Sgl Carbon Fibres Ltd V Rbg Ltd

SGL CARBON FIBRES LTD V RBG LTD

Scotland, Outer House, Court of Session

Lord Glennie

31 March 2011

THE FULL TEXT OF LORD GLENNIE’S OPINION

Introduction

[1] The pursuers, SGL Carbon Fibres Limited, seek to enforce the decision of an adjudicator, Mr George Ross, in terms of which he found the defenders, RBG Limited, liable to pay them the sum of £1,074,609.99 plus VAT, together with interest of £45,266.11 on the principal sum awarded. The pursuers quantify the VAT as being at least £161,191.50 (on the basis that the rate of VAT having been at least 15% at all material times). Mr Ross' decision was made on 8 October 2010 and was corrected in respect of certain clerical mistakes by letter dated 22 October 2010. I shall refer to the decision as corrected simply as "the decision". Because the parties adopted opposite roles in a previous adjudication and, as pursuer and defender in a previous action relating thereto, I shall, to avoid confusion, refer to them in this Opinion by the abbreviations "SGL" and "RBG". Similarly, because there have been two adjudications before different adjudicators, I shall refer to Mr Ross by name rather than, as is more usual, simply calling him the adjudicator.

[2] RBG resist enforcement on two grounds. The first is that the decision, or part of it, was made in breach of the principles of natural justice in that, in reaching his decision on certain issues, Mr Ross made use of his own knowledge and experience (a) to make factual determinations for which there was no evidence and (b) without giving them a reasonable opportunity of commenting thereon. The second is that he failed to exhaust his jurisdiction or, alternatively, acted in excess of it, the two criticisms in this case being simply opposite sides of the same coin. In their defences, RBG seek to have the decision set aside ope exceptionis (by way of exception).

[3] The matter came before the court for debate, it being agreed that the relevant facts appeared sufficiently from the documents before the court. At the beginning of the hearing, Mr Lake, QC, for RBG, indicated that he would also be seeking reduction of the decision. To this end, without objection from Mr Howie QC, who appeared for SGL, RBG lodged a petition in which they, as petitioners, sought reduction of the decision on those same grounds. The petition was in short form, incorporating by reference the contentions of the parties in the Summons and Defences in the main action. This came on for hearing at the same time as the debate, it being agreed that the disposal of the petition would follow from the decisions reached at debate in the main action.

The contract

[4] The contract between the parties was entered into on 10 June and 30 July 2008. In terms of that contract, RBG agreed to construct an additional production line at SGL's factory premises. The work included the installation of pipework, plant and ducting, the construction of an extension to part of the existing factory premises and the execution of associated infrastructure works. The contract was substantially on the terms of the NEC 3 form of contract with amendments and additions as agreed by the parties. It provided two alternative methods of dispute resolution, the applicable method depending upon whether or not the contract works were subject to the Housing Grants, Construction and Regeneration Act 1996. The works here were subject to the 1996 Act, and the method of dispute resolution in clause W2 applied. That provided for disputes arising under or in connection with the contract to be referred to and decided by an adjudicator. It contained provisions regulating the conduct of the adjudication. These included, at clause W2.3(4), a provision that the adjudicator was entitled to "take the initiative in ascertaining the facts and the law related to the dispute". It provided also, in clause W2.3(11) that the adjudicator's decision was binding unless and until revised by the tribunal - the chosen tribunal in this case being arbitration - and, further, it made a decision by the adjudicator a condition precedent to any reference to arbitration.

The first adjudication

[5] The adjudication with which this action is concerned is the second to have taken place between the parties under this contract. The first adjudication was commenced by RBG by notice dated 19 November 2009. The adjudicator was Robert Fleming. The reference was in respect of the following disputes:

(i) whether the Completion Date should be changed to 16 January 2009;

(ii) whether SGL were due to pay RBG the sum of £250,049.93 plus VAT, or some greater or lesser sum, in respect of invoice SINV/0036570;

(iii) whether SGL were due to pay RBG the sum of £45,703.47 plus VAT, or a greater or lesser sum, in respect of invoice SINV/0036578;

(iv) whether SGL were due to pay RBG the sum of £508,629.36 plus VAT, or some greater or lesser sum, in respect of invoice SINV/0036591;

(v) whether SGL were due to pay RBG the sum of £139,482.61 plus VAT, or some greater or lesser sum, in respect of invoice SINV/0039421;

(vi) whether SGL were due to pay RBG the sum of £972,192.01 plus VAT, or some greater or lesser sum, in respect of invoice SINV/0039657; and

(vii) whether the above payments should be made with interest.

The five invoices referred to were all issued in 2009, and those identified in paragraphs (iv) to (vi) above were issued in respect of work carried out after 31 December 2008.

[6] On 18 January 2010 Mr Fleming issued his decision in the first adjudication. On 29 January 2010 he corrected various clerical errors. No sums were found due to the defenders in respect of the matters referred to at paragraphs (ii) and (iii) above. Payment of £183,212.46 with VAT at 15% was found due in terms of paragraph (iv). Payment of £139,482.61 with VAT at 15% was found due in terms of paragraph (v). Payment of £612,020.58 with VAT at 15% was found due in terms of paragraph (vi). The total sum due to the defenders was £934,715.65 plus VAT.

[7] RBG raised proceedings to enforce that decision. Those proceedings were defended by the SGL. After hearing parties on RBG's motion for summary decree and at debate, Lord Menzies refused the motion for summary decree and dismissed the action. His decision is reported as RBG Ltd. v SGL Carbon Fibres Ltd. [2010] BLR 631. He held that Mr Fleming had failed to exhaust his jurisdiction as a result of misconstruing his remit. The question he had had to answer concerned RBG's entitlement to be paid in respect of five invoices under deduction of certain credits. The contract provided that the amount payable at each date for payment was the accumulating value of the Price for Work Done to Date ("PWDD"). Mr Fleming had correctly rejected the argument that the accumulating value of the PWDD was fixed and could not be revisited. It was necessary for him, therefore, in considering RBG's entitlement to payment in respect of the five invoices before him, to revisit the PWDD and consider whether it contained any element of overpayment by SGL, SGL's contention being that no further payment was due to RBG in respect of the 2009 invoices because of earlier overpayments. Mr Fleming had declined to have regard to evidence concerning those earlier overpayments and to this extent had failed to exhaust his jurisdiction.

[8] In addition to refusing the motion for summary decree and dismissing the action, Lord Menzies also sustained SGL's fifth plea-in-law and set aside the decision ope exceptionis. There was no separate petition by SGL for reduction. The effect of that appears to be that the decision stands but it cannot be relied upon by the parties to it and cannot be revisited by the adjudicator: see Vaughan Engineering Limited v Hinkins & Frewin Limited 2003 SLT 428 at para.[35].

The current adjudication

[9] Notice of Adjudication in the adjudication with which this action is concerned was served by SGL on 7 April 2010. On 9 April 2010 Mr Ross was appointed to act as adjudicator and wrote to the parties informing them of his selection. The dispute was identified in the Notice of Adjudication in the following terms:

"3.1 The dispute between the parties is in relation to the cumulative amount due to date to RBG, and payment to SGL for the change in the amount due."

The "Redress Sought" was set out in para.4 of the Notice of Adjudication. SGL sought a determination that RBG was in breach of contract and that the cumulative amount of £11,710,534 claimed by RBG was not justified. They contended as their primary case that the amount due to RBG was only £5,310,520.85. RBG had already been paid the sum of £9,540,989.18. On the basis that the amount due was only £5,310,520.85, they sought an order for repayment by RBG to them of £4,230,468.30 (or such other sum as might be found due), plus VAT and interest as appropriate.

[10] Mr Ross produced his decision on 8 October 2010, various extensions of time having been agreed between the parties to enable him to do so. His decision runs to some 217 pages. He corrected his decision on 22 October 2010, the corrections consisting of revisions to the Summary in the last four pages. As I have said, he found RBG liable to pay SGL the sum of £1,074,609.99, plus £45,266.11 by way of interest on that sum, together with VAT where applicable. He approached the matter by considering the issues under 20 broad headings. Issues 1-4 were of a general nature, relating to the form of contract operated by the parties, early warning notices, and an analysis of SGL's primary and secondary positions. Issues 5-20 related specifically to the matters in dispute. Thus, Issue 5 was described as:

"Section 1 - Site Set Up and Management

(Relative to PWDD up to 31 December 2008)"

The descriptions of other issues took a similar form, each being qualified by the words, in brackets,

"(Relative to PWDD up to 31 December 2008)".

After a consideration of each of these issues in turn, at p.213 of his decision Mr Ross gave a summary entitled:

"PWDD up to 31 December 2008 Summary (Adjudicator's Evaluation)".

He then listed Issues 5-20, giving a figure for each. Most of those figures showed sums due to RGB. The last three, Issues 18-20, concerned criticisms of the work done by RGB and, on his findings, resulted in sums to be deducted from the PWDD. Having added and subtracted the various figures, Mr Ross arrived at a sum of £7,771,329.94 as being the "True PWDD up to 31 December 2008". His calculations thereafter are somewhat complex, and I refer to them in detail below, but what he then did was, in effect, this. He added in certain sums (totalling £695,049.25) relating to matters for which SGL had already been given credit in the first adjudication, to produce a total of £8,466,379.19, and deducted this from the sum already paid by SGL (£9,540,989.18) to arrive at the sum due to SGL (£1,074,609.99). I shall refer to this in more detail when considering the second ground of challenge to enforcement of Mr Ross' decision.

The first argument - breach of natural justice

[11] RBG contend that, in reaching his decision, Mr Ross failed to observe the principles of natural justice. This issue is focused on his determination in respect of Issues 18 and 19. Issue 18 was concerned with "Loss of Productivity (Inefficiency)". Issue 19 was concerned with "Pipework/HBAC Labour Productivity". The complaint, in summary, is that in respect of each of these issues, Mr Ross made his decision not on the basis of the evidence provided to him by the parties or on the basis of any evidence gathered from his own investigation as to the facts on site, but on the basis of assumptions purportedly derived from his own experience, without providing parties with a proper opportunity of making submissions to him about the course he proposed to adopt or as to the relevance of his experience or as to the assumptions upon which he proposed to proceed.

[12] Fairness requires that an adjudicator must be impartial and must give each side a fair opportunity to present its case: see, for example, per Lord Drummond Young in Costain Limited v Strathclyde Builders Limited 2004 SLT 102 at para.[7], and per Dyson LJ in Amec Capital Projects Limited v Whitefriars City Estates Limited [2005] BLR 1 at para.[14]. The requirement that both sides must be given a fair opportunity to present their cases means, inter alia, that in a case where the adjudicator makes his own investigations of fact, or intends to rely upon his own experience in order to supplement the evidence presented by the parties, or to decide the dispute on a different basis from that advanced by the parties, he must inform the parties of his intention and give them a reasonable opportunity of commenting thereon. It goes without saying that he must give them sufficient information about what he proposes to do to enable them to make an informed response. The adjudicator may have fallen into error in his own researches, or in his assessment of the relevance of his own experience, and the parties must be given an opportunity of pointing this out. If no opportunity is given, any error may stand uncorrected: Costain para.[14]. At para.[15] in Costain, Lord Drummond Young cited from the judgment of Judge Humphrey Lloyd, Q.C. in Balfour Beatty Construction Limited v London Borough of Lambeth [2002] BLR 288 at 301-303. Included within that passage is the following:

"Is the adjudicator obliged to inform the parties of the information that he obtains from his own knowledge and experience or from other sources and the conclusions which he might reach taking their sources into account? In my judgment it is now clear that, in principle, the answer may be: Yes. Whether the answer is in the affirmative will depend on the circumstances ...

An adjudicator is of course entitled to use the powers available to him but he may not of his own volition use them to make good fundamental deficiencies in the material presented by one party without first giving the other party a proper opportunity of dealing both with that intention and the results. ..."

At para.[20], Lord Drummond Young set out a number of principles which he thought emerged from the authorities on adjudication and arbitration. Amongst them was the following:

"6. An adjudicator is normally given power to use his own knowledge and experience in deciding the question in dispute; ... if the Adjudicator merely applies his own knowledge and experience in assessing the contentions, factual and legal, made by the parties, I do not think that there is any requirement to obtain further comments. If, however, the adjudicator uses his own knowledge and experience in such a way as to advance and apply propositions of fact or law that have not been canvassed by the parties, it will normally be appropriate to make those propositions known to the parties and call for their comments. As I have indicated, the timescale may be very short."

This is, in my opinion, a correct statement of the law. A distinction always has to be drawn between the case where the adjudicator uses his own knowledge and experience in order to inform his decision on the factual and legal arguments presented to him by the parties, in which case there may be no requirement on him to obtain any further comments from the parties - he is, after all, chosen in part because he has such experience to bring to bear on the matters in dispute in deciding the reference - and the case where an adjudicator uses his own knowledge and experience to introduce new matters which the parties have not raised and to decide the case, in part at least, on the basis of those matters, in which case he should make his intentions known to the parties and invite their comments.

[13] A related question, adverted to in Costain, is that of timing. In an adjudication the timescale is, from the start, very short. Time will often be extended by agreement, as it was here, but even then there is seldom the opportunity for a very long period for further comments or submissions, particularly if points are raised at a late stage. One consequence of this is that if the adjudicator intends to proceed on the basis of his own knowledge and experience, in circumstances where he is required to give the parties a reasonable opportunity of commenting on what he proposes to do, he should raise the issue with the parties as soon as he is aware of it and must do so in time to allow adequate opportunity for comment. If he does not raise the issue until just before the deadline for producing his decision, he is in great danger of not providing the parties with a proper opportunity to respond.

[14] I turn now to consider the two issues in respect of which this point is taken.

Issue 18

[15] Issue 18 is concerned with "Loss of Productivity (Inefficiency)". SGL's contention, as recited at para.10.336 of the decision, was that RBG's labour was inefficient due to the shift patterns adopted by RGB. Some operatives were working 12 hours per day, 7 days per week for sustained periods. They submitted that it was recognised that such long shifts resulted in losses of productivity by up to about 50%. RBG's response was that they worked a shift pattern appropriate to delivery of SGL's needs. SGL had asked them to increase their resources on site and they had done so. SGL's contention therefore was unsubstantiated.

[16] On 22 September 2010 Mr Ross wrote to the parties in the following terms. The letter was sent by fax and appears to have been sent out after 5pm on that date.

"I hereby advise the Parties that I intend using my own knowledge in respect of the loss of labour productivity which I am considering for the works carried out by RBG in the above contract.