In Bovis Lend Lease Limited v Triangle Development Limited [2002] Judge Thornton QC
reviewed the extensive authorities to decide whether and when payment could
be withheld against against an adjudicator's decision ordering payment. In doing so he
considered the
status of an adjudicator's decision particularly in the context of
determination of employment of the contractor and the contract provisions.
He also considered the effect of the claim for damages for common law
repudiation on the adjudicator's order for payment.
Background
Bovis entered into a management contract with Triangle to refurbish and fit out three existing Victorian school
houses into 43 luxury residential apartments and associated works at
Silverthorne Triangle, Thackeray Road, London. The contract incorporated the
JCT Standard Form of Management Contract, 1998 Edition and provided for the
work to be completed in four phases between 16 October 2000 and 16 July
2001.
In 2002 several inter-related events occurred:
- Negative Payment Certificates were issued;
- A purported Compromise was made;
- Triangle issued Notices to deduct Liquidated
Damages;
- Triangle purported to determine the employment of Bovis;
- Three Adjudications were commenced and decided.
(1) Negative Payment Certificates
The work was divided up into work
packages. The contract required the architect to issue interim certificates.
The architect decided that Bovis, as management
contractor, had been in default in the manner in which it had checked the
relevant applications for payment of three work package contractors
and disallowed the entire sum being claimed for each of
them. This removed substantial sums from the sums previously certified and
led to the two negative valuations in two interim certificate nos. 23 and
27. These were issued on 9
April 2002 and 21 June 2002 with the final date for payment under the terms
of the contract being fourteen
days later, respectively, 23 April 2002 and 5 July 2002. The final date for the giving of a valid notice to
withhold payment against the sums certified was 16 April 2002 and 28 June 2002, being seven days before the respective
final dates for payment.
(2) Compromise
Triangle contended that it was
agreed that a sum of 100,038.07 retention would be released early in return for which the
parties would immediately mediate the dispute as to the negative interim
certificates and the deductions that had been made.
Triangle considered the early release to be an on-account payment towards the sums
deducted from the interim certificates pending that mediation.
Triangle contended that Bovis then declined to participate in a mediation
despite the issuing of an additional interim certificate on 28 June 2002
certifying as due for payment a sum of 100,038.07 with a final date for
payment of 29 July 2002. Triangle had paid that sum.
Bovis did not accept that the sum was an on-account payment towards the
sums deducted from the earlier interim certificates.
(3) Purported Determination
On 25 July
2002, the architect served on Bovis a notice under clause 7.2 of the
contract to the effect that Bovis were failing to proceed regularly and
diligently with the carrying out of its obligations. On 26 July 2002, Bovis responded that the default notice did
not comply with the procedural requirements of the contract and that the
underlying factual basis for its issue did not exist. Bovis had always
contended that the default notice was invalid and erroneously given and that
the determination of its employment was invalid.
On 7 August 2002 Bovis served notice that Triangle had repudiated the contract by engaging new contractors
and that, therefore, Bovis was accepting that repudiation and was treating
the contract as being at an end. This amounted to the exercise by Bovis of
its common law rights, preserved by clause 7.12 of the contract, to accept
what it regarded to be Triangle's repudiatory breach of contract.
On 8 August 2002 Triangle replied that the contract had not been repudiated by Triangle and
that it expected Bovis to improve its performance on site. On the same day,
the architect wrote to Bovis and asked that a programme detailing the steps
that Bovis propose to take to complete the work be delivered within seven
days.
On 9 August 2002, Triangle sent Bovis a
notice under clause 7.2 of the contract as a follow-up to the earlier
default notice dated 25 July 2002 that determined Bovis' employment under
the contract on the grounds that the originally specified default had
continued for more than fourteen days from 25 July 2002.
(4) Liquidated Damages
On 31 July 2002, Triangle issued a notice under clause 2.10.1 of the
contract informing Bovis of its intention to withhold or deduct liquidated
damages following certificates of non-completion of two blocks or sections
of the works that the architect had issued on 24 June 2002, and referred to a sum of 87,000 as being
due.
On 2 August 2002 the notice was issued that clauses 4.3.4 and
4.12.4 of the contract provided for and which had to be served before
liquidated damages could be deducted from sums otherwise payable under interim
certificates.
(5) Three Adjudications
In the period July to September 2002 three adjudications were started and
decided with the same adjudicator.
- On 23 July 2002, Bovis referred to adjudication the
dispute as to whether or not the architect was entitled to deduct from
interim certificates sums that had been previously certified. On 12
September 2002 the adjudicator decided that the two
interim certificates should be amended by including the omitted valuations
and that Triangle should pay Bovis 158,020.71 and interest from the
respective dates of final payment of the interim certificates.
- A second adjudication was started by Triangle,
which concerned Triangle's claim that Bovis was in default of
contractual provisions relating to the provision of documents for the
valuation of work package contractors' work. On
the 13 August 2002 the adjudicator decided that Bovis was in breach
of its contractual obligations by not providing certain of the documents
required by Triangle. The adjudicator was unable to reach a decision in
respect of other documents.
- On 19 August 2002 Triangle referred to adjudication the dispute whether Triangle had evinced an
intention to abandon and refuse to perform the management contract. On 26 September 2002
the adjudicator decided that Triangle had not prior to 9 August 2002 evinced an
intention no longer to be bound by the management contract and that the
management contract had not been brought to an end on 7 August 2002 by Bovis'
acceptance of Triangle's allegedly repudiatory breach.
On 13 September 2002 and in response
to the adjudicator's first decision, Triangle served on Bovis a composite
notice which:
- gave notice under clause 4.3.3 of the contract as to the
amount of the adjudicator's decision, being nil, which it was proposed to
pay;
- gave notice that the adjudicator's decision should be corrected due
to a suggested discrepancy which was that in
directing that a sum of 158,020.71 should be paid, the adjudicator had overlooked the
contents of the interim certificate for
early release of retention in accordance with the agreement reached in late
June 2002. As a result, there had already been a payment of 100,038.71
towards the overall sum that Triangle had been directed to pay;
- identified the withholding it proposed
to make being:
- its entitlement to withhold payment as a result of clause
7.6.4.1 of the contract on account of the determination of Bovis'
employment;
- the early payment of 100,038.73 of the retention which was
to be credited to the sum directed to be paid; and
- a further 15,084.59
in liquidated damages retained pursuant to clause 2.10 of the contract.
The adjudicator declined to correct his
first decision on the grounds that the matter of the sum of
100,038.73 was a separate issue unrelated to Triangle's obligations to make
payment of monies that he had decided should have been included in relation
to Works Contractors. There was therefore no error in his decision to be
corrected.
Bovis had started CPR Part 8 proceedings in its attempt to enforce the
adjudicator's decision that Triangle should pay 158,020.71 within 7 days of
12 September 2002. Part 8 is applicable where a party seeks the court's
decision on a question which is unlikely to involve a substantial dispute of
fact. The Issues
The main issue was whether
the adjudicator's decision that Triangle must pay Bovis 158,020.78 was superseded by contractual provisions
allowing Triangle to withhold payment as a result either of the
determination of Bovis' employment or as a result of Bovis' alleged
repudiation of the contract or as a result of the service of the withholding
notice dated 13 September 2002.
In order to decide the issue, Judge Thornton considered six sub-issues:
- He considered the legal status of an adjudicator's decision by
examination of extensive caselaw;
- He considered whether Triangle as a defence to enforcement proceedings
was entitled to rely on Clause 7.6.4.1 of the Contract which provided that
following a determination under Clause 7.2 the provisions
of the contract requiring further payment to be made to Bovis did not apply;
- He considered whether Bovis could rely on Clause
9A.7.2 as taking precedence over Clause 7.6.4.1. Clause 9A.7.2 provided that the parties would, "without prejudice to
their own rights under the Contract", comply with the decision of the
adjudicator and would ensure that the decisions of the adjudicator were
given effect.
- He considered whether the proviso of Clause
7.6.4.1 could be relied upon by Bovis. The proviso to clause 7.6.4.1 was that the clause was not to be construed
so as to prevent the enforcement by Bovis of any rights under the contract
in respect of amounts properly due to be paid by Triangle which Triangle had
had unreasonably not paid and which had accrued 28 days or more before the
date of determination. In other
words Judge Thornton considered whether the sum decided by the Adjudicator after determination as
the sum which the architect should have stated in his certificate issued
before determination, became due before the purported determination.
- He considered whether Triangle's alternative
ground for common law repudiation could succeed to prevent payment on the
adjudicator's decision;
- He considered whether Triangle could withhold
payment of 100,038.71 on the grounds that it had paid, or was to be
treated as having paid, that sum already.
These issues involved a consideration of the closely inter-woven
contractual provisions concerning payment, the service of withholding
notices, termination of the contractor's employment and adjudication.
Issue 1 - Legal Status of Adjudicators Decision
Judge Thornton observed that ordinarily, a decision of an adjudicator
would give rise to a contractual entitlement to immediate payment without
deduction, set off, withholding, reliance on a cross-claim, abatement or
stay of execution. This was because the sum in question was due by virtue of
the statutory and contractually backed provisions requiring compliance and
full effect to be given to the decision of an adjudicator in addition to it
being due by virtue of the underlying contractual provisions. It was for
this reason that courts had repeatedly held that no deduction or withholding
will ordinarily be allowed from an adjudicator's decision.
Judge Thornton observed that the courts had developed three exceptions to the general rule:
- where it could be shown that the
adjudicator had no jurisdiction to make the whole or some definable part of
the decision in question or where the adjudicator had failed to act fairly
or in conformity with applicable procedural rules in some significant
respect. This exception gave effect to the court's two-fold duty of
ensuring that the draconian powers of the state that were available to ensure
that judgments were satisfied, were not used where an adjudicator's decision
was a nullity or lacked substantial procedural integrity.
- where the terms of the contract clearly
overrode the apparent obligation of a party to comply within seven days
with an adjudicator's payment decision. Judge Thornton observed that clear
words would be needed if the contract was to be construed so as to give
primacy to a deduction or withholding or to some other basis that was
being relied on as a ground for not paying the payment decision in full.
- where the terms of another conflicting
adjudication decision applied - similar considerations as 2 arose.
Judge Thornton observed that the relevant principles governing set off and withholding from an
adjudicator's decision were set out in the decision
of Judge Hicks in VHE Construction PLC v RBSTB Trust Limited [2000] BLR 187:
".. that
enforcement proceedings such as these are proceedings to enforce a
contractual obligation, namely the obligation to comply with the decision.
The decision does not have the status of a judgment, nor is there any
corresponding provision to section 66 of the Arbitration Act 1995, under
which, by leave of the court, judgment may be entered in terms of an
arbitral award, or the award may be enforced in the same manner as a
judgment. There is, however, a question whether the obligation to
"comply with" a decision which requires the payment of a sum of
money has any greater effect than to make that sum a simple debt, for
example by excluding certain defences which could be raised in answer to an
action on such a debt. ...".
Judge Thornton observed that Judge Hicks then considered whether any of the contractual provisions
that had been relied on by the paying party merely gave the adjudicator's
decision the status of a simple debt or, instead, made it more substantial
and impregnable by excluding defences such as set off. His conclusion was
that
"... section 111 [of the HGCRA] constitutes a comprehensive code
governing the right of set off against payments contractually due. [The
paying party] has not complied with it. It would make a nonsense of the
overall purpose of Part II of the Act, to which sections 108 and 111 are
central and in which they are closely associated, not least by the terms of
section 111(4), if payments required to comply with adjudication decisions
were more vulnerable to attack in this way than those simply falling due
under the ordinary contractual machinery. To return to the question I left
unanswered in paragraph 56 above, therefore, I find these compelling reasons
for concluding that in clause 39A.7.2 and 39A.7.3. [which Judge Thornton
observed were in similar
terms to clauses 9A.7.2 and 9A.7.3 in the instant contract] at least on
the facts of this case, "comply" means "comply, without
recourse to defences or cross-claims not raised in the adjudication."
Judge Thornton listed the cases which had followed and applied Judge Hick's statement of
principle and cited in argument:
Northern Developments
(Cumbria) Limited v J & J Nichol (2000) BL 158, Judge Bowsher;
Solland
International Limited v Daraydan Holdings Limited 15 February
2002, Judge Seymour and
Levolux A.T. Limited v Ferson Contractors Limited
(2002) BLR 341, Judge Wilcox
Judge Thornton then dealt with the suggested conflict between the above line
of authority and three decisions of Judge Lloyd. It was suggested that
Judge Lloyd had held in these decisions that an adjudicator's decision did
not create a separate obligation to pay from the underlying contractual
obligation that was protected from set off or withholding. Judge Thornton
observed that when the three decisions were carefully considered, they do
not conflict with, but instead illuminated the general principles
summarised by Judge Hicks in the VHE case.
Judge Lloyd's three judgments were:
KNS Industrial Services
(Birmingham) Ltd v Sindall Ltd (2001) 75 Con LR 71;
Glencot Development and
Design Co Ltd v Ben Barrett & Son (Contractors) Ltd [2001] BLR 207 and
David McLean Housing Contractors Limited v Swansea Housing Association
Limited [2002] BLR 125.
Judge Thornton observed that in KNS, Judge Lloyd was faced with an argument that clause 29.6.3 of the
contract in that case, which allowed for the determination of the
contractor's employment and was the equivalent of clause 7.3.4.1 in the
instant case, had the effect of overriding the requirement that
the decision of the adjudicator had to be complied with. Judge Lloyd
concluded
"other rights under the contract which were not the subject
of the decision remain available to the relevant party. If therefore by the
time an adjudicator makes a decision requiring payment by a party to the
contract has been lawfully terminated by that party (or that party has real
prospects of success in supporting that termination) or some other event has
occurred which under the contract entitles a party not to pay then the
amount required to be paid by the decision does not have to be paid."
Judge Thornton observed that Judge Lloyd was affirming the general principle that
immediate effect should be given to an adjudicator's payment decision as
well as pointing out that that principle can be excluded by other terms of
the contract.
Judge Thornton then considered Judge Lloyd's decision in Glencot. In that case, after a detailed consideration of the law
relating to the need for an adjudicator to be impartial and to the facts of
the case, Judge Lloyd concluded that there was sufficient evidence that the
adjudicator was not impartial to preclude his giving summary judgment to
enforce the adjudicator's decision since, if that lack of impartiality was
made out at the trial of the enforcement claim, the adjudicator's decision
would be held to be a nullity. However, although the adjudicator's decision
could not be relied on in the summary judgment application being heard by
Judge Lloyd, an interim payment of part of the underlying claim was ordered
which was based on the evidence of the underlying claim set out in the
adjudicator's reasons for his decision. Judge Lloyd concluded that the
receiving party had established that it had a real prospect of success in
relation to a substantial part of the claim. It was in this context that
Judge Lloyd stated
"an adjudicator's decision does not create a cause
of action as such; it is merely an expression as to liability and quantum
about the dispute that has arisen under the contract. ... Under the Act and
the Scheme that decision cannot be challenged if it is within the
jurisdiction of the adjudicator as the parties are taken to have agreed to
be bound by it and cannot in law question the decision if it is valid. The
cause of action (or chose in action) remains the original claim (if upheld)
and is not the decision of the adjudicator, but the amount recoverable is
the amount the adjudicator decides is due."
Judge Thornton observed that in essence, Judge Lloyd decided that where an adjudicator's decision is
valid, the parties are taken to have agreed to abide by that decision.
However, if there was a dispute as to the validity of the decision, the
claiming party was still free to rely on its entitlement to judgment or an
interim payment based on the underlying cause of action that had been dealt
with by the adjudicator since that cause of action survived and did not
merge in, and was not superseded by, the disputed adjudicator's decision.
Judge Thornton observed that Judge Lloyd then returned to this area of law in
David McLean which was summarised by Judge Seymour in Solland International Limited
v Daraydan Holdings Limited 15 February 2002). Judge Seymour
explained that Judge Lloyd was concerned with an adjudicator's decision in
an unusual situation where
"in the course of the very decision as to how
much was due to the contractor the adjudicator had to reach a conclusion as
to whether the contractor was entitled to any, and if so what, extension of
time. The converse of a decision that the contractor was not entitled to
loss and expense over the full period of delay as was excluded from the
evaluation of the loss and expense to which the contractor was entitled to.
there was thus a decision of an adjudicator as to the period over which the
employer was entitled to liquidated and ascertained damages. Subject to the
question of the giving of a notice of intention to withhold payment in
respect of such liquidated and ascertained damages against the sum which the
adjudicator had determined was payable to the contractor, there was no
reason why a set off was not appropriate. Judge Lloyd held that an effective
notice of intention to withhold payment against the decision of the
adjudicator had been given. In those circumstances his decision is wholly in
line with and not a departure from the approach which I [and earlier
decisions of the TCC and Court of Appeal] consider to be appropriate."
Judge Thornton adopted Judge Seymour's reasoning which showed that
David McLean was a case where the court was giving effect to and complying
with a further decision of the adjudicator as to extensions of time and
their corollary, the extent of delayed completion by the receiving party and
its entitlement to liquidated damages for delay. It was for that reason that
effect was not given to the separate decision in favour of the paying party
that a sum of money was due to it.
Judge Thornton held that
- the decision of an adjudicator that money
must be paid gave rise to a separate contractual obligation on the paying
party to comply with that decision within the stipulated period. This
obligation would usually preclude the paying party from making withholdings,
deductions, set offs or cross-claims against that sum.
- for a withholding to be made against an adjudicator's
decision, an effective notice to withhold payment must usually have been
given prior to the adjudication notice being given, or possibly the decision
being given, and which was ruled upon and made part of the subject-matter of
that decision.
- where other contractual terms clearly had the
effect of superseding, or provided for an entitlement to avoid or deduct
from, a payment directed to be paid by an adjudicator's decision, those
terms would prevail.
- equally, where a paying party was given an entitlement to
deduct from or cross-claim against the sum directed to be paid as a result
of the same, or another, adjudication decision, the first decision would not
be enforced or, alternatively, judgment will be stayed.
Issue 2 - Clause 7.6.4.1
Triangle contended that it had
determined Bovis' employment under the contract and was entitled to rely on clause 7.6.4.1 of
the contract. Bovis disputed the validity of both the substantive
determination and the procedural validity of the notice.
Clause
7.6.4.1 provided that, following a clause 7 determination of Bovis' employment, the provisions of the contract requiring further payments
to be made to Bovis did not to apply.
Judge Thornton held that it was not relevant in enforcement proceedings,
to consider the underlying or procedural validity of the determination
unless it could be seen that there were substantial grounds for that
challenge. The evidence served by Bovis would not raise any
substantial grounds for challenging the validity of Triangle's determination
in summary judgment proceedings. Judge Thornton held that for the
purposes of activating clause 7.6.4.1, Triangle merely had to point to an
architect's default notice which was valid in appearance and for which there
was no evidence that it was given in bad faith and to its own follow-up
notice of determination which had the same characteristics. Judge Thornton
held that unless and until there was an adjudicator's decision or an
arbitrator's award that decided or declared that the determination was
invalid or a nullity, Triangle was entitled to proceed on the basis that the
determination had current, albeit potentially temporary, validity and that
it was entitled to rely on clause 7.6.4.1 if that was applicable to the
enforcement application.
Bovis further argued that clause
7.6.4.1 was governed by section 111 of the HGCRA. Bovis argued that
clause 7.6.4.1 could not be
relied on since no withholding notice had been served which notified Bovis
of Triangle's intention to rely on that clause prior to Bovis' adjudication
notice dated 23 July 2002.
Judge Thornton considered whether it was necessary for Triangle to serve a
section 111 withholding notice before it could rely on the right to avoid
payment provided for by clause 7.4.6.1. He observed that Section 111 applied to
any payment: "of a sum due under the contract". Judge Thornton
held that the wording was
not appropriate to cover clause 7.6.4.1 since that clause had the effect, on
the determination of the employment of the contractor, that: "the
provisions of this Contract which require further payment shall not
apply". Judge Thornton held that it followed that, following a determination of the contractor's
employment, but in no other circumstances, further potential contractual
payments that the contract would otherwise have required, were no longer to
be regarded as accruing due under the contract at all. Thus, any sum which
any term of the contract would have required payment of had the contractor's
employment not been terminated ceased to be subject to a contractual
requirement of payment on a determination. It followed that the service of a
section 111 withholding notice was not prerequisite to a paying party's
reliance on clause 7.6.4.1 of the contract as a defence to enforcement
proceedings.
Issue 3 - Clauses 7.6.4.1 and 9A.7.2
Bovis contended that clause 9A.7.2 took precedence over clause 7.6.4.1
and that, in consequence, Triangle's obligation to discharge the direction
of the adjudicator and make a payment of 158,020.71 trumped the provision
in the contract that, following a determination of Bovis' employment,
contractual obligations requiring payments to be made to Bovis should no
longer apply.
Clause 9A7.2 provided that the parties would, "without prejudice to
their own rights under the Contract", comply with the decision of the
adjudicator and would ensure that the decisions of the adjudicator were
given effect.
Judge Thornton observed that the starting point in any consideration of what contractual terms, if
any, could prevail to enable a set off or cross-claim to be relied on in
answer to an enforcement claim was the decision of the Court of Appeal in
Parsons Plastics (Research and Development) Limited v Purac Limited [2002]
BLR 334. Judge Thornton observed that Pill LJ considered the principle
to be that:
"It is open to
the [employer paying party] to setoff against the adjudicator's decision any
other claim they have against the [contactor receiving party] which had not
been determined by the adjudicator. The adjudicator's decision cannot be
re-litigated in other proceedings but, on the wording of this sub-contract,
can be made the subject of set-off and counterclaim."
Judge Thornton observed that in that case, the
adjudication was a purely contractual adjudication without the statutory
backing of the HGCRA. Judge Thornton held that fact immaterial when considering the
applicability of the principle applied by the Court of Appeal in Parsons
Plastics to the effect that appropriate terms of the contract can
defeat the requirement that immediate effect should be given to an
adjudicator's payment decision. Judge Thornton held that it was only clear words that could
trump the payment decision. In Parsons Plastics, the relevant clause
provided that:
"nothing contained in this Deed whether expressly or by
incorporation or by implication shall in any way restrict [Purac's]
equitable or common law rights of set off. Without prejudice to the
generality of the foregoing, [Purac] shall have the right to set off against
any sum due to [Parsons] whether hereunder or otherwise a fair and
reasonable sum in respect of or on account of any claim or claims that have
been made against [Purac] by the Purchaser the subject matter of which
touches or concerns the Sub-Contract Works."
Judge Thornton observed that the principle was applied by Judge Lloyd KNS,
where a sub-contractor had given notice that it
intended to suspend work on the grounds of non-payment. Having done so, the
main contractor terminated the sub-contractor's employment under the
sub-contract. The adjudicator decided that the sub-contractor was not
entitled to suspend working. The result of that decision was, Judge Lloyd
concluded, that the main contractor was entitled to terminate the
sub-contractor's employment. One of the questions for decision by Judge
Lloyd was whether the sub-contractor was entitled to payment following
another of the adjudicator's decisions that a payment should be made by the
main contractor. This second decision had been made notwithstanding the
determination of the employment of the sub-contractor under a contractual
provision which gave the main contractor the right to defer further payment
'until after completion of the Sub-contract works and the making good of
defects' following the determination of the subcontractor's employment.
Judge Thornton observed that in the course of his judgment, Judge Lloyd
stated that
"[Counsel for the sub-contractor] submitted that when an adjudicator
decided that an amount had to be paid, it had to be paid notwithstanding, it
seemed, any provision in the sub-contract.
..... In my judgment the answer is clear. Clause 38A7.2
expressly provides that-'
the parties shall, without prejudice to their other rights under the
contract, comply with the decisions of the adjudicator ...'
Therefore other rights under the contract which were not the subject
of the decision remain available to the relevant party. If therefore by the
time an adjudicator makes a decision requiring payment by a party the
contract has been lawfully terminated by that party (or that party has real
prospects of success in supporting that termination) or some other event has
occurred which under the contract entitles that party not to pay then the
amount required to be paid by the decision does not have to be paid."
Bovis contended that clause 9A7.2 required
Triangle to be bound by the adjudicator's payment decision and to comply
with and give effect to it. These clear-cut obligations fell outside the
ambit of clause 7.6.4.1 which only applied to payments which were required
to be made by the provisions of the contract.
Judge Thornton held that since the obligation
imposed on Triangle that it was to comply
with and give effect to the adjudicator's payment decision was itself a
contractual provision requiring further payment, there was no scope for
contending that clause 7.6.4.1 did not include clause 9A7.2 in its embrace.
Judge Thornton held that this conclusion was reinforced by the qualification to Triangle's
obligation to comply with the payment decision contained in clause
9A7.2. Triangle's payment obligation was qualified by the phrase:
"without prejudice to their own rights under the contract". One of
Triangle's over-arching contractual rights that was encompassed by that
phrase was the right no longer to be contractually obliged to make further
payments to Bovis following a determination of Bovis' employment under
clause 7.
Bovis argued that the proviso to clause 9A7.2 was only of
limited effect and was inapplicable to the instant case. Bovis relied on the passage in Judge Hicks' judgment in
VHE that
construed the same phrase in a similarly worded clause:
"... [Counsel for the paying party]
contends, as I understand it, that that entitles [the paying party] to
exercise its right under clause 24.2.1 of the contract to "deduct the
[liquidated damages claimed] from any sum due ... to [the paying party]
under this contract" including the money due under the adjudication
decisions. I agree with [counsel for the receiving party] that that involves
reading "without prejudice to" as equivalent to "subject
to". There may be contexts in which that meaning is required, but the
more natural and usual one is "but leaving unaffected".
Bovis contended that if the phrase "without prejudice to
[Triangle's] rights under the Contract" was read as if it stated
"but leaving unaffected [its] rights under the Contract" rather
than "subject to [its] rights under the Contract", it was clear
that the proviso did not extend to the provisions of clause 7.6.4.1.
Judge Thornton held that the phrase "without prejudice to" in the context
of clause 9A.7.2, was making it clear that the obligation to pay an
adjudicator's payment decision was not to be cut back or diminished by any
withholding by the paying party which would not have been allowed in
relation to the underlying obligation to pay and which had not been subject
to a valid section 111 notice to withhold payment. Judge Thornton held that
where there pre-existed some other contractual right to avoid payment which
was not governed or affected by section 111 or by the terms of the
adjudicator's decision, that contractual right survived an adjudicator's
payment decision and, in the words of Judge Hicks, was left unaffected by
the contractual obligation to give effect to an adjudicator's decision.
Judge Thornton held that if the phrase "without prejudice" had the extended meaning of
"subject to", it was probable that any pre-existing entitlement to
withhold could be used to defeat payment even if that had not been made the
subject of a section 111 notice. Judge Thornton held that on any view the phrase
was sufficiently
wide in its ambit so as to extend the effects of the proviso to clause
7.6.4.1.
Issue 4 - Proviso to Clause 7.6.4.1
Bovis mounted a further argument that the sums in question
had accrued due 28 days or more before the date on which Triangle could
first have given a notice to determine Bovis' employment and Triangle had
unreasonably not paid those sums. On this argument clause
7.6.4.1 did not apply, given the proviso to clause 7.6.4.1.
The proviso to clause 7.6.4.1 was that the clause was not to be construed
so as to prevent the enforcement by Bovis of any rights under the contract
in respect of amounts properly due to be paid by Triangle which Triangle had
had unreasonably not paid and which had accrued 28 days or more before the
date of determination.
Judge Thornton held that the sum in question did not accrue due before the
determination of Bovis' employment but only accrued due after that
determination. The constituent parts of the relevant sum did not become due
or payable until the adjudicator's decision was made on 12 September 2002
when the interim certificates were amended by that decision.
Bovis argued that the consequence of the amendments decided by the adjudicator,
was that the certificates were to be treated for all purposes as if only the amended interim
certificates had been issued on the date that the original certificates were issued
and as if the unamended certificates had never seen the light of day.
Judge Thornton held that the effect of the adjudicator's decision amending the two interim
certificates was not to back date the accrual of the obligation to pay the
sums inserted into them by amendment. Although the certificates themselves
retained their original dates, the final date for payment of the sums added
by the amendment was not the contractual fourteen days after the date of
issue but was, by virtue of section 111(4) of the HGCRA, a date not later
than seven days after the date of the adjudicator's decision to pay. Thus,
the obligation to pay the relevant sum had not accrued more than 28 days
before the determination of Bovis' employment but only accrued on, or within
7 days after, a date some days after that determination. Judge Thornton held
that it followed that the
proviso to clause 7.6.4.1 was not relevant to the instant case.
Issue 5 - Common Law Repudiation
Triangle alleged that Bovis irrevocably repudiated the contract by
its written notice in its letter dated 7 August 2002 notifying Triangle that
it was treating the contract as at an end. Triangle argued that there was in consequence no
necessity for Triangle to accept that repudiation since it had been
presented with a fait accompli. This common law repudiation was confirmed by
the adjudicator's third decision dated 26 September 2002 when he decided
that Bovis had not accepted any repudiation of the contract by Triangle
since Triangle had not repudiated the contract. Triangle argued that the consequence of that
third decision was that Triangle was no longer obliged by its contractual
obligation to ensure compliance with and give effect to the first payment
decision by paying it forthwith but could, instead set off against it its
own cross-claim for damages flowing from Bovis' repudiation of the contract.
Bovis contended that Triangle's common law damages cross-claim arising
out of Bovis' repudiation could not be used for the purpose of defending and
resisting payment of Bovis' claim based on the adjudicator's payment
decision. That would amount to a withholding that was not allowed by the
terms of the contract and had not been made the subject of any section 111
notice. Bovis concluded that this aspect of this case was on all fours with
Judge Bowsher's decision in Northern Developments
(Cumbria) Limited v J & J Nichol [2000] BLR 158 where he allegedly declined to give effect to
a similar cross-claim.
Judge Thornton made the following observations in relation to the
judgment in Northern Developments:
- The sub-contractor started adjudication proceedings against
the main contractor and obtained a decision that 205,000 should be paid to
it. Before the adjudication notice had been served however, the main
contractor had purported to accept a repudiatory breach by the
sub-contractor and had appointed an alternative sub-contractor to complete
the subcontract works. The main contractor claimed to be entitled to set off
its claim for damages against the sum that the adjudicator had decided was
due that flow from the sub-contractor's repudiation of the sub-contract.
Judge Bowsher held that the main contractor was not entitled to set off or
withhold payment on that ground.
- The main contractor was asserting a cross-claim for damages
flowing from the repudiation. The cross-claim, advanced as a set off, was
nothing less than a withholding that had not been made the subject of any
section 111 notice nor had the main contractor referred the cross-claim to the
adjudicator as a ground for its non-payment of the subcontractor's claim.
It was in
those circumstances, that Judge Bowsher concluded that the adjudicator was
correct in paying no regard to the repudiation and the main contractor could
not belatedly pray it in aid as a defence to the claim based on the
adjudicator's payment decision.
- Judge Bowsher also observed that if the validity of the repudiation or
the cross-claim advanced by the main contractor for damages flowing from that
repudiation had been referred to adjudication, any decision favourable to
the main contractor might have been capable of being used as a set off
against the adjudicator's payment decision but, in the absence of such a
referral, the first payment decision was effective and fully enforceable.
- There was no contractual provision in the
contract in Northern Developments allowing a set off or a
cross-claim for damages flowing from a repudiation to defeat the immediate
effect of an adjudicator's payment decision. Moreover, there was no
adjudicator's decision that the main contractor could rely on in asserting
such an entitlement.
Bovis also relied on the
decision of Judge Wilcox in Levolux A.T. Ltd v Ferson Contractors Ltd [2002] BLR
341.
Judge Thornton made the following observations in relation to the
judgment in Levolux:
- The subcontractor suspended work following the withholding of part of
an application for payment and, in consequence, the main contractor
determined the sub-contractor's employment. The subcontractor started
adjudication proceedings and obtained a payment decision in its favour.
The main contractor resisted the claim to enforce that decision on the
ground that the determination clause in the contract contained a provision
that all further sums accruing due to the sub-contractor, including an
adjudicator's decision, should cease to be due and should no longer be
capable of accruing due.
- Judge Wilcox enforced the decision. He did not have to consider the
potential effect of the determination provisions of the contract because
he concluded that it was a necessary implication of the adjudication
decision that the sub-contractor had been entitled to suspend the works
and that, in consequence, the purported determination of its employment
had had no effect. Thus, on the facts as determined by the adjudicator, no
cross-claim arose at all so that the question as to whether a cross-claim
was permitted by the terms of the contract to defeat the immediate effect
of an adjudicator's decision did not arise.
- Judge Wilcox was giving effect to the principle
that the effect of an adjudicator's decision can in appropriate
circumstances be trumped by, or read in conjunction with, another
adjudicator's decision, particularly where that decision formed part of
the payment decision and had the effect that the grounds for
cross-claiming had not been made out. Judge Wilcox found that there were
no grounds for a set off, given the terms of the adjudicator's decision.
Judge Thornton then
turned to the non-controversial facts of this case. The third decision of
the adjudicator was that Bovis had no entitlement to treat the contract as
having been repudiated by Triangle and it therefore had no right to treat
the contract as at an end. Thus, Bovis had no contractual entitlement to
cease work or to fail to complete the contract. Judge Thornton observed that
the only possible
conclusion, in the light of that decision, was that Bovis repudiated the
contract in a way that did not require acceptance since Bovis had acted
unilaterally, irretrievably and unequivocally to treat the contract as at an
end and had ceased work under the contract without any contractual
justification.
Judge Thornton held that the instant case was on all fours with the reasoning of Judge Bowsher in
Northern Developments:
"...
the repudiation issues might have been raised in a later adjudication either
by the same or a different adjudicator. Depending on the timing of the
decision of those adjudications, it might have turned out that in
considering enforcement of the decisions there might be some set-off of the
decisions as occurred in VHE, but that would arise merely as a coincidence
of timing. ... If there are two conflicting adjudication decisions, it may
be appropriate to set one off against the other in enforcement proceedings
..."
Judge Thornton held that the first and third adjudication decisions were in conflict.
That situation had arisen because the parties chose to refer their existing
disputes piecemeal to adjudication and although the same adjudicator was
appointed to decide each of the three disputes, he had to consider each in
isolation given the manner in which he had been nominated and in which the
parties had presented their respective cases to him in each of the three
adjudications. As a result, there were two conflicting decisions, one gave Bovis a right to payment and the other gave Triangle the right to
cross-claim unliquidated damages flowing from Bovis' repudiation of the
contract. It was not possible in a Part 8 claim to determine whether
Triangle's cross-claim was sufficient to defeat or merely to reduce Bovis'
claim but, given the availability of clause 7.6.4.1 to Triangle as an
additional basis for defeating the entire claim based on the adjudicator's
first decision, Judge Thornton considered that question to be purely academic.
Issue 6 The Payment of 100,038.71
Triangle sought to rely on its alleged entitlement to
withhold payment of a sum of 100,038.07 that it contended it had
already paid Bovis following the purported early release of retention and
also to withhold a further sum of 15,084.59 on account of unpaid
liquidated damages. Judge Thornton considered that these withholdings had not been preceded by a timeous withholding notice since, to be effective to avoid payment of the
amended interim certificates nos 23 and 27, a withholding notice would have
had to have been issued at least five days before those certificates were
originally issued. T only relevant withholding notice was issued long
afterwards.
Triangle also sought to show that 100,038.07 of the claim has already
been paid as an alternative to its withholding defence. Judge Thornton
considered that that defence raised a disputed question of fact which could
not be raised in Part 8 proceedings.
Judge Thornton held that in the light of hiss conclusion that Triangle
could
defend Bovis' claim by relying on clause 7.6.4.1 and on its cross-claim for
damages flowing from Bovis' repudiation, these alternative grounds and
defence of Triangle did not arise.
Judge Thornton's Conclusion
Judge Thornton held in conclusion and summary:
- The decision of an adjudicator that
money must be paid gave rise to a separate contractual obligation on the
paying party to comply with that decision within the stipulated period.
The obligation would usually preclude the paying party from making
withholdings, deductions, set offs or cross-claims against that sum.
- For a withholding to be made against an adjudicator's
decision, an effective notice to withhold payment must usually have been
given prior to the adjudication notice being given, or possibly the decision
being given, and which was ruled upon and made part of the subject-matter of
that decision.
- However, where other contractual terms clearly had the
effect of superseding, or provide for an entitlement to avoid or deduct
from, a payment directed to be paid by an adjudicator's decision, those
terms would prevail.
- Equally, where a paying party was given an entitlement to
deduct from or cross-claim against the sum directed to be paid as a result
of the same, or another, adjudication decision, the first decision would not
be enforced or, alternatively, judgment would be stayed.
- Triangle was entitled
to rely on clause 7.6.4.1 of the contract and the adjudicator's third
decision to withhold payment of the sum directed to be paid under the
adjudicator's first decision.
- Bovis' contention that the determination of
its employment was invalid or a nullity was not sufficient, in the absence of
an adjudicator's decision to that effect, or any sufficient evidence to
sustain that contention, to entitle Bovis to defeat Triangle's reliance on
clause 7.6.4.1 in the Part 8 proceedings.
Judge Thornton held that in the light of these decisions, there was nothing capable of
determination under Part 24 and the Part 8 claim was decided by the
answers set out in the summary. Commentary
The situation in Bovis Lend Lease Limited v Triangle Development Limited [2002]
was complicated. The judgment of Judge Thornton required consideration
of a complex interaction of adjudication decisions and the particular
clauses of the contract in question. The judgment is of general
application because it emphasises the essential contractual status of the
adjudicator's decision. Judge Thornton has identified from decided
cases the general principle that immediate effect should be given to an
adjudicator's payment decision.
Judge Thornton also identified that the
general principle can be excluded by other terms of the contract. His
judgment is a useful summary of legal principle in this area based on the
full list of decided cases. The application of the principle in the
instant case is useful in the approach taken in the interpretation of such
clauses. This part of his judgment must however be considered in the
light of the judgment by the Court of Appeal in Ferson
Contractors Limited v Levolux A T Ltd [2003] which firmly closed the
door on any extension of the principle in KNS restricting the
enforcement of an adjudicator's decision. This principle in Ferson
was applied in Dumarc Building Services Ltd v Mr Salvador Rice [2004]
which distinguished the judgment of Judge Thornton in Bovis Lend Lease.
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