Adjudication and Part 8

30.11.11

 

This article was prepared by Wragge & Co's Engineering and Construction team, and was published in Construction Law, volume 27, issue 1, 2011

Introduction

Faced with an unfavourable adjudicator's decision the paying party usually has two options. To pay up and litigate later; or to raise a jurisdiction challenge in front of the judge when the decision is enforced. In some cases, the paying party has a third option; a CPR Pt 8 claim asking the court to make a final determination of a key part of the dispute.

The Pt 8 claim procedure may be used to decide any question which is unlikely to involve a substantial dispute of fact - which generally means without significant witness testimony.

In recent months there appears to have been an increase in the use of Pt 8 claims intended to prevent enforcement of an adjudicator's decision. Certainly there have been a number of reported cases on the subject.

It is also apparent from other cases that parties are still trying to resist claims for enforcement of an adjudicator's decision in circumstances where a Pt 8 claim may have been more successful.

This article considers the circumstances in which a Pt 8 claim may be:

  1. appropriate; and
  2. more advantageous than defending enforcement proceedings.

When is a Pt 8 claim appropriate in the context of adjudication?

A Pt 8 claim can be made at any time, before[1], during[2] or after adjudication.[3] Part 8 claims have been used successfully to:

  1. determine issues relating to an adjudicator's jurisdiction, or a procedural irregularity or breach of natural justice in the conduct of the adjudication;
  2. determine which terms have been incorporated into the contract between the parties, whether the contract is "in writing", and to interpret those terms; and
  3. occasionally, to correct perceived errors made by the adjudicator during the adjudication.

Not all disputes are suitable for resolution under Pt 8 though, and the court has to decide whether a Pt 8 declaration is the best way to resolve a claim.

In Forest Heath DC v ISG Jackson Limited [2010] EWHC 322 (TCC), Ramsey J expressed his view on the types of cases that the Technology and Construction Court (TCC) would consider suitable for a Pt 8 claim or declaration. As his starting point he took CPR Rule 8.1(2)(a) which says that the Pt 8 procedure may be used where a party "seeks the court's decision on a question that is unlikely to involve a substantial dispute of fact" and the comments of Neuberger J[4] relating to the court's general discretion to grant declarations:

"... when considering whether to grant a declaration or not, the court should take into account justice to the claimant, justice to the defendant, whether the declaration would serve a useful purpose and whether there are any other special reasons why or why not the court should grant the declaration".[5]

Before applying the principles to claims in the TCC, Ramsey J said:

"In the TCC the ability of a party to obtain a declaration on a point of law where there is little dispute of fact, can be a useful means of resolving an important issue between the parties... In the context of adjudication, the resolution of an issue as to jurisdiction may provide a means of avoiding wasted costs of an adjudication ... in appropriate cases, a declaration under Part 8 might permit a party to obtain a final determination of the dispute which was the subject of a temporarily binding decision by the Adjudicator or allow the parties to resolve their differences on the basis that a finding by the Court has shown that an essential part of the adjudicator's decision was wrong".[6]

"I accept...that a useful analogy is to be found in the approach of the Court in ordering the trial of preliminary issues".[7]

The TCC guidelines[8] relating to preliminary issues (PI) state:

"The court would expect that any issue proposed as a suitable PI would, if decided in a particular way, be capable of:

  • resolving the whole proceedings or a significant element of the proceedings; or
  • significantly reducing the scope, and therefore the costs, of the main trial; or
  • significantly improving the possibility of a settlement of the whole proceedings.

The court would ordinarily expect that, if issues are to be dealt with by way of a PI hearing, there would be either no or relatively limited oral evidence. If extensive oral evidence was required on any proposed PI, then it may not be suitable for a PI hearing".

It is likely that in future the TCC will use these principles to decide whether Pt 8 is a suitable and fair means of resolving a claim or a particular issue.

On the facts of Forest Heath, however, Ramsey J decided that because the case related to a dispute on the overall extension of time, it was not suitable for the Pt 8 procedure. He commented that:

"In such circumstances the court would be unwilling, in my judgment, to order a preliminary issue .... where that opened up an area of factual investigation and where the ultimate outcome in terms of extension of time would be unclear. I consider that similar considerations apply to the declarations sought in this case". [9]

Determining the adjudicator's jurisdiction

Often, even if the responding party believes that the adjudicator does not have jurisdiction, they will wait until the referring party tries to enforce the decision before inviting the court to rule definitely on jurisdiction. There can be very good reasons for this. It may be the most cost effective way to resolve a genuine jurisdiction issue; the issues may not be suitable for resolution at a summary judgment hearing or in Pt 8 proceedings (perhaps because it involves a substantial dispute of fact); or the responding party may believe it will be successful in the adjudication, on the merits, making jurisdiction irrelevant.

However, time and costs can often be saved by resolving jurisdiction arguments during an adjudication. Sometimes, the parties will agree to suspend the adjudication for a few weeks while the court resolves the issue. In Banner Holdings Limited v Colchester Borough Council [2010] EWHC 139 (TCC), a Pt 8 claim allowed Coulson J. to finally determine the adjudicator's jurisdiction.

The claim related to works under the GC Works/1 standard form of contract. The Pt 8 procedure allowed the court to provide welcome guidance, not only to the parties but also to any other users of the GC Works/1 standard form.

Banner sought a declaration that the adjudicator did not have jurisdiction because cl.59(8) expressly provided:

"the adjudicator shall have power to vary or overrule any decision previously made under the Contract by the Employer...other than decisions in respect of....decisions...to determine the Contract...and in relation to decisions in respect of those matters, the Contractors's (sic) only remedy against the Employer shall be financial compensation". [10]

Banner Holdings was decided a few days before Forest Heath but falls well within Ramsey J.'s guidelines. It resolved a significant element of the proceedings and did not involve a significant dispute of fact. The TCC often deals with this type of case using Pt 8.

On the facts, Coulson J. decided that the adjudicator did have jurisdiction. He said that, while it was true that the adjudicator could not vary or overrule the notice of determination (because the decision had been taken and could not be undone) this was not what he had been asked to do. Instead:

"All the adjudicator would have done would have been to identify the status of the determination and its financial consequences. He would neither vary that decision, nor would he overrule it".[11]

He went on to hold that, if he was wrong in his interpretation of condition 59(8) then the clause did not comply with s.108 of the Construction Act[12]. If the adjudicator could not vary the decision then cl.59(8) would prevent a party referring the dispute to adjudication. It would therefore fall foul of section 108[13].

Aceramais Holding Limited v Hadleigh Partnerships Limited [2009] EWHC 1664 (TCC) is a case where the applicant may have chosen to allow the adjudication to run its course, rather than seek a Pt 8 declaration. Aceramais sought a declaration that the adjudicator did not have jurisdiction because there was no contract or no contract in writing for the purpose of s.107 of the Construction Act.

Initially, having issued its Pt 8 claim, Aceramais tried to obtain an injunction to prevent the adjudication. This was refused. However, HHJ Frances Kirkham gave directions for a speedy trial of the issues and that, in the interim, Hadleigh could not enforce any decision of the adjudicator. HHJ Frances HHJ Frances Kirkham's judgment at the trial shows that the case was never one for which the Pt 8 procedure was appropriate.

HHJ Frances Kirkham referred to Coulson J.'s comments in Dorchester Hotel Ltd v Vivid Interiors Ltd [2009] EWHC 70 (TCC) which sets out the approach to be taken by the court to this type of case:

"...the TCC does have the jurisdiction to consider the application for a declaration in this case. But I make it clear, as I hope I made clear in argument, that such a jurisdiction will be exercised very sparingly. It will only be appropriate in rare cases for the TCC to intervene in an ongoing adjudication. It is important that, wherever possible, the adjudication process is allowed to operate free from the intervention of the Court. Applications of this sort will be very much the exception rather than the rule. They will only be granted in clear-cut cases..."[14]

HHJ Frances Kirkham was not happy with the approach taken by Aceramais and commented that the case was inappropriate for a Pt 8 declaration because:

  1. the case was not clear-cut- it was always going to require disclosure and a trial to resolve - so the court could not act quickly to stop the adjudication;
  2. it was not a rare or exceptional case - disputes as to whether there is a contract in writing are common place - the issues could (and perhaps should) have been raised at the enforcement stage; and
  3. the approach was disproportionate - the parties spent a substantial amount of time and money in preparation for a trial to decide only a very narrow issue.

Ultimately, on the facts, Aceramais was unsuccessful and HHJ Frances Kirkham decided that there was a contract in writing and that Aceramais had to pay Hadleigh's costs which were, no doubt, significant. However, as Omar Ensaff points out[15], Aceramais may have made a tactical error in choosing the Pt 8 procedure:

..."had Aceramais simply waited for enforcement of the award, then it may well have been successful at such a hearing. This is because all it would have had to have shown (so as to resist summary judgment of the award) was a real prospect of succeeding in saying there was no contract in writing. However, by going down the declaratory relief route and issuing the Part 8 claim, the burden they imposed upon themselves was far higher i.e. proving on a balance of probabilities that there was no contract in writing".

The case does not appear to be one that was particularly suited to the Pt 8 procedure.

Decisions as to the terms of the contract

In contrast, Supablast (Nationwide) Limited v Storey Rail Limited [2010] EWHC 56 (TCC) is a recent adjudication enforcement case where the responding party may have been better advised to pursue a Pt 8 claim asking for a declaration as to the terms of the contract - was there one contract, as contended for by Supablast or more than one as contended for by Storey Rail?

The adjudicator had already considered the question and, having agreed with Supablast that there was only one contract, awarded a substantial sum in its favour. On the facts, Mr Justice Akenhead agreed with the adjudicator and decided that there was only one contract.

However, he went on to consider what he would have done if he had concluded that the adjudicator was wrong, and there was more than one contract. On this subject Akenhead J. said:

"Generally, an adjudicator properly appointed under the original contract between the parties to the adjudication will have jurisdiction to determine whether or not particular work was or was to be treated as a variation under or pursuant to that original contract. Of course, it is open to either party to argue that, although the particular work was extra to the scope of works covered by the original contract, it was not a variation envisaged or permitted by that contract. That argument will or may in effect give rise both to a substantive defence under the original contract ('there is no entitlement to payment because there is no variation') as well as a jurisdictional challenge ('the adjudicator has no jurisdiction to decide because the extra work cannot have been ordered under the original contract which gives the adjudicator jurisdiction in the first place'). This is where there will often be an overlap between jurisdiction and substance".[16]

"... I am of the view that this is a case where substance and jurisdiction overlapped and the adjudicator was acting within jurisdiction in deciding that the steel works were to be treated as having been instructed as a variation." [17]

Accordingly, even if he thought the adjudicator had come to the wrong conclusion as to the terms of the contract, he would still have enforced the decision. The mistake, if there had been one, would have been an error of fact or law that was within the adjudicator's jurisdiction to make. The decision would have been enforced in line with the policy of the court. On enforcement of an adjudicator's decision, the court will enforce the decision, even if it is wrong, provided the adjudicator has made a decision that is within his jurisdiction.

However, had this been a Pt 8 application, the court would have been entitled to make a final and binding determination as to whether there was one contract or two, and the result of that determination (had the court come to a different view) would have necessarily been that the adjudicator did not have jurisdiction. The decision would not, then, have been enforceable.

The Supablast and Air Design decisions do involve a rather circular argument to create the adjudicator's jurisdiction. If, under the correct interpretation of the contract, the adjudicator does not have jurisdiction how can he obtain the power to make a decision by virtue of a mistake in that very same decision?

It would now be a brave defendant who resisted enforcement on the basis that it thought there was more than one contract (especially where the argument related to the interpretation of documentary evidence). The defendant would be better advised to instigate Pt 8 proceedings either during or immediately following the adjudication.

It may well be that there is an element of pre-emptive policy in these decisions. Under the present Construction Act, disputes are restricted to contracts in writing - and the courts can deal with legal issues arising out of written contracts fairly easily under the Pt 8 regime. However, the amendments to the Construction Act[18] extend the adjudication regime to oral contracts. If the courts did not allow adjudicators to make potentially binding decisions as to the terms of the contract, many adjudicators' decisions could be rendered unenforceable because of a dispute about the terms of the contract (which arguably affects the adjudicator's jurisdiction). If the contract includes oral terms, the court is unlikely to be able to resolve the issue without hearing witness evidence - this would involve a trial. This would undermine the intention of Parliament in providing a quick, albeit interim, resolution of disputes. It remains to be seen how the courts will deal with this type of dispute.

The distinction between the Supablast-type case and Aceramais is probably the evidence required to prove the case rather than anything intrinsic to the dispute. In Supablast there was no dispute as to which documents formed the contract or contracts, only a dispute as to the interpretation of those documents. Very little, if any, oral evidence was required. A dispute perfectly suited to Pt 8. However, in Aceramais, the dispute was as to which documents (if any) formed the contract, and a substantial amount of oral evidence was required.

When should Pt 8 proceedings be commenced?

It is difficult to resist enforcement of an adjudicator's decision. The cases illustrate the importance of choosing the correct procedure, based on the facts of the case; there are dangers inherent in waiting until the referring party enforces the adjudicator's decision before asking the court to rule on the terms of the contract as well as in issuing inappropriate or premature Pt 8 proceedings.

However, as Fenice Investments Inc v Jerram Falkus Construction Ltd [2009] EWHC 3272 (TCC) illustrates, waiting until after the adjudicator has made his or her decision also carries a costs risk. Fenice Investments, the employer, brought a claim under Pt 8 for declarations as to the proper interpretation of the contract and Jerram, the contractor, applied for summary judgment. The claims were issued a day apart but heard together (indicating the court's pragmatic attitude to this type of claim).

The dispute turned on the interpretation of the contract, which contained two contradictory payment procedures. Ultimately, Coulson J. preferred Jerram's interpretation based on the facts of the case. However, his judgment on the question of interest and costs will have consequences for many other employers:

"I am in no doubt that an adjudicator's decision is binding on the parties and, save in exceptional circumstances, it must be complied with, no matter how quick or slow the Part 8 procedure to challenge that decision. A losing party who makes a challenge to the decision by using the CPR Part 8 procedure can do so, but in the ordinary case he must, in the meantime, pay the sum found to be due ...

If a party does not comply with the adjudicator's decision, then, whatever the result of the subsequent CPR Part 8 proceedings, that party should expect to be penalised for its default by way of both interest and costs. As to interest, the Court may well impose a punitive rate of interest ...[19] Further or alternatively, orders for costs, including costs on the indemnity basis, may be appropriate...".[20]

In Coulson J'.s view, the pay now litigate later principle is paramount. This does, though, leave an employer who genuinely believes the adjudicator has made a mistake as to the correct interpretation of the terms of the contract, with a difficult choice. If it pays up, asking the court to make a ruling may be academic, particularly if it believes the contractor will be unable to repay the money if the adjudicator's decision is complied with. However, if it does not pay up it may well be penalised in interest and costs. Perhaps the answer might be to pay the money into court although this idea has not been tested in the courts.

Employers might, though, take comfort from Edwards-Stuart J.'s judgment in Geoffrey Osborne Limited v Atkins Rail Limited [2009] EWHC 2425 (TCC) - which at first glance is difficult to reconcile with Fenice Investments and appears to have only become available after Coulson J. gave his judgment in Fenice Investments.

Correcting mistakes in an adjudicator's decision

It has long been thought that the court has no power to correct errors made by adjudicators that are within their jurisdiction. So long as the adjudicator had jurisdiction and answered the correct question, that decision will be enforced. It does not matter if the decision is wrong (or wrong in part) no mater how obvious the error[21].

However, that may not now always be the case. Geoffrey Osborne opens up the possibility of using the Pt 8 procedure to overturn part of the adjudicator's decision before making payment - at least for obvious arithmetical errors.

The facts of Geoffrey Osborne are strikingly similar to the old Court of Appeal decision in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000]. In both cases, the adjudicator made an error in his allowance for payments already made on previous interim certificates. In Geoffrey Osborne, the mistake was worth around £900,000.

In Bouygues, Dyson L.J. confirmed that:

"It is inherent in the scheme that injustices will occur, because from time to time adjudicators will make mistakes. Sometimes those mistakes will be glaringly obvious and disastrous in their consequences for the losing party. The victims of mistakes will usually be able to recoup their losses by subsequent arbitration or litigation...".[22]

In Geoffrey Osborne, both sides acknowledged the error but Geoffrey Osborne sought to enforce the adjudicator's decision (following Bouygues) on the basis that the error was within the adjudicator's jurisdiction.

Edwards-Stuart J. considered Bouygues and the policy reasons underlying the enforcement of an adjudicator's decisions. He observed that:

"I infer two things from the fairly brief account of the rival contentions in the reports of that case. First, that the contractor was not seeking to obtain the court's ruling on a point of law or fact decided by the adjudicator, but was simply asserting - both in defence to the claim for summary judgment and in support of its own application for declarations - that the adjudicator exceeded his jurisdiction because in effect he decided a question that was not referred to him. Second, that there must have been an arbitration clause in the sub-contract, with the result that any final determination of the issues decided by the adjudicator had to be by way of arbitration and not litigation".[23]

Edwards-Stuart J thought that the option of seeking a Pt 8 declaration as to the terms of the contract was not available in Bouygues. He did not therefore feel that Bouygues prevented him making the declaration sought by Atkins. However, he declined to correct the decision and enforce the award as if the error had not been made. He decided:

"In effect, they amount to a submission that because what the adjudicator did was wrong, his award must be wrong and should be set aside. Attractive though these submissions are, I am firmly of the view that put in those wide terms they should be rejected.

... In my opinion it is not open to the court to set aside the entire decision because the adjudicator was wrong, it would have to go further and determine the correct value of the claims so that it could substitute other findings for those of the adjudicator. It cannot do that on these Pt 8 proceedings".[24]

He therefore declined to set aside the adjudicator's decision.[25] Instead he granted a declaration to the effect that the adjudicator was wrong to order payment to Geoffrey Osborne without taking into account the sums that Atkins had already paid.

However, he did enforce the adjudicator's order with respect to the costs associated with his decision.

It is difficult to reconcile the decisions in Geoffrey Osborne and Fenice Investments. Both issues were suitable for resolution under the Pt 8 procedure and, indeed, both disputes were resolved under the Part 8 procedure. The easiest distinction to draw is that the error in Geoffrey Osborne was manifest (and conceded by both parties) whereas the point in Fenice Investments was a more balanced legal point on contractual interpretation which was ultimately decided against Jerram.

It is also worth noting that Atkins was not criticised (as Jerram was) for its non-compliance with the adjudicator's decision. Perhaps this is simply because it was successful on the point. However, the TCC judges do have a wide discretion on the question of interest and costs and cases such as these are likely to be decided on their underlying merits.

Nevertheless, parties in the position of Atkins or Jerram will need to consider making payment to the contractor (or a payment into court) or take the risk of adverse cost consequences even if they are successful with their application.

In addition, a major factor in the different results in Bouygues and Geoffrey Osborne is that in Bouygues the contract was subject to an arbitration clause so the court did not have jurisdiction over any declarations. For paying parties, this decision is a factor (along with many others) in favour of selecting the courts to resolve disputes.

Summary

The Pt 8 procedure can be used in any case where:

  1. the decision will resolve a significant element of the dispute or save costs; and
  2. the issue does not involve a significant dispute of fact.

In the context of adjudication, it has been used for determining jurisdictional challenges, disputes over the incorporation or interpretation of contract terms or to resolve potential errors in an adjudicator's decision.

A paying party takes a risk on the issue of costs and interest, if it does not comply with the adjudicator's decision before seeking a Pt 8 declaration.

The Pt 8 regime will probably not be available to resolve disputes relating to oral or partly oral contracts. It remains to be seen what effect this has on adjudication enforcement and how this type of dispute is dealt with by the courts once the amendments to the Construction Act come into force. Parties are likely to be forced to pay now and litigate later.

Footnotes:

[1] See Vitpol Building Service v Samen [2008] EWHC 2283 (TCC) for an example of proceedings commenced in respect of an anticipated adjudication.
[2] See Dalkia Energy and Technical Services Limited v Bell Group UK Limited [2009] EWHC 73 (TCC) for an example of proceedings commenced during an adjudication.
[3] See Walter Lily & Co Limited v DMW Developments Limited [2008] EWHC 3139 (TCC) for an example of a Pt 8 claim commenced after receipt of the adjudicator's decision.
[4] In Financial Services Authority v Rourke (t/a J E Rourke & Co) [2002] CP Rep 14.
[5] See extract in Forest Heath DC v ISG Jackson Ltd [2010] EWHC 322 (TCC) at [27].
[6] Forest Heath at [29].
[7] Forest Heath at [45].
[8] Sections.8.2.1 and 8.2.2.
[9] Forest Heath at [45].
[10] See paragraph 10.
[11] See Banner Holdings Ltd v Colchester BC [2010] E WHC 139 (TCC) at [21].
[12] Housing Grants, Construction and Regeneration Act 1996. Section 108 provides that a construction contract must provide parties with the right to refer a dispute arising under the contract for adjudication.
[13] See Banner Holdings at [39].
[14] Dorchester Hotel Ltd v Vivid Interiors Ltd [2009] EWHC 70 (TCC) at [17].
[15] See O.Ensaff, "Declaratory Relief in Relation to Adjudication Proceedings", December 21 2009, available at http://www.no5.com/3903.
[16] See Supablast (Nationwide) Ltd v Story Rail Ltd [2010] EWHC 56 (TCC) at [29]. See also Air Design (Kent) Limited v Deerglen (Jersey) Limited [2008] EWHC 3047 (TCC).
[17] See Supablast at[35].
[18] Local Democracy, Economic Development and Construction Act 2009
[19] In accordance with the Late Payment of Commercial Debts (Interest) Act 1998 and the decision of the Court of Appeal in Ruttle Plant Hire Ltd v Secretary of State for Environment Food & Rural Affairs [2009] EWCA Civ. 97 .
[20] See Fenice Investments Inc v Jerram Falkus Construction Ltd [2009] EWHC 3272 (TCC) at [48] and [49].
[21] See Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 49; and in the Court of Appeal at [2000] BLR 522.
[22] See Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 49 at [35].
[23] See Geoffrey Osborne Ltd v Atkins Rail [2009] EWHC 2425 (TCC) at [17].
[24] See Geoffrey Osborne at [24] and [25].
[25] See Geoffrey Osborne at [77] and [78]


For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785 or Liam Thompson on +44 (0)121 685 2943

This published article may contain information of general interest about current legal issues, but does not give legal advice.

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