KARL CONSTRUCTION (SCOTLAND) LTD v SWEENEY CIVIL ENGINEERING (SCOTLAND) LTD
Scotland, Outer House, Court of Session
Lord Caplan
21 December 2000
THE FULL TEXT OF THE JUDGMENT
[1] This petition for Judicial Review is for review of the decision by an adjudicator who in terms of the Housing Grants Construction and Regeneration Act 1996 (hereinafter referred to as "the 1996 Act") decided an adjudication that had been referred to him under a construction contract. The petitioners are the principal contractors under that contract and are hereinafter referred to as "Karl Construction". The first respondents are Sweeney Civil Engineering (Scotland) Ltd and they are hereinafter referred to as "Sweeney". Sweeney entered into a Building Sub-Contract Agreement (hereinafter referred to as "the Sub-Contract") with Karl Construction dated 30 September and 5 October 1999. Karl Construction for their part entered into a contract (the Main Contract) with the Secretary of State for Scotland and under the Sub-Contract Sweeney had undertaken to carry out certain construction works which are the subject of the Main Contract. Paragraph 5 of the Sub-Contract provided that: "If any dispute or difference arises under or by reason of breach of this Agreement either party may refer it to adjudication in accordance with Clause 38A." Sweeney made a reference to adjudication and after their Notice of Intention to refer was issued, Janey Milligan, FRICS, LLM, MCIArb (who was called to this petition as second respondent) was nominated and appointed adjudicator. The adjudicator accepted office, conducted the adjudication, and issued her decision dated 7 July on 10 July 2000. Although the adjudicator was called to the petition as second respondent, she took no part in the Hearing I am deciding. The Sub-Contract makes provision for the carrying out of construction operations and since it was signed after 1 May 1998, it falls within the definition of a construction contract in accordance with the 1996 Act.
[2] The adjudicator's said finding was to the effect that Sweeney are entitled to payment from Karl Construction in respect of contract works carried out in terms of Sub-Contract of the sum of £39,872.24 (as calculated in the Appendix C to her Decision) and exclusive of Value Added Tax. The due date for payment was stated to be the date of the Decision, the final date for payment being 7 days thereafter. It was also provided in the Decision that Sweeney are entitled to interest on the said sum at the rate of 5% over the base rate of The Bank of England rate at 17 March 2000 and that from 17 March 2000 until payment. Other provisions in the Decision related to liability for the adjudicator's fees.
[3] In this petition Karl Construction challenged the adjudicator's said Decision on the grounds that it is ultra finescompromissi et separatimultra vires of the adjudicator. Karl Construction in the petition accordingly seek reduction of the Decision.
[4] In Appendix 1 of the Sub-Contract, there are incorporated into the Contract provisions for payment of Sweeney and in particular there are provisions for interim payment after certification for approval of the works. Section 108(1) of the 1996 Act provides that a party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with the section and for that purpose "dispute" includes any difference. Appendix 1 also incorporates in the Sub-Contract Clause 38 which relates to the Settlement of Disputes. Clause 38A relates to adjudication and in 38A.1 the Clause is said to apply when pursuant to Clause 5 either party refers any dispute or difference arising under or by reason of a breach of the Sub-Contract to adjudication. It should perhaps be noted that subsequent provisions about the adjudication of disputes do not impose the specific qualification that the dispute or difference must arise out of a breach of the Sub-Contract but the parties were agreed that nothing turns on any implication that the dispute must relate to a breach of contract. It is clear that the Sub-Contract has provisions designed to achieve expeditious results in the adjudication so that Clause 38A.2.1.1 provides that any application to the nominator of an adjudicator must be made with the object of securing the appointment of, and referral of the dispute or difference to the adjudicator within seven days of the date of the Notice of Intention to Refer. Clause 38A .3.4 makes certain provisions which apply "where a dispute varies significantly from the dispute referred to him and for that reason he is not competent to decide it". It might be noted at this point that there was some discussion as to the meaning of Clause 38A.3.4 at the Hearing on the basis that its terms are somewhat ambiguous. On the one hand the reference to competence may apply to legal competence. On the other hand the reference may be to physical competence because if an adjudicator is selected because of some special experience he might not be competent to apply his expertise to the adjudication if the referral changes the nature of the issues. However, although consideration of the meaning of Clause 38A.3.4 may be interesting in my view, it had no bearing on the final resolution of this petition. Clause 38A.5.1 provides for the party requiring adjudication of a dispute or difference giving notice to the other party of the intention to refer and provision is made for the dispute or difference being "briefly identified in the notice". Within seven days of the Notice of Intention, the party wanting to refer must refer the dispute or difference to the adjudicator for his decision. There must be included in the referral particulars of the dispute or difference together with the contentions on which the referring party relies, a statement of the remedy which he seeks, and any material he wishes the adjudicator to consider. The other party will get copies of this. Within seven days the other party "may" send the adjudicator a written statement of any contentions on which he relies and any material he wishes the adjudicator to consider. Paragraph 38A.6.3 then provides that the adjudicator within 28 days of the receipt of the referral shall reach his decision and send a copy of this in writing to the parties. It is provided that he will be reaching his decision acting as an adjudicator for the purposes of section 108 of the 1996 Act. The parties may jointly extend the time allowed to the adjudicator by up to 14 days. Paragraph 38A.6.4 gives parties a right to request within seven days from delivery of the decision that the adjudicator provides reasons for his decision. Paragraph 38A.6.5 sets out various considerations which apply to the conduct of the adjudication by the adjudicator. He must act impartially. He may set his own procedure. He "at his absolute discretion may take the initiative in ascertaining the facts and law as he considers necessary". This may include among the other powers specified "using his own knowledge and/or experience". This includes "opening up, reviewing and revising any certificate, opinion, decision, requirement or notice issue, given or made. He can carry out "tests and experiments". He can obtain from others such information and advice as he considers necessary on technical and legal matters subject to giving prior notice to parties together with an estimate of statement of the costs involved. Paragraph 38A.8.1 provides that the decision of the adjudicator shall be binding on the parties until the dispute or difference is finally determined by arbitration or court proceedings (or agreement in writing) after the decision is given. The parties without prejudice to their other rights under the Sub-Contract must comply with the decisions of the adjudicator.
[5] By letter dated 1 June 2000 to Karl Construction, Sweeney gave notice of an intention to refer a dispute between the parties to an adjudicator. The said letter makes reference to the dispute as follows:
"The dispute has arisen over the failure of Karl Construction (Scotland) Limited to comply with the payment provisions of the aforementioned scheme, whereby Sweeney Civil Engineering's payment application of 1 February 2000 has not been honoured nor properly disputed within the prescribed period.
The dispute under this contract regards non-payment for work carried out by Sweeney Civil Engineering Limited under their contract with Karl Construction (Scotland) Limited at the above site in accordance with the written agreement created by the tender offer from Sweeney Civil Engineering Limited and accepted by Karl Construction (Scotland) Limited's correspondence dated 9 July 1999."
[6] The reference to "the scheme" is a reference to the Scheme for Construction Contracts (Scotland) Regulations 1998 (hereinafter referred to as "the Scheme"). Part II of the Scheme makes certain arrangements for payment of instalments, staged payments, or periodic payments and paragraph 3 (which provides for dates for payment) provides that where parties to a construction contract fail to provide an adequate mechanism for determining when payments under the contract become due for payment, any payment of the kind specified shall become due on whatever of the dates set out falls later, namely, the expiry of seven days following the expiry of the period mentioned in paragraph 2(1) of the payment provisions of the Scheme or the making of a claim by the payee. It has to be noted that in Sweeney's Notice of Intention to refer to adjudication there is reference to the payment provisions of the scheme but this may be due to Sweeney's failure to focus on the precise provisions warranting payment rather than an intention to rely on any specific provisions. It can also be noted that when Sweeney on 1 June 2000 write to the Scottish Building Employer's Federation seeking nomination of an adjudicator, they requested the nomination of an adjudicator with experience not only of the 1996 Act but also of the Scheme (although no doubt experience of these matters would normally go together). Redress was sought by Sweeney by way of full payment of the sum due under the application for payment they were relying on.
[7] Janey Milligan having been nominated as adjudicator by the Scottish Building Employers' Federation, by letter dated 8 June 2000 Sweeney formally referred a dispute between the parties to her adjudication. Documents were enclosed and it was requested that all these be taken into account "when ascertaining the facts and the law in this case". It is stated that the nature of the dispute and relevant points of law are as detailed in the said letter of 1 June. It was stated that "the dispute is over an outstanding interim payment in relation to an application for payment dated 1 February 2000". It is said,
"This has not been settled in accordance with the payment provisions of the Scheme for Construction Contracts (Scotland) Regulations 1998. This account represents our claim for works provided by us to Karl Construction Limited, as provided in the written contract between the two parties along with additional costs resulting from instructions issued to us by Karl Construction Limited."
Thus there is again a reference to the 1998 Scheme although Mr Connell, solicitor advocate for Sweeney, fairly conceded that this reference should not be taken as specific notification by Sweeney that their claim to interim payment was based on the Scheme alone.
[8] In a letter to the adjudicator dated 9 June 2000, Karl Construction set out certain objections to the appointment of the adjudicator. They challenged the manner of her appointment but this matter is no longer insisted on. However, they claim that Sweeney's right to interim payments is governed by Clause 21.2.4 of the Sub-Contract which provides that although interim payments to the Sub-Contractor shall become due, they shall only be payable to the sub-contractor when the value of the equivalent works are included in the certificate from the architect or contract administrator under the Main Contract or otherwise approved by the employer under that contract. Karl Construction claimed that Sweeney had already been paid more than their certified entitlement. The additional element was said to be a gesture to assist Sweeney with a cashflow problem and it was said to be the basis of the entire payment that Sweeney would complete and resource the outstanding work.
[9] In a letter from their solicitors to the adjudicator dated 21 June 2000 Karl Construction set out their formal response to Sweeney's referral. The third paragraph of that response contains the following:
"The Referring Party suggests that the Scheme for Construction Contracts (Scotland) Regulations 1998 ('The Scheme') should be used for this adjudication. However, the parties' contract contains an adjudication clause (Clause 38) which is Act compliant. Therefore, no regard may be had to the Scheme when determining this dispute".
The Response concludes that the Referring Party had failed to demonstrate any contractual entitlement to the various sums claimed; that these sums cannot be said to be due and that the service of a Notice of Withholding Payment is irrelevant to those claims. The Response sets out in relation to "payment provisions" that to succeed with their claim Sweeney must demonstrate a contractual entitlement to the sums claimed. They then proceeded to develop the argument the interim payment shall become due (but not payable) on the date when the value of the equivalent works under the Main Contract are included in the certificate from the architect or contract administration. By reference to these provisions they claim that Karl Construction have actually paid Sweeney more money than is due under the contract at this point of time. They also specifically refute any suggestion from Sweeney that the absence of a Notice of Withholding requires the payment of the whole of Sweeney's application for payment dated 1 February 2000. They state that Karl Construction have not withheld payment on the basis that they have a claim against Sweeney which they consider they are entitled to use as a set-off but rather their reason for non-payment is that Sweeney is not due to be paid the various sums sought. By way of redress, Karl Construction requested the adjudicator to find that there was no contractual requirements for Sweeney to serve a Notice of Withholding and that Karl Construction have not sought to withhold payment from Sweeney. They also ask the adjudicator to find that Karl Construction have properly valued Sweeney's entitlement in terms of the Sub-Contract and accordingly are not due to pay the sums sought by Sweeney.
[10] In addition to the formal documents I have referred to, the parties corresponded on some of the matters raised by Karl Construction. This correspondence was usually addressed through the adjudicator. It would appear that in this correspondence Sweeney never claimed that their claim to early payment of the sums due for the work they were seeking redress for was based on the payment provisions of the Scheme rather than those of the Sub-Contract. In a letter from Sweeney to the adjudicator dated 27 June 2000, Sweeney wrote,
"We would respond as follows to the above-noted submission on behalf of the respondents (Karl Construction).
Notices. We accept that Clause 38 of the Conditions of Contract complies with requirements of the Scheme for Construction Contracts (Scotland) Regulations 1998 this, however, does not relieve the respondents of their contractual obligation to issue a written notice under Clause 21.3.2 of the conditions of their contract."
Sweeney claimed that in the absence of the necessary contractual notice it was impossible for them to know the basis upon which the interim payment eventually made had been calculated.
[11] In her Decision dated 7 July 2000, the adjudicator held that in arriving at her decision she had taken account of the Referral Notice and Response and further exchanges of correspondence submitted by the parties. She had held a meeting with the parties to determine the extent and value of the works carried out by Sweeney. She had asked parties to identify items in dispute and monies paid against each item. She determined that the nature of the dispute between the parties was the right of the sub-contractors to receive payment for the work carried out to 31 January 2000. In particular she asserted that the matters referred to adjudication were:
(1) To decide if Sweeney is entitled to the payment of their Payment Application No 5 for the sum of £65,479 excluding value added tax and as to deduction of previous payments;
(2) To decide if they are entitled to interest on that amount if awarded;
(3) To decide on liability for the adjudicator's fees and expenses in the adjudication."
The adjudicator then considered the history of the work done and the payments which were received by Sweeney. She held that the contract terms and conditions do not make adequate provisions as required by section 110 of the 1996 Act. Accordingly the default provisions of invoking the relevant stipulations of Part II of the Scheme apply to the time for payment. Thus the adjudicator held that the Sub-Contract did not make adequate provision for determining when payments became due. Applying the provisions I have mentioned, the money payable under the relevant application was due for payment on 1 February 2000 and the final date for this payment was 17 March 2000. Accordingly the adjudicator (having adjusted the total payable) found that Karl Construction were due to make payment to Sweeney of £39,872.24 exclusive of VAT and interest on the sum awarded of 5% over the base rate of the Bank of England rate at 17 March 2000 from that date until payment. She found Karl Construction had to meet the ultimate liability for her fees and expenses.