Construction Adjudication Part 1 of 2021

The Enforcement of Adjudicators’ Awards under the HousingGrants, Construction and Regeneration Act Adjudication Cases

1996: Part 1 of 2021 Kenneth T. Salmon Consultant Solicitor at Slater Heelis LLP

Construction&Engineering

Contents

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1.. . .Introduction ..............................................................................................................................................

2. Counterclaim - Final determination of issue on enforcement........................................ D McLaughlin & Sons Ltd v East Ayrshire Council [2020] CSOH 109 Lord Clark

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3. Jurisdiction – excess of and failure to exhaust - reservation of position..................... Hochtief Solutions A G and others v Maspero Elevatori S.p.A [2020] CSOH 102 Lord Clark 4. Jurisdiction to award interest - waiver - severance.. .............................................................. Aqua Leisure International Ltd v Benchmark Leisure Ltd [2020] EWHC 3511 (TCC) HHJ Bird 5. Jurisdiction - failure to exhaust - no distinction between deliberate and inadvertent failure............................................................................................................................ Barhale Ltd v SP Transmissions plc [2021] CSOH Lord Tyre

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6. Natural Justice - wrongful exclusion of defences................................................................ Global Switch Estates Ltd v Sudlows Ltd [2020] EWHC 3314 (TCC) O’Farrell J

Introduction The Enforcement of Adjudicators’ Awards under the Housing Grants, Construction and Regeneration Act 1996: Part 1 of 2021, by Kenneth T. Salmon, Consultant Solicitor, Slater Heelis LLP. In this part we cross the border into Scotland to consider the currently fashionable issue of final determination of an issue on enforcement, two Scottish cases and an English decision on jurisdiction and a natural justice case dealing with an attempt to restrict the ambit of the dispute referred.

Legislation 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 ‘new’ provisions apply to contracts entered into on or after 1 October 2011. The Act applies to Northern Ireland.

The main regulations are contained in the Scheme for Construction Contracts (England & Wales) Regulations 1998 (the ‘Principal Regulations’)[1] They have been amended by the Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011[2] (the ‘new Regulations’). The new Regulations apply only to contracts for construction operations in England entered into on or after 1 October 2011. For earlier contracts the Principal Regulations apply. Northern Ireland has its own scheme: the Scheme for Construction Contracts in Northern Ireland 1999 as amended by the Scheme for Construction Contracts in Northern Ireland (Amendment) Regulations (Northern Ireland) 2012. The Northern Ireland Scheme is broadly similar to that in force in England and Wales. There are separate regulations for contracts for work in Scotland applicable to contracts made on or after 1 November 2011.[3] The new Regulations apply only to contracts for work in Scotland entered into on or after this date. For earlier contracts the Scheme for Construction Contracts (Scotland) Regulations 1998[4] applies. There are new separate regulations for Wales, applicable to contracts for construction operations in Wales entered into on or after 1 October 2011[5]. A reference to “the Scheme” is to the Principal Regulations for England and Wales, or the Scheme for Scotland, or Northern Ireland, as the context requires.

[1] Scheme for Construction Contracts (England & Wales) Regulations 1998 (SI 1998/649). [2] Scheme for Construction Contracts (England & Wales) (Amendment) (England) Regulations 2011 (SI 2011/2333). [3] Scheme for Construction Contracts (Scotland) Amendment Regulations 2011 (SI 2011/371). [4] Scheme for Construction Contracts (Scotland) Regulations 1998 (SI 1998/687) (S.34). [5] Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (Wales) Regulations 2011 (SI2011/1715) (W.194).

1) final determination of issue on enforcement D McLaughlin & Sons Ltd v East Ayrshire Council [2020] CSOH 109 Lord Clark Counterclaim – The broad question in this case was whether the principles derived from the English case of Hutton [6] were to be applied to enforcement proceedings in Scotland. Background In Hutton Coulson J set out (as was now widely accepted), that an adjudicator’s decision could only be challenged at enforcement on narrow grounds, namely lack or excess of jurisdiction and breach of natural justice. An award could not be resisted at enforcement for the reason that it contained an error of law or fact, subject to one narrow exception. That is where the point at issue was self-contained and capable of being finally determined swiftly and without need for oral evidence, for example a point of law or of construction of the contract which if answered would finally resolve the dispute. The pursuer asserted that the final certificate failed to include one of the 27 interim certificates of payment issued during the course of the contract, with the result that the final certificate was under-valued. It had commenced court proceedings in September 2019 to challenge the final certificate and then in March 2020 started adjudication proceedings claiming the sum due upon the July 2017 interim payment notice, in respect of which the defender had failed make payment or to give any pay less notice. The adjudicator found for the pursuer and awarded them £428,000.

The enforcement proceedings The defender now argued that the adjudicator had fallen into error in failing to treat the final certificate as being conclusive as to the sum due[7]. The parties’ JCT Standard Building Contract with Quantities, 2011 Edition required the final certificate to be challenged within 60 days, failing which it became conclusive as to the sum due. The pursuer argued that its court proceedings were sufficient to comply with this requirement, and the defender disputed that assertion. This then was the issue which the defender urged the court to decide since otherwise it would be unable to rely upon the error of law (if that is what it was) to avoid enforcement. Lord Clark reviewed the English and Scottish authorities. He questioned whether in Hutton , Coulson J. considered the short question of law that arose as being an exception to the normal rule, or whether he was simply applying section 108(3) of the Act and paragraph 23(2) of the Scheme, each of which provided for final determination of the dispute decided by the adjudicator. Either way he saw no difficulty with the application of the principle. Whilst there was no procedure in Scotland equivalent to the English Part 8 procedure seeking a declaration, the defendant in Scotland was entitled to lodge a counterclaim and the court could decide if it was just and convenient to make a final determination upon it at the enforcement stage. In this case, Lord Clark decided that the issues raised by the counterclaim did not fall within the Hutton criteria, that determination of the conclusivity point of itself would not finally resolve the larger dispute, including the question of the validity and effect of the payment notice in question. Further Lord Clark was mindful that as part of his consideration in Hutton , Coulson J. had suggested that the court would look to see whether the decision was “beyond rational justification” or “obviously wrong” indicating that the criteria for the exception may include such matters. As regards the adjudicator’s decision here it was not “beyond rationally justifiable”. Therefore the challenge failed.

[6] Hutton Construction Ltd v Wilson Properties (London) Ltd [2017] BLR 344 [7] Trustees of Marc Gilbard 2009 Settlement Trust v OD Developments and Projects Ltd [2015] EWHC 70 (TCC)

2) Jurisdiction – excess of and failure to exhaust – reservation of position Hochtief Solutions A G and others v Maspero Elevatori S.p.A [2020] CSOH 102 Lord Clark The pursuers sought to enforce an adjudicator’s award in its favour. The defenders sought to reduce the award on the grounds that the adjudicator had both (i) exceeded his jurisdiction and (ii) failed to exhaust his jurisdiction on another matter, in that he had failed to consider a ground of defence. The pursuers said the challenges were without merit and in any event the defenders had failed to adequately reserve their jurisdictional objection. The pursuers had been engaged by the Scottish Ministers to design and construct a replacement bridge over the Forth of Firth to be known as the Queensferry Crossing. They in turn engaged the defenders by subcontract entered into in July and August 2012 to design, manufacture and install three lifts, one in each of the towers of the bridge. The parties were in dispute over approach and progress and in November 2018 the pursuers determined the defenders’ employment, claiming their costs, principally, of employing other subcontractors to start afresh and re-do the defenders’ work. The issues of whether the sub-contract had been validly terminated and, if so, whether the sums claimed by the pursuers were required to be paid by the defenders, were referred to adjudication. The adjudicator decided the subcontract had been validly determined and awarded the pursuers sums totalling £1.25m.

Excess of jurisdiction The adjudicator was required to decide whether an agreement reached in July 2018 had varied the subcontract or was a new agreement. The defenders contended that the adjudicator exceeded his jurisdiction by proceeding to make his award under the sub-contract when the dispute actually fell under a separate and distinct “new agreement” reached at the meeting on 24 July 2018. This point was raised in its response in the adjudication and the defenders went so far as to say that the ‘new agreement’ was outwith the scope of the adjudication. They did not however reserve their position and they left the adjudicator to decide the issue. In its reply, the pursuers said it was not clear whether the defenders were making a challenge to the adjudicator’s jurisdiction; that any such challenge must be made in clear terms; that they were aware from the outset that the pursuer would be relying on the July agreement as a variation to the subcontract and had 4 weeks in which to object to jurisdiction and it was now too late to do so. In its rejoinder, the defenders reiterated that the dispute arose under the subcontract and it was that dispute the adjudicator was asked to determine and not another dispute arising under the July agreement. They did not reserve their position or right of challenge in the event that the adjudicator decided against them on the point. In his decision the adjudicator said “11.24 The Respondent submits that the minutes of meeting of 24 July 2018, being a separate agreement, is outwith the scope of my jurisdiction and that I determine the dispute of termination by reference to the Subcontract. Having decided that the minutes of meeting 24 July 2018 is not a separate contract but a variation to the Subcontract, then it falls within the scope of my jurisdiction. 11.25 If I am wrong in that decision, then I consider that the challenge to my jurisdiction has not been made at the outset of the adjudication procedure when it ought to have been known. The Respondent has not set out any challenges to my jurisdiction appropriately and clearly.”

3) Jurisdiction to award interest – waiver – severance Aqua Leisure International Ltd v Benchmark Leisure Ltd [2020] EWHC 3511 (TCC) HHJ Bird Introduction The Late Payment of Commercial Debts (Interest) Act 1998 (‘LPCD’) introduced a statutory right to interest and fixed compensation for the late payment of commercial debts whenever the contract did not make adequate provision for the payment of interest. It was comparatively recently that the courts decided that an adjudicator does not have power to award legal costs under the LPCD[9]. It is well established that in the right circumstances a court has power to sever an adjudicator’s award (the bad from the good) and enforce the good part only. This power is available where part of the decision is made without jurisdiction. The facts Are you going to Scarborough fair? If you go to the Sands, North Bay you will find water rides and other attractions which the defendant, Benchmark, engaged the claimant, Acqua, to design supply and install. There was a dispute over payment which Acqua referred to adjudication. The adjudicator ordered Benchmark to pay Acqua £200,537 within 7 days. The sum awarded included £12,600 for legal costs pursuant to LPCD. Following negotiations the parties reached a compromise agreement in late August/early September 2017 under which Benchmark would make certain payments to Acqua,

Lord Clark decided that the defenders had not made an appropriate and clear reservation such as was required[8]. Therefore they had acceded to the adjudicator’s jurisdiction to decide whether or not the July 2018 agreement varied the subcontract or was a new and separate agreement and thereby waived their right to challenge it later on at the enforcement stage. It mattered not whether the adjudicator was right or not in finding it was a variation of the subcontract. Failure to exhaust jurisdiction This issue concerned the question whether the design costs were covered by a clause in the determination provision. It was a point the adjudicator had addressed before concluding the clause covered design costs. He did not overlook a material issue.

The decision was enforced.

Comment Lord Clark considered both English and Scottish authorities on the question of the requirements for a jurisdictional reservation to be appropriate, clear and timely and the consequences of failure meet them. He regarded what was said in the Response and the Rejoinder as “hinting at a challenge” rather than making one. Clear words are needed from the outset to protest jurisdiction and state plainly that a party will not accept or regard itself as bound by a decision on the contested issue. Contrast this with the situation where the issue is not inherent in the adjudication notice and only arises during the course of the adjudication, when obviously the protest can only be made once the protesting party becomes aware of the facts and matters giving rise to the lack of jurisdiction. A good example would be where a new or different claim is introduced in or by the referral evidence or a later submission.

[8] See Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd [2019] EWCA Civ 27 [9] See Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd [2017] EWHC 2159 (TCC)

Severance and enforceability It was held in Enviroflow that an adjudicator had no power to award legal costs under the LPCD. Benchmark said that part of the decision could and should be corrected by severance, applying Caledonian [11]. Acqua agreed that the adjudicator had made an error but in an effort to keep the £12,500 awarded, contended either the error was one of law, in which case it should be enforced regardless. Or it was an error of jurisdiction which Benchmark having failed to reserve its position had waived. Acqua also argued that as Benchmark had not made a part 8 application seeking the appropriate declaration as set down in Hutton [12], relief should be refused. Waiver HHJ Bird held that this type of error lead to a question of jurisdiction in the most fundamental sense. The adjudicator “had no jurisdiction at all because the statute under which he purported to act had no application.” Even though Benchmark had not reserved its position it could not be taken to have waived its jurisdictional objection. First, it could not be expected to reserve its positon for the reasons given in Enviroflow before that case had even been decided. Second, it was undesirable to take a view that would encourage parties to advance general reservations in respect of developing law. The judge was unpersuaded that that such a fundamental point of jurisdiction was capable of being waived. What had happened here was not a mere procedural failure. Moreover, the parties could not override a statute by agreement, still less by conduct. The court severed the portion of the decision awarding a small amount of legal costs and enforced the remainder.

the payments would be guaranteed by Benchmark's parent company (Abbey), and Acqua would carry out agreed snagging works. This was intended to be in settlement of various claims including the adjudicator’s award. The agreement was made “subject to contract”. The agreement was performed to the extent that Benchmark made a number of payments and Acqua carried out snagging works. In December 2017 Acqua sent Benchmark a settlement deed to sign. They sent it a further 5 times. Benchmark did not sign. Meanwhile payment continued to be made and snagging works carried on. In May 2018 before the final payment was made, Acqua said it wished to rely on the guarantee from Abbey. Benchmark said no guarantee would be provided. Acqua commenced proceedings to enforce the adjudicator’s decision and Benchmark resisted arguing 1) that as a result of the compromise, the decision was no longer binding; 2) the decision was unenforceable as to the legal costs Issue 1: was the compromise agreement binding? On decided principles and case law the term “subject to contract” meant that until a formal contract was made, neither party intends to be bound and each reserves the right to withdraw. Each party “took the commercial risk that one or other of them might back out of the proposed transaction…..in short a ‘subject to contract agreement is no agreement at all”[10]. The court said the fact that the agreement was acted upon on, without more, was not sufficient to indicate the parties intended to be bound. It was obvious it would be acted upon before it became binding. They had “set their own rules of engagement”. On this basis the first defence has no prospect of success.

[10] Per Lewison LJ in Generator Developments Ltd v Lidl UKGmbH [11] CaledonianModular Ltd vMar City Developments Ltd [12] See supra

4) Jurisdiction – failure to exhaust – no distinction between deliberate and inadvertent failure Barhale Ltd v SP Transmissions plc [2021] CSOH Lord Tyre The pursuer, Barhale Ltd, (‘P’) brought an action to enforce an adjudicator’s decision in its favour. SP Transmissions, the defender (‘D’) applied to set aside the decision on the grounds that the adjudicator had (i) failed to exhaust his jurisdiction by not considering a critical issue raised in their defence and or (ii) had failed to give adequate reasons for his decision. In February D had engaged P to carry out and construct certain civils works at an electricity sub-station under an NEC3 form of contract, Main Option B, Third Edition, April 2013. The Contract >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12

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