Adjudication enforcement – some recent decisions of the Scottish courts
As part of our collaboration with Chartered Institute of Arbitrators, Kenneth Salmon MCIArb, looks at three recent cases in which the validity and enforcement of adjudicators’ awards was contested and considered.
Legislation
In this article the Act means the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 Pt 8. The amended provisions apply to contracts entered into on or after 1 October 2011. The applicable regulations made under the Act are, for contracts made before 1 November 2011, the Scheme for Construction Contracts (Scotland) Regulations 1998; and for contracts made on or after that date, the 2011 regulations (referred to as the Scheme). Together the Act and the Scheme govern the statutory right to adjudication as well as providing for rights to interim and final payment with the object of preserving cashflow, for construction contracts falling within the scope of the Act.
The cases
The cases considered are taken in date order.
The first case we consider concerns the effect of an adjudicator’s decision made after the final certificate under a much-used standard form of building contract. The case was first heard in the Court of Session in 2021 before it came on for appeal before the Inner House in 2022.
Effect of Final Certificate – Effect of adjudicator’s decision after final certificate
D McLaughlin & Son v East Ayrshire Council [2022] CSIH 42
The original decision
At first instance, the Court of Session found that, under a Standard Building Contract with Quantities for use in Scotland, (SBC), the Final Certificate was not conclusive evidence for the purpose of a counterclaim raised by the employer in an adjudication enforcement action. Separate court proceedings challenging the Final Certificate were already underway, and the court held the employer could not rely on the alleged conclusivity of the Final Certificate in relation to its counterclaim, to obtain interim payment pending resolution of those original proceedings. Further, the counterclaim related to matters decided in the adjudication, and the employer had failed to challenge the adjudicator’s decision within the time limit specified in the contract meaning the decision had become final.
This was a case where there was a time lag between the “smash” and the “grab”. Following the issue of the Final Certificate (FC) on 17 July 2019, the Contractor, DMS, raised proceedings in the Sheriff’s court on 19 September 2019 (within the 60 day time limit to prevent the FC from having conclusive effect under the contract) as to the sums payable to them. Later, in March 2020 (outside the 60 day period), DMS took adjudication proceedings claiming an interim payment pursuant to its payment notice issued in August 2017. In the absence of a pay less notice the adjudicator awarded them some £500,000 finding that the issue of the FC after the interim payment notice did not affect the dispute over the interim payment. DMS raised an action to enforce that decision which was heard in December 2020 and the decision was enforced and payment made by the Council.
In the adjudication enforcement, the Council had raised a counterclaim to avoid enforcement and later sought final determination of issues as to (i) the effect of the FC on its counterclaim; (ii) the validity of the interim payment notice; (iii) repayment of interest awarded by the adjudicator if its counterclaim was upheld. This is what the court decided.
(1) The conclusive effect of the final certificate
The SBC provided at clause 1.9.1 that if adjudication or other proceedings were commenced by either party within 60 days after the FC had been issued, the FC was to have effect as conclusive evidence (of various stated matter) save only in respect of the matters to which the proceedings related. Both the adjudication and the enforcement proceedings (in which the counterclaim was raised) were commenced more than 60 days after the FC was issued so that the exception did not apply to the dispute referred (i.e. the interim payment notice) or the counterclaim. Raising the same matters in later proceedings outside the 60 days, did not engage the exception. On the face of it, this finding supported the Council’s contention that the FC was conclusive as to the sum due upon its counterclaim. But two obstacles stood in the Council’s way. The first was the effect of the adjudicator’s decision.
Under clause 1.9.4 of the SBC where an adjudicator made a decision after the FC, that decision could only be challenged if proceedings were commenced within the further time limit of 28 days. The Council’s failure to bring proceedings within that period to finally determine that dispute was fatal to its case. The adjudicator’s decision became final (Jerram Falkus v Fenice Investments).
There was a second difficulty which was the position pending future final determination. This arose from the existing Sheriff action which had been commenced in time and where the correctness of the FC would be determined. Given that the FC was under challenge in those proceedings it was not open to a party to take proceedings to recover payment outside the time limit and contend that the FC was conclusive in order to seek relief in the meantime. The Council could not look to recover payment in reliance on the FC in the current proceedings, while the wider issue of the sum due under the FC was pending in the Sheriff Court. Nothing in clause 1.9 indicated that the FC had this effect. Coulson J had expressed a similar view in Trustees Marc Gilbard 2009 Settlement Trust v OD Developments and Projects Ltd.
(2) The validity of the interim payment notice
This issue had been decided by the adjudicator. The Council had failed to challenge that finding within 28 days of the decision and it was therefore final. Had the court the power to look at the issue it would have found that if the due date stated in the notice had been wrong, as the Council alleged, the notice would have been invalid. It was the duty of the party giving a payment notice to ensure it complied with the Contract in all its particulars.
Obviously, to avoid the conclusive effect of the final certificate, a party should not only commence adjudication proceedings but should also issue protective court or arbitration proceedings to ensure it preserves its full rights of challenge.
The appeal
We then come to the appeal by the Council to the Court of Session Inner House which, by a majority of 2 to 1, was refused. The Lord President refusing the appeal held that although the FC was conclusive, in relation to the adjudication the Council had failed to challenge the decision within the contractually specified time limit, so its counterclaim failed. The interim and final certificate regimes although linked served different purposes and, proceedings having been commenced by DMS to challenge the FC, they were the only appropriate forum for that dispute.
Lord Woolman also refused the appeal. He also regarded the FC as being conclusive but he also held that adjudicating an earlier interim certificate was an impermissible and invalid attempt to circumvent the impact and effect of the FC. However, the Council had failed to challenge the adjudicator’s decision (to disregard the FC) within the contractual time limit and that put paid to their (counter)claim.
Lord Malcolm dissented. He agreed with Lord Woolman that under the contract it was not possible to adjudicate on historic interim certificates after a FC had been issued (which would have been a simple answer to what is otherwise a complex situation requiring a more nuanced approach.) He was not happy that DMS could come along after the FC to try and grab the interim certificate sum from 2 years prior. The Council had paid what it thought was due under the interim certificate; its failure was to address the issue by anticipating how the full sum claimed by DMS might later become ‘conclusive’ after the FC. That could have been cured by a pay less notice. That lack of foresight was compounded by failing to challenge the FC, though he was also of the view that it made little sense for that time limit (the 28 days) to apply to an adjudication raised long after the event of the FC.
It appears their Lordships were agreed that the FC would have conclusive effect, but for the Lord President this did not rule out a possible adjudication on an interim certificate where the time limits for proceeding with such a claim were complied with. Their dissenting Lordships clearly felt this should not permit a payee to pursue payment of an old interim certificate. This leaves uncertainty as to the possible effect of an adjudicator’s jurisdiction in relation to a claim for payment of an interim certificate, after a final certificate, under a standard form in regular use.
Natural Justice – failure to answer the right question; Challenge to enforcement of award arising from validity of final account statement – Broad Justice at high speed
Atalian Servant AMK Ltd v B W (Electrical Contractors) Ltd [2023] CSIH 18 Lord President Carloway, Lords Woolman and Pentland (18 April, 2023)
The headline here is that adjudication gives and is intended to provide ‘broad justice at high speed’. The Reclaimers AMK raised an action asking the Inner House to set aside the order of the commercial judge granting judgment on an adjudicator’s award in favour of the Respondents BWE (see Cases Part 2 of 2023).
AMK had engaged BWE as sub subcontractor to provide what was essentially labour only for part of its electrical sub contract work at Lords Cricket Ground.
The sub subcontract provided for BWE to submit its final account and for AMK to then provide a Final Account Statement (FAS) which was to become ‘final and binding’ unless BWE commenced adjudication or court proceedings within 20 working days. There was a massive difference in value between BWE’s final account (showing gross of £2.384m with £1.9m due to them) and the FAS value of £306k. BWE commenced adjudication and court proceedings within the time limit of 20 working days of the FAS. A first adjudicator resigned because the dispute was "absolutely incapable of proper resolution in the timescales set by the Construction Act" in light of the overwhelming amount of material sent to him – the referral alone was accompanied by 26,000 pages of material. BWE served a further notice in respect of the same dispute essentially asking the second adjudicator to determine the sum properly due on the final account. Mr Tony Bingham was appointed. Following the Referral, Response, Reply, Rejoinder and further submissions, Mr Bingham concluded that a sum of £1.4m was due to BWE (‘Award’). At a fairly late stage he had said that the nature and extent of the multiple variations changed the complexion of the sub subcontract into what he termed ‘a beck and call’ arrangement, though not a new contract. He indicated his line of thinking saying he proposed to look at the number of hours worked and to select an appropriate contract rate and invited comments. The parties did respond and address him on this in detail.
In the commercial court BWE sought enforcement of the Award and AMK opposed and claimed that the Award was invalid on the grounds that Mr Bingham had not answered the question referred to him, namely “what was the sum due?”, but had embarked on a frolic of his own in breach of the rules of natural justice in assessing a fair price based on what he regarded as a new contract. Further, he had decided that the FAS was contractually invalid without this issue having been raised by either party. Separately, Mr Bingham had failed to address, and thus failed to exhaust, his jurisdiction in relation to various lines of defence advanced by AMK including several items of cross claim.
At first instance
In the court below the commercial judge had found:
(a) The question put to the adjudicator could scarcely have been wider: what sum (if any) was due from AMK to BWE? The Award was a genuine attempt to answer that question.
(b) As to the issue of the validity of the FAS, the adjudicator was clearly entitled under the adjudication provisions at paragraphs 13 and 20 of the Scheme for Construction Contracts (applicable to Scotland) to raise it with the parties. Once he had done so there was extensive correspondence about it in which every opportunity was offered and taken for each party’s position to be amply elucidated. In accepting BWE’s position, he had obviously rejected AMK’s position.
(c) Residual complaints were similarly dismissed each party having ample opportunity to advance its case.
On AMK’s action to finally determine the validity of the FAS, the judge held that it would undermine the valid decision of the adjudicator to allow AMK in effect to set off their FAS claims against the Award.
The appeal
Before the Inner House AMK contended that the adjudication was out of time and the FAS was therefore final and binding. The first adjudication notice was not a ‘foot in the door’ allowing the second notice to be in time. The adjudicator had not answered the question posed but had devised his own questions and answers. He had failed to allow them a fair opportunity to address him on his proposed method of valuation. He had treated the sub subcontract as ‘beck and call’ and not valued the works as required under the sub subcontract. Indeed because of the weight of material they had not had enough time to address the new evaluation. He had not addressed their various defences. All, in breach of the rules of natural justice.
BWE argued the first adjudication was commenced in time and upon the resignation of the adjudicator they had followed the correct procedure under the Scheme by serving a new notice. All that was required was that proceedings be commenced in 20 days and this was done. The adjudicator had answered the right question and the parties had been given and had taken every opportunity to deal with the matters he had raised.
The decision
The Inner House held that clause 33.4 provided that the FAS was final and binding on BWE, unless the parties agreed to modify it or BWE commenced an adjudication or court proceedings within 20 working days. Adjudication proceedings were commenced within that time and the FAS was therefore no longer final and binding. The adjudication proceedings did not come to an end on the resignation of the first adjudicator. BWE followed the correct procedure in serving a new notice. The two notices were very similar. The essential question was the same: what sum was properly due? The court opined: “The resignation of the first adjudicator did not terminate BWE's right to challenge the FAS. BWE have their foot firmly in the door, as permitted by clause 33.4, by virtue of both the adjudication and the timeous, and still pending, litigation.” The challenge on that ground failed. The court agreed with the dictum of Lord Briggs in Bresco (para, 12): “pay now, argue later.”
The court also agreed with the principle of fairness as adopted by Lord Malcolm in J&A Construction (para 7) from the English case of Absolute Rentals. The court found no unfairness here. The adjudicator gave due notice to the parties of his line of thinking on ‘beck and call’, and the number of man hours worked and applicable rates, and invited comment. AMK responded in detail and repeatedly set out their case why the variations had to be valued under the sub subcontract and that the number of man hours worked was irrelevant and unreliable.
The Lord President noted the adjudicator took on “a nigh impossible task” (para 11), having to consider an enormous volume of written materials. He said it was redolent of what was described by Turner J in in Re Fundao Dam Disaster as amounting to "a fractal pattern of progressively complex and ever-finer recursive detail of sharply declining significance" adding that it would have required a super-human effort to carry out a precise valuation exercise before the adjudication deadline. The decision was bound to involve “broad justice at high speed”. The court concluded that the Award was “an exemplary piece of work”, the adjudicator having cut down the issue to one of assessing roughly what he considered to be payable and doing so in accordance with the sub subcontract. He selected a contractual rate and applied it to the hours worked. This was no frolic of his own and the natural justice challenge failed.
The court found no need to address the discrete question of whether the court could have considered, as a parallel question on enforcement, whether the FAS was binding on the adjudicator and reserved it to a future occasion.
Jurisdiction – Failure to exhaust by not expressly considering line of defence
AGB Scotland v Darren McDermott [2023] CSOH 31, 17 May 2023, Lord Sandison
Our final case is a decision of Lord Sandison in the Outer House. This was a case where the parties entered into a SBCC Standard Building Contract with Quantities for the carrying out of alterations and an extension at Mr McDermott’s home. AGB applied to the quantity surveyor for an interim payment for £367.8k (IPA). Upon being notified that the quantity surveyor was no longer instructed by Mr McDermott, then resubmitted the IPA to the contract administrator (CRGP) who issued a pay less notice stating nothing was due.
The IPA referred to and, AGB said, enclosed a copy of an earlier letter and its appendix which set out the basis on which the interim payment was calculated. AGB commenced adjudication proceedings in which the adjudicator had to decide several issues including whether the appendix was sent with the IPA. He found for AGB and awarded them the sum claimed.
Before the court, Mr McDermott contended that the adjudicator had failed to exhaust his jurisdiction by failing to consider and make a finding on the defence that the appendix had not formed part of the IPA, with the result that there was no proper specification given of the sums claimed in the IPA. The adjudicator had noted in the decision that Mr McDermott had argued that AGB had not provided a basis for the calculation of the sum claimed but had not noted the specific ground was the absence of the appendix and that, said Mr McDermott, was significant and indicated he had not considered that line of defence.
After reviewing the law as to the principles on which the court would approach an application to enforce an award, Lord Sandison stated that an adjudicator could not rely on a general assertion that s/he had considered all submissions and documents. There must be some effort to address the lines of defence advanced and to explain the basis upon which they were accepted or rejected, failing which the decision would be unenforceable.
Mr McDermott contended that the only questions the adjudicator had directly addressed were (a) whether an earlier document could be incorporated by reference in an IPA and (b) whether the letter and appendix in question provided sufficient detail. AGB said it was clear from the terms of the decision that the question had been adequately addressed. They also argued that the decision should be enforced unless there was a failure to exhaust jurisdiction in a material respect and the court should intervene only in the plainest of cases.
His Lordship quoted a number of paragraphs from the decision which could only be read as deciding that the letter and appendix had been included in the IPA (at least in the earlier application to the quantity surveyor). Whether that could be criticised as an ill-founded conclusion in law or fact was of no consequence. The appendix itself was already in the hands of Mr McDermott’s agents and was both referenced in the IPA and contained adequate specification. Decree granted in favour of AGB.
It may be noted that the court’s approach is in line with existing judicial authority, which is to say that for policy reasons frequently restated, the court will be slow to refuse enforcement. It is a common, if not universal practice, for adjudicators to say in their decision they have read and considered and taken account of all notices, submissions and documents placed before them. Such statements are unobjectionable, but the adjudicator must go further and attempt to show they have addressed all lines of defence and explain why they have accepted or rejected them. A little meat on the bones will go long way to satisfying the requirements for an enforceable decision.
Conclusion
As much as parties / advisers refine their challenges, the courts provide staunch support for adjudicators working within the constraints of a process, pithily encapsulated in the phrase (bound to be repeated hereafter), which delivers ‘broad justice at high speed’.
Kenneth T Salmon
About the author: Kenneth T Salmon MCIArb is a qualified solicitor in England, Wales and Eire. He is a Ciarb qualified and CMC accredited Mediator and Chair of Education at Ciarb North West Branch. Kenneth is a construction specialist currently working as a consultant to Slater Heelis Limited. He has extensive experience of all forms of dispute resolution including arbitration, adjudication, expert determination and mediation. He is the author of Cases on the Enforcement of Construction Adjudication Awards (2012) and the series Cases (on adjudication enforcement) published in Ciarb’s journal Arbitration: The International Journal of Arbitration, Mediation and Dispute Management 1999-2017 and again from 2023.
Courtesy of CIArb
May 2023
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