Buildlaw Newsletter - Autumn/Winter 2010

Adjudicator’s erroneously restrictive view of jurisdiction

Pilon Ltd -v- Breyer Group plc (2010)

Pilon brought proceedings against Breyer to enforce an Adjudicator’s decision.  The case was heard by the Honourable Mr Justice Coulson in April 2010.

Work had been carried out by Pilon for Breyer.  The work was carried out in two separate batches: 1 - 25 and 26 - 62.   Pilon issued an interim application for payment for work in respect of batches 26 - 62. The application was not paid and Pilon commenced adjudication proceedings.  Pilon submitted that they were entitled to the sum claimed of £337,000.67 without deduction as a result of Breyer’s failure to serve either a payment notice or a withholding notice.

Breyer argued that, pursuant to the terms of the contract, they were not required to serve such notices.  However, Breyer’s primary defence was that it was entitled to set off the sum of £147,774, which Breyer submitted constituted an earlier overpayment to Pilon in relation to batches 1-25.

Mr Mark Entwistle was appointed as adjudicator.  Mr Entwistle was of the view that he did not have jurisdiction to consider the overpayment defence as his jurisdiction was limited to batches 26 - 62, as set out in the Notice of Adjudication.  Therefore, the adjudicator declined to consider the overpayment defence at all and Pilon was awarded £207,617.74

Breyer did not pay and Pilon issued proceedings in the Technology and Construction Court to enforce the decision.

The Honourable Mr Justice Coulson summarised the law as follows:

“1. The adjudicator must attempt to answer the question referred to him.  The question may consist of a number of separate sub-issues.  If the adjudicator has endeavoured generally to address those issues in order to answer the question then, whether right or wrong, his decision is enforceable: see Carillion v Devonport.

2. If the adjudicator fails to address the question referred to him because he has taken an erroneously restrictive view of his jurisdiction (and has, for example, failed even to consider the defence to the claim or some fundamental element of it), then that may make his decision unenforceable, either on grounds of jurisdiction or natural justice: see Ballast, Broadwell, and Thermal Energy.

3. However, for that result to obtain, the adjudicator’s failure must be deliberate.  If there has simply been an inadvertent failure to consider one of a number of issues embraced by the single dispute that the adjudicator has to decide, then such a failure will not ordinarily render the decision unenforceable: Bouygues and Amec v TWUL.

4. It goes without saying that any such failure must also be material: see Cantillon v Urvasco and CJP Builders Limited v William Verry Limited  [2008] EWHC 2025 (TCC).

In other words, the error must be shown to have had a potentially significant effect on the overall result of the adjudication: see Kier Regional Ltd v City and General (Holborn) ltd [2006] EWCH 848 (TCC).”

The result was that His Honour Judge Coulson held that the adjudicator had deliberately placed an erroneous restriction on his own jurisdiction, which amounted to a breach of natural justice, and that the adjudicator’s failure was highly material. Pilon’s application for summary judgment was dismissed and the adjudicator’s decision was not enforced.

The judge concluded that “Pilon took a deliberate and risky strategic decision, to try and exclude an important part of Breyer’s defence, and to use adjudication to obtain a quick payment at minimum cost by reference to batches 26-62 only. … that deliberate tactic has backfired, as Pilon must have known it might”

Government contract payment periods

The Office of Government Commerce (“OGC”) has recently issued a new Procurement Policy Note following the March 2010 budget.  From 25 March 2010 all Government departments, agencies, non departmental public bodies (NDPBs) and the bodies over which they have direct control must include in their contracts a condition requiring contractors to pay sub-contractors within 30 days.

The background behind the requirement is that in recent years the public sector has improved its payment periods with the result that many suppliers and contractors are now paid within 10 days.  The government is keen to ensure this is flowed down the supply chain to sub-contractors so that they too benefit from enhanced payment terms.

All Central government departments now aim to pay 80% of all undisputed invoices within five days. 

As such, all new contracts for the supply of goods or services entered into with government bodies will now contain a clause requiring the contractor to include a clause in its sub-contracts providing for payment within 30 days. The model wording suggested by the OGC is as follows:

“Where the Contractor enters into sub-contract with a supplier or contractor for the purpose of performing its obligations under the Contract, it shall ensure that a provision is included in such a sub-contract which requires payment to be made of all sums due by the Contractor to the sub-contractor within a specified period not exceeding 30 days from the receipt of a valid invoice”.
 
Effectively, contractors who will not agree to pay sub-contractors within 30 days will no longer win public sector contracts.

Third Parties (Rights Against Insurers) Act 2010

The Third Parties (Rights Against Insurers) Act 2010 received Royal Assent on 25 March 2010 although it is not yet in force.  

It is supplementary to a 1930 Act of the same name which was considered to require updating to assist claiming parties.  

Under the 1930 Act, a third party who had a claim against a party who had become insolvent but had the benefit of an insurance policy covering its liability was entitled to pursue its claim against the insurer, having first established liability against the insured.  The effect was that a claiming party could go to the expense of obtaining a judgment against an insolvent insured only to discover that the insurer was disputing liability under the policy. 

Furthermore, under the 1930 Act a third party was not entitled to obtain information about an insurance policy, or even its existence, until it had established liability against the insured (albeit that this has been modified by subsequent case law).  Again, this could result in the third party incurring significant expense in obtaining a judgment only to find no policy was in place at all.

Under the 2010 Act, when it comes into force, the third party will be entitled to bring proceedings directly against the insurer without first having established the liability of the insured.   Remember, however, the Act will only apply where the party against whom the third party has a claim is insolvent.

Furthermore, third parties may request information from those against whom they have a claim or their insurers as to the existence and terms of any insurance policy that may cover the insolvent insured’s liability to the third party, and the information must be provided within 28 days.

Finally, where the insured party has been struck off the company register there will no longer be a need for an application to be made to restore the company to the register prior to issuing proceedings (as was the case under the 1930 Act). 

Tolent clauses - who pays the adjudicator’s costs?

Readers will be interested in the recent case of Yuanda (UK) Co Limited v W W Gear Construction Limited.  

The case concerned an adjudication clause in a construction contract that stated that the entity referring a dispute to adjudication had to bear their own and the other side’s legal and experts costs in relation to the adjudication (commonly known as a “Tolent clause”). In this particular case, the Court held that the clause was unenforceable whereas in earlier cases the Courts have held that such a clause is enforceable against the referring party.

In this case the clause in the contract was drafted in such a way that if the contractor referred the matter to adjudication he had to bear the employer’s legal costs of the adjudication, whereas if the roles were reversed and the employer referred a dispute to adjudication, each party would bear their own costs.

The Court held that the clause in this case was not compliant with the Housing Grants Construction and Regeneration Act 1996 on the basis that a clause that states that the referring party must pay the financial costs of the adjudication is a very real fetter on the referring party’s ability to refer a dispute to adjudication pursuant to the Housing Grants Construction and Regeneration Act 1996.  This is because the practical effect is that the contractor bringing the adjudication will be deprived of his remedy up to the amount of the employer’s costs, so that if the employer’s costs exceeded the amount  of the adjudicator’s decision in favour of the contractor the contractor would not receive any money.

As such, the Court held that the offending clause was not  compliant with the Construction Act and should be struck out and not enforced.

The result is that the entirety of the provisions in the contract regarding adjudication were unenforceable and instead the adjudication provisions in the Scheme for Construction Contracts (England and Wales) Regulations 1998 applied to the contract.

What this means to you

This decision is to be welcomed.  Contractors often have to work on their client’s terms of contract (whether the client be an employer or main contractor) and provisions of the type considered in this case unfairly penalise the contractor.  The decision of the Court in Yuanda (UK) Co Limited v W W Gear Construction Limited provides a decision that could be used by Judges in future cases to find that such a clause is unenforceable and must be struck out. 

It is still best not to agree to terms that contain a clause stating that the contractor has to pay the employer’s costs of an adjudication but at least now, if you do find yourself working on such terms, there is a real possibility that the Court will treat such a clause as ineffective.

The Local Democracy, Economic Development and Construction Act 2009, when it is brought into force, will in any event prohibit Tolent clauses.

For further information on Ashfords Construction Team, please visit www.ashfords.co.uk/construction/

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