
the decision in the House of
Lords in President of India v Lips Maritime Corporation apparently to
the contrary and relied upon by A, applied to Scots Law in view of the authority of the above two
Scots cases.
Lord Young also dismissed A's argument that Rule 28A were sufficient to
prevent B from asserting a right of retention. Lord Young held that the right of retention
could not be categorised as a right of "set-off counterclaim or
abatement" the terms used in Rule 28A. Retention was a mere defence to a claim, and
did not involve the extinction of any debt. The expression
"set-off" accordingly did not apply to it. Nor could retention be
regarded as a counterclaim; a counterclaim was a claim actively pursued, by
a defender against a pursuer. Nor could retention be considered an
"abatement". The effect of a defence of retention was not to reduce
the amount of the pursuer's claim, rather it suspended the defender's
obligation to meet the pursuer's claim until such time as the pursuer
implemented or indicated willingness to implement its own contractual
obligations. It followed that the expression "abatement" did not
adequately describe the principle of retention. The right of retention could only be excluded by clear
and unequivocal words in a contract Redpath Dorman Long v Cummins Engine
Company Limited [1981].
Summary Decree
Lord Young held that the question of law which was
raised in the instant case admitted of a clear and obvious
answer in A's favour, which was the test applied by Lord Macfadyen in The Construction Centre Group Limited v The Highland Council,
and therefore pronounced decree against B in favour of A declarator that A
was entitled to payment of the amount of the adjudicator's award.
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