Adjudication: a risk of abuse?

T Clarke (Scotland) Ltd v MMAXX Underfloor Heating Ltd [2014] CSIH 83 (15 October 2014) involved a very unusual set of circumstances. Subcontractors often allege that the main contractor is abusing its commercial position and refusing to make payment for works carried out. Adjudication was established under the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act”) to address this situation. In this case, the main contractor (T Clarke (Scotland) Ltd) alleged that the subcontractor (MMAXX Underfloor Heating Ltd) was demanding monies that it accepted were not due, but if payment in that sum was not made, MMAXX would continue to adjudicate until T Clarke gave in and paid the sums demanded.

What followed was a series of adjudications, followed by an application by T Clarke to the court seeking interim interdict to prevent MMAXX from commencing or insisting upon any adjudications in relation to its contract. T Clarke alleged that MMAXX was deliberately referring “sham” disputes to adjudication to run up costs. This was contrary to the intended purpose of the Construction Act which had introduced a speedy mechanism for settling genuine disputes in construction contracts.

T Clarke was unsuccessful in its application at first instance ([2014] CSOH 62) and appealed to the Inner House, which upheld the decision of Lord Woolman of 26 March 2014 not to grant an interdict in the terms sought.

The allegations

T Clarke entered into a contract with MMAXX for the provision of underfloor heating and heat pumps at a primary school in West Linton. From the information before the court, it appears that, almost immediately, relations between the parties deteriorated and disputes emerged. T Clarke said that MMAXX began to act in bad faith, seeking payment of monies which MMAXX admitted were not due.

The Outer House hearing (which took place after nine adjudications between the parties) was continued to allow MMAXX to answer T Clarke’s criticisms by way of written submissions or affidavits from its witnesses. MMAXX failed to do so and it was accepted that the court should proceed on the basis that T Clarke’s submissions were true. As such, the court was asked to consider T Clarke’s request for a protective interdict.

The criticisms made were that during the works, MMAXX refused to address a health and safety issue, and had sought to create confusion by:

• lodging various notices claiming delays to its works without a proper foundation;
• submitting large volumes of inaccurate correspondence;
• claiming that it had negotiated different payment terms from those which had been agreed; and
• submitting “erratic” payment applications (which sought different sums for the same works in different applications).

At the same time, MMAXX made unjustified threats to suspend its works and unjustified demands for further payments when the progress of its works became critical to the progress of the project as a whole.

In the adjudications which followed, it was stated, MMAXX misrepresented key facts both in the adjudication process and in earlier correspondence. Particular examples included averments that MMAXX had falsified quotes from its own subcontractor and that, prior to the adjudication, MMAXX had claimed that it was entitled to payment because it had been instructed by T Clarke to stop drilling, which, as MMAXX admitted at adjudication, was untrue.

It was also said that MMAXX’s director further stated that he was “a maverick” and would not play by the rules; that MMAXX would do whatever it needed to do and “would never give up”; that T Clarke would face significant legal costs; that MMAXX would continue to do whatever was required to obtain monies, including making use of misinformation and misdirection; that he did not care whether his claims were valid or not, and would simply use the adjudication process as often as required on an item by item basis to force a settlement.

These threats were made, T Clarke explained, against a background whereby MMAXX’s director had suggested that he was the company’s only shareholder and had only invested £1 in the company, implying that both he and MMAXX had little to lose.

Arguments presented

As a result of its experiences, T Clarke sought an interim interdict to prevent MMAXX from commencing or insisting upon any further adjudications in relation to the contract between the parties. Although there is English authority concerning the ability of the court to grant an injunction to prevent a particular adjudication proceeding where the referring party’s conduct was unreasonable and oppressive, this appears to have been the first attempt to obtain a court order to prevent the party from referring any dispute to adjudication in respect of a contract.

T Clarke submitted that the balance of convenience supported the grant of an interim interdict as, on the basis of MMAXX’s conduct and threats throughout the contract process, T Clarke was understandably apprehensive that MMAXX would continue to raise further fictitious claims and that T Clarke would incur substantial costs in defending them. Depriving MMAXX of its ability to go to adjudication would not deprive it of an ability to recover any genuine sums in a court action, and if need be, MMAXX could seek the court’s permission to refer genuine disputes to adjudication.

MMAXX did not contest the facts presented, but argued that the order sought was too broad and it would be fairer for T Clarke to return to court to seek an interdict in respect of each subsequent adjudication that could be demonstrated to be an abuse of process. MMAXX claimed it would be unfairly prejudiced in having to go to court to vindicate its claims, due to the greater cost of the court process as compared with the cost of adjudication.

MMAXX said that whatever had happened in the past did not mean that any future reference to adjudication would be in bad faith.

Exercise of power

At first instance, Lord Woolman was of the opinion that T Clarke had failed to establish that MMAXX was deliberately abusing the process. The court noted that a cloud of suspicion hung over MMAXX’s conduct, but felt that the facts did not yield a clear inference that MMAXX had acted unreasonably and oppressively, as most of the adjudications it had sought had foundered due to procedural problems.

Lord Woolman was of the view that the balance of convenience still tipped in favour of MMAXX because MMAXX would be significantly prejudiced in not being able to take advantage of the speedier and cheaper means of dispute resolution provided by adjudication, whereas T Clarke had the option of raising an action against MMAXX seeking damages for abuse of process.

The Inner House upheld Lord Woolman’s decision. In so doing, the court commented that while it did not doubt that it had an inherent power to intervene in a case before it to protect against an abuse of process, that power had to be exercised sparingly because it could involve the denial of a well-founded claim.

In situations such as the present, the court considered that it should be slow to interfere with a party’s right to refer a dispute to adjudication at any time, particularly when that right had been provided by Parliament and was incorporated into the contract between the parties. In short, the court upheld the principle “that a party should not be prevented from pursuing its right to adjudication save in the most exceptional circumstances”.

In light of that key consideration, the court opined that T Clarke’s attempt to prevent MMAXX from referring any dispute to adjudication went too far, as it would also prevent any adjudication which was genuine and well founded.

Comment: potential for abuse

This case raised the novel question as to whether a party can obtain an interdict to prevent another party referring any dispute to adjudication, notwithstanding that they have statutory rights to do so. The court’s apparent acceptance that it can deprive a party of its right to go to adjudication is sensible, as is the restriction of that power to the most exceptional circumstances.

However, if it is not possible to obtain an order to prevent the referral of any dispute, a party may struggle to protect itself if it cannot predict what form a bad faith referral may take.

If an innocent party has to wait until it has notice of a particular dispute which constitutes an abuse of the adjudication process before it can seek an interdict to stop it, it may already be prejudiced. If sufficient detail is only provided in a referral notice (or, worse yet, can only be demonstrated as a result of acts taken later in an adjudication process) the innocent party may have to incur substantial costs in defending the claim before it can obtain a protective interdict.

In addition, if it is not possible to obtain an order to prevent the referral of any dispute, it may be necessary for an innocent party to seek multiple orders to stop each abuse as it becomes apparent. This would be expensive and would not alleviate the prejudice that T Clarke claimed to have suffered by being subjected to unnecessary costs.

As such, the court’s acceptance (at first instance) that a party that could have a claim for damages where it had been subject to an abuse of the adjudication process is a significant development. This could offer some relief to an innocent party and may help deter abuses of process in the first place.

As was stated in the introduction, thankfully this is a very unusual set of circumstances and the court had to consider a novel and difficult question. It does however highlight that potential for abuse of the adjudication process. Meanwhile T Clarke awaits the next development in this saga.

Ross McGinness is an associate in the insurance and risk team at Brodies LLP, which acted for T Clarke in this case. 
t: 0141 245 6278; e: ross.mcginness@brodies.com