Summary
The judgment of Lord Justice Chadwick on 16 November 2005 in
Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2005] EWCA Civ
1358 is important since it confirms the four principles of law
that define the status of an adjudicator's
decision and the five propositions for the process
required of an adjudicator in dealing with submissions, issues and evidence
and the giving of reasons, set out by Justice Jackson in the first instance
decision in Carillion Construction
Ltd v Devonport Royal Dockyard [2005] EWHC 778 (TCC).
The judgment also examines the power of an adjudicator to award interest
under paragraph 20(c) of the Scheme.
The Appeal
Lord Justice Chadwick gave the judgment of the Court of Appeal on an application for permission to appeal and on
the appeal in so far as permission is granted - from an order made on 28 April 2005 by
Mr Justice Jackson in Carillion Construction
Ltd v Devonport Royal Dockyard [2005] EWHC 778 (TCC).
The proceedings followed an adjudication, made on a referral pursuant to
section 108 of the Housing Grants, Construction and Regeneration Act 1996,
of a dispute arising under a construction contract made between Devonport
Royal Dockyard Limited and Carillion Construction Limited.
Justice Jackson upheld the adjudicator's decision. He dismissed Devonport's proceedings.
In Carillion's proceedings he gave summary judgment for 12,376,454.54 inclusive of interest and value added tax.
He ordered that that sum be paid by Devonport by 10 May 2005. He refused permission to appeal from his order.
The Facts
The main facts are set out in Carillion Construction
Ltd v Devonport Royal Dockyard [2005] EWHC 778 (TCC).
Devonport was engaged under a contract which contained a target cost
mechanism. The concept of payment by reference to a target cost was carried into the subcontract
with Carillion and, in particular, into the provisions for payment in respect of the subcontract works
which are set out at clause 10 of the Alliance Agreement. The amount payable to Carillion
on satisfactory completion of the subcontract works was to be calculated by combining three distinct
elements: (i) the final actual cost, (ii) an element described as "gainshare" and (iii) a
subcontractor's fee.
Lord Justice Chadwick observed that target cost was integral to the calculation of the amount payable
to Carillion on satisfactory completion of the subcontract works. First, target cost was the basis of the
reward/risk incentive underlying the gainshare/painshare element. Second, the subcontractor's fee was
based on one of the elements (base cost) which was comprised in the calculation of target cost.
Adjudication under the Statutory Scheme
Lord Justice Chadwick observed that Section 108(1) of the Housing Grants, Construction and Regeneration Act 1996 provides that a party
to a construction contract has the right to refer a dispute arising under the contract for adjudication.
If the contract does not itself contain a procedure for adjudication, the adjudication provisions of the
Scheme for Construction Contracts to be made by regulations under section 114(1) of the Act apply.
That was the position in the instant case. The scheme for adjudication is set out in Part I of the schedule
to the
Scheme of Construction Contracts (England
and Wales) Regulations 1998 (SI 1998/649).
The purpose for which the provisions in Part II of the 1996 Act ("Construction Contracts")
were enacted and the 1998 Regulations made was explained by Mr Justice Dyson in Macob Civil Engineering Limited v Morrison
Construction Limited BLR 93, 97, (1999) 64 Con LR 1, 6
(para 14), in a passage to which Justice Jackson referred in his judgment:
" . . . The intention of Parliament in enacting the Act was plain. It was to introduce a speedy
mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring
the decisions of adjudicators to be enforced pending final determination of disputes by arbitration,
litigation or agreement: see section 108(3) of the Act and paragraph 23(2) of Part 1 of the Scheme.
The timetable for adjudications is very tight (see section 108 of the Act). Many would say unreasonably
tight, and likely to result in injustice. Parliament must be taken to have been aware of this. So far as
procedure is concerned, the adjudicator is given a fairly free hand. It is true (but hardly surprising)
that he is required to act impartially (s 108(2)(e) of the Act and paragraph 12(a) of Part 1 of the Scheme).
He is, however, permitted to take the initiative in ascertaining the facts and the law (s 108(2)(f) of the
Act and paragraph 13 of Part 1 of the Scheme). He may, therefore, conduct an entirely inquisitorial process,
or he may, as in the present case, invite representations from the parties. It is clear that Parliament
intended that the adjudication should be conducted in a manner which those familiar with the grinding detail
of the traditional approach to the resolution of construction disputes apparently find difficult to accept.
But Parliament has not abolished arbitration and litigation of construction disputes. It has merely introduced
an intervening provisional stage in the dispute resolution process. Crucially, it has made it clear that
decisions of adjudicators are binding and are to be complied with until the dispute is finally resolved."
That passage was cited and approved by Lord Justice May in Pegram Shopfitters Ltd v Tally Weijl (UK) Ltd
[2003] EWCA Civ 1750, para [8], [2004] 1 All ER 818, 821j-822d.
The Reference to Adjudication
Carillion was contending that the sum claimed would have been found to be due if Devonport
had carried out the review contemplated. In substance Carillion's primary claim was
for payment of what (as Carillion alleged)
would have been payable if the amended target cost machinery had been given
effect.
Carillion's secondary, or alternative, claim was to be reimbursed Actual Cost
together with a Fee. That claim was that the target cost machinery (as
amended) broke down and/or become inoperable such that Carillion was now
entitled to be reimbursed Actual Cost together with a Fee.
Both primary and secondary claims were computed net of the 1.5 million
bonus. That bonus was claimed separately
The Course of the Adjudication
The adjudicator gave his answers to the four issues which he thought he had been asked to decide:
Issue 1:Carillion was entitled to be paid an amount in excess of 110 million representing sums
due under the Alliance Agreement as amended.
Issue 2:The correct evaluation of the amount due to
Carillion in excess of 110M due to the
undertaking of the Works was 1,167,436.00 plus any applicable VAT, exclusive of the Fee.
Issue 3:Carillion was entitled to the payment of an amount of 1,500,000.00 representing a bonus.
Issue 4: Carillion was entitled to the payment of a fee in
the sum of 6,778,986.00 plus any applicable VAT.
He directed that Devonport pay to Carillion within seven days of his decision the sum of 9,446,422, being the
aggregate of (i) 7,946,422 (1,167,436 + 6,778,986) and (ii) 1,500,000; and the further sum of
1,199,905 by way of interest on that sum. The total amount to be paid by Devonport to
Carillion under the
adjudicator's decision was thus 10,646,327 (exclusive of VAT).
The adjudicator gave reasons for his decision as he had been
requested to do by the parties.
The three determinative elements which led the adjudicator to his
decision of the amount due of 1,167,436 were (i) Target Cost, (ii) Final Actual Cost and (iii) Defects.
In relation to Target Cost and Final Actual Cost he accepted the figures advanced by
Carillion.
Lord Justice Chadwick considered it was clear that the adjudicator saw it as his task to resolve the dispute
arising from the failure of Carillion and Devonport to reach agreement in accordance with what he described
as "the basic philosophy of the original Alliance Agreement" - as to what the revised
adjustment to Actual Costs and Target Costs should be. Or, to put the point another way, he saw it
as his task to supply the figures for Actual Costs and Target Costs which if the dialogue between
the parties had not failed to produce agreement - the parties would have supplied by agreement. That
was the task upon which he embarked in answering Issue 2 "What is the correct evaluation of any
amount due to Carillion?".
The Court Proceedings
Devonport did not accept the adjudicator's decision and did not make the payment which that decision required.
Each of the parties commenced proceedings in the Construction and Technology Court on
4 April 2005. Carillion sought summary judgment in the amount (10,646,327) to which the adjudicator had
decided it was entitled. Devonport sought declarations in the following terms:
- The decision was made without and/or in excess of jurisdiction; and/or,
- The decision was made on an intrinsically unfair basis and/or in breach of the rules of natural
justice; and/or,
- The decision was not compliant with the requirements of the Housing
Grants, Construction and Regeneration Act 1996 and the Scheme for
Construction Contracts Regulations 1998.
The proceedings were commenced and heard, and judgment delivered, within the space of three weeks.
That degree of expedition led, as Justice Jackson observed in his judgment, to some evolution
in the formulation of each party's case in the course of the hearing.
Justice Jackson summarised the submissions
advanced on behalf of Devenport as they finally emerged:
- The adjudicator's decision on target cost was a decision which was
outside his jurisdiction and therefore should not be enforced.
- The adjudicator's decision on target cost was reached in breach of the rules of natural justice
and therefore should not be enforced.
- The adjudicator's decision on allowance for defects was reached in breach of the rules of natural
justice and not supported by any or any adequate reasons; therefore it should not be enforced.
- The adjudicator had no jurisdiction to award
interest.
As Justice Jackson explained, if the attack on the adjudicator's decision were to succeed under any one
of the first three of those grounds, the decision would be unenforceable. But if the attack were to
succeed on the fourth ground alone, then the award of interest would be severable and the balance of
the decision could be enforced.
The Reasoning of Justice Jackson
Four Basic
Principles
Before addressing those submissions Justice Jackson set out the legal principles which he was to apply.
He examined a number of authorities, including five decisions of the Court
of Appeal Bouygues (UK) Limited v Dahl-Jensen (UK) Limited [2001] All ER Comm 1041, [2000] BLR 522, C&B Scene Concept Design Limited v Isobars Limited [2002] BLR 93,
Levolux AT
Limited v Ferson Contractors Limited [2003]EWCA Civ 11, 86
Con LR 98, Pegram Shopfitters Limited v Tally Weijl (UK) Limited [2003] EWCA Civ 1750, [2004] 1 All ER
818 and Amec Capital Projects Limited v Whitefriars City Estates Limited [2004] EWCA Civ 1418, [2005] BLR
1. Justice Jackson stated the general principles to be derived from those authorities
and from two decisions in the Technology and Construction Court Discain Project Services Limited v
Opecprime Development Limited [2000] BLR 402 and
Balfour
Beatty v the London Borough of Lambeth [2002] [2002] BLR 288:
- The adjudication procedure does not involve the final determination of anybody's rights
(unless all the parties so wish).
- The Court of Appeal has repeatedly emphasised that adjudicators' decisions must be enforced,
even if they result from errors of procedure, fact or law: see Bouygues,
C&B Scene and Levolux;
- Where an adjudicator has acted in excess of his jurisdiction or in serious breach of the rules
of natural justice, the court will not enforce his decision: see Discain,
Balfour Beatty and Pegram
Shopfitters.
- Judges must be astute to examine technical defences with a degree of scepticism consonant with
the policy of the 1996 Act. Errors of law, fact or procedure by an adjudicator must be examined
critically before the Court accepts that such errors constitute excess of jurisdiction or serious
breaches of the rules of natural justice: see Pegram Shopfitters and
Amec.
Lord Justice Chadwick did not consider there to be any challenge to those general principles. They
were fully
supported by the authorities, as Justice Jackson demonstrated in his judgment.
Five Propositions
Justice Jackson stated five propositions which, as
he said, bore upon the issues which he had to decide:
- If an adjudicator declines to consider evidence which, on his analysis of the facts or the
law, is irrelevant, that is neither (a) a breach of the rules of natural justice nor (b) a failure to
consider relevant material which undermines his decision on Wednesbury grounds or for breach of paragraph
17 of the Scheme. If the adjudicator's analysis of the facts or the law was erroneous, it may follow that
he ought to have considered the evidence in question. The possibility of such error is inherent in the
adjudication system. It is not a ground for refusing to enforce the adjudicator's decision.
This
conclusion was reached based on the Court of Appeal decisions above. This conclusion
was also supported
by the reasoning of Mr Justice Steyn in the context of arbitration in Bill Biakh v Hyundai Corporation
[1988]
1 Lloyds Reports 187.
- The judgment of His Honour Judge Thornton's judgment in
Buxton Building Contractors Limited v
Governors of Durand Primary School [2004] 1 BLR 474, was not
inconsistent with proposition 1. If, however Buxton was inconsistent with proposition 1, then Buxton was wrongly decided and
was not to be followed.
- It is often not practicable for an adjudicator to put to the parties his provisional conclusions
for comment. Very often those provisional conclusions will represent some intermediate position, for
which neither party was contending. It will only be in an exceptional case such as
Balfour
Beatty v the London Borough of Lambeth [2002] that an adjudicator's failure to put his provisional conclusions to the parties
will constitute such a serious breach of the rules of natural justice that the Court will decline to
enforce his decision.
- The principles in the decisions on the duty to give reasons in a
planning context (see in particular Save Britain's Heritage v No 1 Poultry Limited [1991] 1 WLR 153 and
South Bucks DC and another v Porter (No 2)
[2004] 1 WLR 1953) were only of limited relevance to adjudicators' decisions for three reasons:
- Adjudicators' decisions do not finally determine the rights of the parties (unless all parties
so wish).
- If reasons are given and they prove to be erroneous, that does not generally enable the
adjudicator's decision to be challenged.
- Adjudicators often are not required to give reasons at all.
- If an adjudicator is requested to give reasons pursuant to paragraph 22 of the Scheme, a brief statement of those reasons will suffice. The reasons should be sufficient to show that the
adjudicator has dealt with the issues remitted to him and what his conclusions are on those issues.
It will only be in extreme circumstances, such as those described by Lord Justice Clerk in
Gillies Ramsay Diamond and others v PJW Enterprises Limited [2004] BLR 131
that the court will decline to enforce an otherwise valid adjudicator's
decision because of the inadequacy of the reasons given. The complainant
would need to show that the reasons were absent or unintelligible and
that, as a result, he had suffered substantial prejudice.
Lord Justice Chadwick was in broad agreement with the five propositions
above.
Those propositions were indicative of the approach which courts should adopt when required to address
a challenge to the decision of an adjudicator appointed under the 1996 Act.
Lord Justice Chadwick was less
confident than Justice Jackson that the decision in Buxton Building Contractors Limited v Governors of
Durand Primary School [2004] 1 BLR 474 could be reconciled with the first of those propositions.
Lord Justice Chadwick
endorsed that first proposition and, to the extent that Buxton is inconsistent with that proposition,
the judge was right not to follow that decision.
Lord Justice Chadwick stated that the objective which underlay the Act and the statutory scheme required the courts to respect
and enforce the adjudicator's decision unless it was plain that the question which he has decided
was not the question referred to him or the manner in which he has gone about his task
was obviously
unfair. It should be only in rare circumstances that the courts will interfere with the decision of
an adjudicator.
Lord Justice Chadwick stated robustly that the courts should give no encouragement to the approach adopted by Devonport in the
instant
case; which (contrary to Devonport's outline submissions) he considered
could, indeed, aptly be described as "simply scrabbling around to find some argument,
however tenuous, to resist payment".
Lord Justice Chadwick observed that it was only too easy in a complex case for a party who
was dissatisfied with the decision of an adjudicator to comb through the
adjudicator's reasons and identify points upon which to present a challenge
under the labels "excess of jurisdiction" or "breach of natural justice".
Lord Justice Chadwick stated that it had to be kept in mind that the
majority of adjudicators were not chosen for their expertise as lawyers.
Their skills were as likely (if not more likely) to lie in other
disciplines. The task of the adjudicator was not to act as arbitrator
or judge. The time constraints within which he was expected to operate
was proof of that. The task of the adjudicator was to find an interim
solution which met the needs of the case. Parliament was to be taken to have
recognised that, in the absence of an interim solution, the contractor (or
sub-contractor) or his sub-contractors might be driven into insolvency
through a wrongful withholding of payments properly due. The statutory
scheme provided a means of meeting the legitimate cash-flow requirements of
contractors and their subcontractors. The need to have the "right" answer
had been subordinated to the need to have an answer quickly. The scheme was
not enacted in order to provide definitive answers to complex questions.
Indeed, it might be open to doubt whether Parliament contemplated that
disputes involving difficult questions of law would be referred to
adjudication under the statutory scheme; or whether such disputes were
suitable for adjudication under the scheme. Lord Justice Chadwick had have every sympathy for
an adjudicator faced with the need to reach a decision in a case like the
instant.
Lord Justice Chadwick stated that in short, in the overwhelming majority of cases, the proper course for the party who
was
unsuccessful in an adjudication under the scheme was to pay the amount that he had been
ordered to pay by the adjudicator. If he did not accept the adjudicator's decision as correct
(whether on the facts or in law), he could take legal or arbitration proceedings in order to
establish the true position. To seek to challenge the adjudicator's decision on the ground
that he had exceeded his jurisdiction or breached the rules of natural justice (save in the
plainest cases) was likely to lead to a substantial waste of time and expense as,
Lord Justice Chadwick suspected,
the costs incurred in the instant case would demonstrate only too clearly.
Lord Justice Chadwick applied the principles and propositions to the
instant case and endorsed the approach taken by Justice Jackson. He
refused permission to appeal except for the issue of interest. That
issue is examined separately below.
Application of Principles
Lord Justice Chadwick observed that with those propositions in mind, Justice Jackson turned to the first of the submissions advanced on behalf
of Devonport - that the adjudicator's decision on target cost was a decision which was outside his jurisdiction
and therefore should not be enforced. Justice Jackson rejected that submission and
gave six reasons in his judgment:
The second of Devonport's submissions before Justice Jackson was that the adjudicator's decision on target cost
was reached in breach of the rules of natural justice. It was submitted that the adjudicator had
disregarded arguments which he should have taken into account. The judge identified these as
three disregards. Devonport characterised
these three disregards in two ways. First, that they amounted to an exclusion of relevant considerations.
Thus the adjudicator was in breach of paragraph 17 of the Scheme. Secondly that these three
disregards were a breach of the rules of natural justice.
The first of the supposed "disregards" was the adjudicator's decision not to enter into the merits or otherwise of the discussion between Devonport
and MoD under the main contract. Justice Jackson rejected that criticism
The second "disregard" was the adjudicator's decision not to consider the alternative calculation of target cost provided by Devonport.
Justice Jackson rejected that criticism
The third "disregard" was that the adjudicator made no reference in his
Reasons to five specific defence arguments. Justice Jackson rejected that criticism also
Justice Jackson rejected, also, a further argument, advanced under the head of 'breach of natural justice'
but which he described as "a variant of [Devonport's] first challenge to the adjudicator's decision".
It was said that, in breach of natural justice, the adjudicator decided the issue concerning target cost
on a different basis from that advanced by the parties and without giving Devonport an opportunity to make
representations. Justice Jackson took the view that Devonport had proper opportunity to make representations concerning the
assessment of target cost on the basis adopted by the adjudicator and
Devonport did
make such representations in the form of expert reports.
The third challenge to the adjudicator's decision was founded on the contention that his
allowance for defects was reached in breach of the rules of natural justice and not supported by
any or any adequate reasons. So, it was said, the decision could not be enforced.
Lord Justice Chadwick observed that the dispute notice submitted by Devonport to the Alliance Board for
consideration in November 2004 had evaluated defective items at 2,942,614. Subsequently Devonport
revised its claim upwards to an amount of 20 million or thereabouts. Carillion's stance was that
there could be no allowance for defects because there had been no withholding notice, no
crystallised dispute and no opportunity to remedy the defects. The adjudicator had rejected
those threshold defences. He took the November 2004 dispute notice as a starting figure and
applied a discount. Justice Jackson summarised the challenge to the adjudicator's approach:
"[Devonport] considers that the allowance made for defects should have been higher.
[Devonport] mounts three separate attacks on the adjudicator's assessment of 2,354,091.
These attacks are:
- The Adjudicator focussed on [Devonport's] original defects claim of November 2004. He did not
address the expanded defects claims of January and February 2005, despite the fact that these
had been prepared after further and fuller investigation.
- The adjudicator applied a reduction factor of 20 per cent to
[Devonport's] original defects
claim: '... in an attempt to more accurately reflect the regular and routine nature of the
intended works and their actual cost.' . . . The adjudicator took this course without giving
either party the opportunity to comment on his proposed reduction.
- The adjudicator gave no, or no adequate, reasons for his decision in respect of defects."
Justice Jackson rejected that challenge.
Justice Jackson addressed the complaint that the adjudicator had applied a 20 per cent
discount without giving either party an opportunity to comment on that course:
"The 20 per cent reduction in quantum which the adjudicator made was the result of
casting a critical eye over the expert evidence. This is precisely the kind of exercise which one
would expect the adjudicator (who is himself an experienced engineer) to undertake. It is unrealistic
to expect an adjudicator, who is struggling under tight time limits with a growing mass of evidence
and legal submissions, as well as a barrage of intricate correspondence, to contact the parties and to
invite their comments on a matter of this nature."
Justice Jackson dismissed the third line of attack:
"In my view, the reasons which the adjudicator gave for his decision on defects were
perfectly adequate. The adjudicator explained why he rejected the expanded defects claim. He also
explained the reduction factor which he applied to the original defects claim."
The fourth challenge to the adjudicator's decision to award interest was
considered separately by Lord Justice Chadwick and is set out below.
Permission to appeal
Lord Justice Chadwick observed that Devonport's outline submissions were
prefaced with a general criticism of the adjudicator's decision in terms which
he considered were robust, if not extravagant:
"3.This appeal relates to an adjudication which went seriously awry. In short:
a. The Adjudicator awarded [Carillion] more than [Carillion] ended up claiming;
b. The Adjudicator expressly ignored all the arguments advanced by both parties as to
the basis upon which Target Cost should be calculated;
c. Instead he decided that issue on a basis which had not been advanced by either party
and which neither party had notice of;
d. The Adjudicator provided no reasons at all for rejecting the arguments put forward
by the parties as to the basis upon which Target Cost should be calculated and/or his reasons
are wholly inadequate;
e. Although the Adjudicator found there were defects, as contended for by
[Devonport], he evaluated
the cost of remedying those defects at a figure well below the figures put forward, on a basis
that neither party contended for and without providing any reasons at all for so doing;.
f. He also discounted that figure for a reason which neither party had advanced and without notice to the parties or giving them an opportunity to make representations;
g. . . .
4.This is not a case where the unsuccessful party is simply scrabbling around to find some argument,
however tenuous to resist payment. It is submitted that it is clear that the Adjudicator's decision
was arrived at in breach of the rules of natural justice and fails to comply with the very basic and
fundamental requirements prescribed by the 1996 Act and Scheme, as interpreted by the Courts. A very
serious injustice has resulted."
Lord Justice Chadwick found it difficult to understand and impossible to accept the criticism that the adjudicator
awarded Carillion "more than [Carillion] ended up claiming". The criticism
was based on the premise that Carillion abandoned the claim to be paid "further amounts
due . . . pursuant to the Alliance Agreement (as amended)". But that premise could not be established.
Lord Justice Chadwick held that it was beyond argument that the questions (i) could target cost be determined in the
event which had happened - that is to say, the failure of the contractual machinery and, if so,
(ii) what figure should be taken as the target cost were central to the determination of the dispute
which was referred to the adjudicator by the notice of adjudication. They were raised
in the referral notice. Justice Jackson was correct to take that view, for the reasons
which he gave. Lord Justice Chadwick held that an appeal from his order on the ground that he
should have held that the adjudicator went beyond his jurisdiction in deciding those questions
did not have any prospect of success. Accordingly permission to appeal on
that ground was refused.
Lord Justice Chadwick held that Carillion had made it clear in the referral notice
that it was inviting the adjudicator to evaluate target cost on the basis
set out in the letter of 30 October 2001. That was the basis which the adjudicator adopted.
It could not be said that Devonport did not have the opportunity to make such representations on the
methodology as it thought fit. It was argued that the opportunity to make representations was
confined to the calculation of the target cost; and that there was no opportunity to make
representations as to the basis of liability. Lord Justice Chadwick
considered that to border on sophistry.
It was obvious that, if the adjudicator were to evaluate target cost on the basis set out in
the letter of 30 October 2001, he would, in effect, provide his own figure to fill the lacuna
which arose from the parties' failure to agree. Lord Justice Chadwick held
that Justice Jackson was plainly correct to reject the
submission that there had been a breach of natural justice in that respect
and refused permission
to appeal on that ground.
The adjudicator excluded from consideration the negotiations
and settlement between Devonport and MoD. Justice Jackson observed that that was a necessary consequence
of the adjudicator's conclusion that "negotiations between [Devonport] and MoD could not impact
upon the calculation of target cost under the Alliance Agreement and its amendments".
In that respect, "the adjudicator was rejecting an argument advanced by Carillion and
accepting an argument advanced more than once by [Devonport]". It was
argued that the judge misunderstood the basis upon which the adjudicator had taken
the view that he should leave out of account the negotiations and settlement between Devonport
and the MoD. Lord Justice Chadwick held that there was no substance in that criticism. The
adjudicator explained why he had taken the view which he did in his reasons. The adjudicator pointed out, correctly, that he could not enquire into
the merits of the outcome of negotiations between Devonport and MoD as those
negotiations were not undertaken under the Alliance Agreement (with or
without the amendments).
Lord Justice Chadwick held that whether the adjudicator was correct to take that view (as a matter of law) might be debated
elsewhere; but not in the instant proceedings. As Justice Jackson observed, in restating
"four basic principles", the Court of Appeal
"has repeatedly emphasised that adjudicators' decisions must be enforced,
even if they result from errors of procedure, fact or law". The adjudicator was properly seized of the issue
which he addressed. Lord Justice Chadwick considered that whether or not the adjudicator was correct (as a matter of law) to
adopt the approach which he did was a question on which it would be inappropriate for
the Court
to express any view; and it did not do so. What was beyond argument was that, adopting
that approach, he was bound to leave out of account the settlement reached between Devonport and MoD.
Lord Justice Chadwick held that there was no substance in the criticism that the
adjudicator failed to take account of Devonport's case as to how target cost should be calculated.
It was argued that Justice Jackson "fell into serious error" in analysing the
adjudicator's reason for disregarding the alternative calculation. It was
argued that Justice Jackson should have
held that: "The Adjudicator did not reject the contractual basis of the alternative
calculation he simply refused to consider it, believing it to be outside his jurisdiction".
Lord Justice Chadwick rejected that criticism. Lord Justice Chadwick held
that the judge's analysis reflected a fair reading of the
reason which the adjudicator had given for the approach
which he had adopted. Lord Justice Chadwick repeated that whether or not the adjudicator was correct
(as a matter of law) to adopt that approach was not an issue in the instant proceedings.
T0he adjudicator saw as his task the need to
supply a figure for target cost in the circumstances that the agreed or
contemplated machinery had failed. Lord Justice Chadwick found that it was not correct to say that he
provided his own view on the basis of what he thought was "fair" without
regard to the issues raised by the dispute which had been referred to him
and the terms of the agreements between the parties. Rather, the adjudicator
accepted the calculation set out in the letter of 30 October 2001 as the
best guide to the figure which would have been agreed between the parties if
effect had been given to the machinery. Lord Justice Chadwick held that the adjudicator may or may not have
been correct (as a matter of law) to adopt that approach; but that was not
the issue. The issue, in the instant context, was whether given the
approach which the adjudicator did in fact adopt he was required to give
reasons for rejecting submissions which (on the basis of that approach) were
irrelevant. Lord Justice Chadwick held that Justice Jackson was right to hold that the adjudicator had done all
that he needed to do in that respect.
The adjudicator's
decision as to the set-off to be allowed in respect of defects was
criticised. Lord Justice Chadwick noted that, in making any allowance in respect of defects, the adjudicator rejected what
Justice Jackson described as Carillion's threshold defences.
Lord Justice Chadwick agreed with the reasons of Justice Jackson which led
him to reject each of the three lines
of attack pursued on behalf of Devonport and to hold that the adjudicator's decision as to defects
was not open to challenge on the basis that it was reached in breach of the rules of natural
justice. Lord Justice Chadwick considered that this ground did not have any real prospect of success; and refused
permission to appeal on those grounds.
Interest
The remaining question was whether it was within the jurisdiction of the adjudicator to
award interest on the sum which he had found to be due under the Alliance Agreement (as amended).
It was common ground that that question turned on the extent of the powers
conferred by paragraph 20(c) of the Scheme:
"20. The adjudicator shall decide the matters in dispute. He may take into account
any other matters which the parties to the dispute agree should be within the scope of the
adjudication or which are matters under the contract which he considers are necessarily connected
with the dispute. In particular, he may
(a) . . .
(b) . . .
(c) having regard to any term of the contract relating to the payment of interest,
decide the circumstances in which, and the rates at which, and the periods for which simple
or compound rates of interest shall be paid."
Justice Jackson took the view that paragraph 20(c) conferred a freestanding power to award interest
'freestanding' in the sense that the jurisdiction existed whether or not (i) the contract itself
provided for interest on monies outstanding or (ii) the parties had agreed that an award of interest
should be within the scope of the adjudication. The reasons which led him to that view
were:
"1. As a matter of impression, this seems to me to be the more natural meaning of subparagraph
(c), when read in the context of the whole of paragraph 20 of the Scheme.
2. In my view it is reading too much into the second and third sentences of paragraph 20 to hold
that everything in subparagraphs (a), (b) and (c) must arise from some other express term of the contract.
3. It makes obvious commercial sense for an adjudicator to have the power to award interest. The
Scheme takes effect as a set of implied terms in many construction contracts pursuant to section
114(4) of the 1996 Act. I would certainly expect the Scheme to include a power to award interest.
4. In my view, the phrase in paragraph 20(c) "having regard to any term of the contract relating
to the payment of interest ..." means that if there is any such term, the adjudicator must have
regard to it. In other words, the freestanding right conferred by paragraph 20(c) does not override
any express term of the contract dealing with interest.
5. If paragraph 20(c) had the meaning for which [Devonport] contends, it would be unnecessary. The
clause would be saying that which was self-evident."
Lord Justice Chadwick agreed that subparagraph (c) must be read in the context of paragraph 20 as a whole.
Lord Justice Chadwick agreed,
also, that there were sensible commercial reasons why the scheme might well be expected to include a
power to award interest. But that took the matter no further. Lord Justice
Chadwick considered there were
sensible commercial reasons why the underlying construction agreement might be expected to
provide for interest on monies outstanding. The scheme did not include a power to award interest
in such a case.
The question, in the instant case, was whether the power existed where the
parties (for whatever reason) had chosen not to include such a provision in the underlying
contract. Lord Justice Chadwick did not accept that, if paragraph 20(c) had the meaning for which Devonport contended,
it would be unnecessary. It would, for example, enable the adjudicator to decide whether
circumstances in which the contract provided for the payment of interest had arisen, the date
from which interest was payable under the contractual provisions and (if not specified in the
contract) the rate at which and the basis on which (whether simple or compound) interest
should be paid.
The real question was what effect was to be given to the words "In particular" which preceded the three subparagraphs (a) to (c). It
was necessary to have
regard to the structure of paragraph 20 as a whole. There were three sentences: (1) The adjudicator
shall decide the matters in dispute; (2) [In deciding those matters] he may take
into account other matters (which are specified); (3) In particular [in deciding those matters]
he may (a) open up, revise and review decisions already taken or certificates already
given (unless the contract otherwise provides), (b) decide that any of the parties is liable
to make payment and if so when and in what currency and (c) decide the circumstances in which
(and the rates at which and the periods for which) interest is to be paid.
Lord Justice Chadwick stated that within that structure
effect had to be given to the words "In particular" at the beginning of the third
sentence. He could see no reason why those words should not bear their usual and natural meaning.
What came after them was intended to be a particularisation of what had gone before. What came
after elaborated and explained what had gone before; it did not add to what had gone before.
So the adjudicator may decide questions as to interest if, but only if,
- those questions were "matters in dispute" which have been properly referred to him or
- those are questions which the parties to the dispute had agreed should
be within the scope of the adjudication or
- those are questions which the adjudicator considered to
be "necessarily connected with the dispute".
Lord Justice Chadwick held that questions which do not fall within
one or other of those categories were not within the scope of paragraph 20(c) of the Scheme.
There was no freestanding power to award interest.
Lord Justice Chadwick gave permission to appeal from the judge's decision
that the adjudicator had power to award interest. But it did not follow that the appeal
should be allowed. The issue remained whether the questions of interest which the adjudicator
decided fell within one or other of the categories which Lord Justice
Chadwick identified above.
In particular, in the instant context, was the question whether interest should be paid on
monies outstanding a question which the parties to the dispute had agreed
should be within the scope of the adjudication.
Lord Justice Chadwick considered it was of significance that Devonport did not dispute that the adjudicator would have power to
award interest if he found monies to be outstanding under the agreement. Its position was that
the question of interest did not arise because there were no monies outstanding.
In those circumstances Lord Justice Chadwick held that the conclusion that the parties to the dispute
agreed that the question whether interest should be paid on monies outstanding was to be within
the scope of the adjudication was irresistible. Carillion had referred that question to adjudication and
Devonport acquiesced in that referral. If Devonport had intended to take the point that interest should not be
within the scope of the adjudication it was inconceivable (given the extensive representations which
were made) that it would not have said so. By agreeing that the adjudicator should decide whether
interest should be paid the parties conferred on him a jurisdiction to award interest which he
would not otherwise have had.
It followed that Lord Justice Chadwick reached the same conclusion as
Justice Jackson on the question of interest, albeit
for different reasons. Lord Justice Chadwick dismissed the appeal.
Conclusion
Accordingly Lord Justice Chadwick refused permission to appeal in respect of all issues save the power to award interest.
On that issue permission to appeal was granted, but the appeal was dismissed.
Commentary
The judgment of Justice Jackson at first instance and of Lord Justice
Chadwick in the Court of Appeal is of great importance to those involved
in adjudication because it emphasises the judicial nature of the
adjudication process and provides useful guidance on the difficult issue of
the rules of evidence in adjudication. For a further detailed analysis
of this issue refer to the article
Judicial Decision Making in Adjudication by Daniel Atkinson.
As to the matter of the
power of an adjudicator to award interest based on paragraph 20(c) of the
Scheme the Court of Appeal has given clear guidance on the extent of the
jurisdiction of an adjudicator. It is not a free-standing power as
suggested by Justice Jackson.
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