APPEAL BY CHARLES HENSHAW AND SONS LIMITED AGAINST STEWART AND SHIELDS LIMITED

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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2014] CSIH 55
Lady Smith Lady Dorrian Lady Cosgrove	XA43/14   OPINION OF THE COURT   DELIVERED BY   LADY SMITH   in the Appeal   by   CHARLES HENSHAW & SONS LIMITED Appellants;   against   STEWART & SHIELDS LIMITED Respondents:   _______________

 

Pursuers and Respondents:  Borland, advocate;  Brodies LLP

Defenders and Appellants:  Howie, QC;  Simpson & Marwick

 

10 June 2014

 

Introduction

[1]        In 2011, the appellants were the main contractors in relation to building works for the repair and adaptation of the Gartnavel Royal Hospital Chapel.  They appointed the respondents as sub-contractors to supply and install glazed screens, windows, curtain walling, rooflights and canopy, in terms of a sub-contract dated 18 and 31 October 2011 (“the October 2011 contract”).  The appellants failed to pay part (£33,565.55) of the respondent’s interim application no. 4, dated 8 October 2012 and the respondents referred the appellant’s withholding of that sum to adjudication.

 

The Adjudication

[2]        In the adjudication, the appellants challenged the adjudicator’s jurisdiction to determine the parties’ dispute. They said that it did not arise from the October 2011 contract;   The ten items at page 2 of application no. 4 – nine of which were disputed in the appeal to this court - did not amount to works under that contract.  The adjudicator rejected their argument.  At paragraphs 63–66 of his decision and reasons dated 24 September 2013, he said:

“63.  In reaching my decision of whether or not the alleged variations are out with the contract and invalidates my jurisdiction as Adjudicator I favour the arguments presented by the Referring Party.

 

64.  On the basis of the documentary evidence presented to me I am of the opinion that the items contained within Application Number 4 are similar to the work envisaged by the Contract and itemised within the Bills of Quantities etc.

 

65.  Furthermore, the contract documents include the ‘technical and scope of works clarifications’ document which includes at Clause 27 that 'due to conflicting information between drawings, bills of quantities and specifications' a provision for variations to be 'subject to a re-quote'.

 

66.  In the circumstances, I am of the opinion that the items listed in Phase 2 of the Application form part of the Contract between the parties and that this does not invalidate my jurisdiction as Adjudicator.”

 

Thereafter, the adjudicator considered the substantive issue referred, namely the valuation of the items on page 2 of interim application no 4.  He found wholly in favour of the respondents (see paragraph 182 of his decision and reasons).

 

Carrillion Construction Ltd v Devonport Royal Dockyard Ltd 2006 BLR 15

[3]        Both parties relied on passages from this judgment of the Court of Appeal in which general guidance was given regarding the approach to be adopted by a court when considering challenges to an adjudicator’s determination.   For the most part, they were not at odds as to what could be taken from that guidance. There was, however, one point of contention that arose in relation to the following passage in paragraph 87 of the court’s judgment:

“ ….To seek to challenge the adjudicator’s decision on the ground that he has exceeded his jurisdiction or breached the rules of natural justice (save in the plainest of cases) is likely to lead to a substantial waste of time and expense …”.

 

Senior counsel for the appellants submitted that the phrase “save in the plainest of cases” applied only to challenges on grounds of natural justice whereas counsel for the respondents submitted that it applied not only to those challenges but also to challenges based on alleged excess of jurisdiction.

[4]        We have no hesitation in agreeing with counsel for the respondents. There is no need to indulge in a task akin to statutory construction – as seemed to be the appellants’ approach. Given the whole tenor of the guidance provided in the judgment (particularly at paragraph 52), it appears to us inconceivable that the phrase in parenthesis was not intended to apply to jurisdictional challenges just as much as to those based on breaches of natural justice.  Further, we agree entirely that it should be only in the plainest of cases that the court upholds a challenge to an adjudicator’s determination based on a submission that he has exceeded his jurisdiction.

 

The Sub-Contract and Application no. 4

[5]        The terms of the sub-contract included a bill of quantities, a series of product specifications and 41 “Technical and Scope of Works Clarifications”, clause 27 of which was in the following terms:

“27.      Due to conflicting information between drawings, bill of quantities and specifications, we would advise you that we have quoted for sizes, quantities and details as described in the above estimate. Any variations would be subject to a re-quote.”

 

The terms of clause 27 were central to the appellant’s argument and we return to it below.

[6]        Page 2 of application no.4 contained a list of items for which the respondents claimed a total payment of £65,084.13. The claims were all for the supply and fitting of glazed screens, doors or windows. It was in relation to nine of these items that the appellants withheld £33,565.55.  They accepted that the eighth item, a claim for the supply of one of a pair of swing doors, was well founded. 

[7]        The items in the list can be identified as being present within the product specifications that formed part of the contract.  When the dimensions of the ten items are compared with the dimensions given for each of them in the bill of quantities, some differences can, we accept, readily be identified. The dimensions of the screens etc in items 1-3, and 6-10 are not the same in application no. 4 as in the bill of quantities. However, those differences are not substantial and are, perhaps, best exemplified by the first item in the list in the application which is stated to be:

“Screen FS O1 including door DO.02 overall size 4092 x 3004mm”

whereas the size specification in the bill of quantities was “3950 x 3000mm”.

[8]        A similar difference in dimensions can be identified in the case of the item which the appellants accepted was properly due (item 8).  They appear in the application as being:

“Screen EX DO.06 overall size 1438 x 2250mm”

whereas the size specification in the bill of quantities was “1450 x 2150mm”.

 

Proceedings in the Sheriff Court

[9]        The appellants failed to pay the sums awarded by the adjudicator (£33,565.55 plus VAT with interest thereon at the rate of 8½ per cent per year from 25 October 2012, together with a compensation payment of £100).  Nor did they pay the adjudicator’s fee of £5,433.75.  The respondents accordingly raised an action in the sheriff court seeking payment of those sums and sought summary decree.

For the appellants, it was submitted to the sheriff that the adjudicator’s determination was ultra vires because he had not had the requisite jurisdiction to consider the reference in relation to the nine items referred to above. That was because they constituted variations, they were not in writing and, in all the circumstances, related to a contract or contracts other than the one on which the referral proceeded, namely the October 2011 contract.  The sheriff rejected the appellants’ submissions and granted summary decree by interlocutor dated 13 November 2013.  The appellants appealed to the sheriff principal who also rejected the appellants’ submission that the adjudicator had acted ultra vires.  She, accordingly, affirmed the sheriff’s interlocutor.

 

Issue in the Appeal

[10]      The central issue raised in this appeal was whether or not the adjudicator’s determination was in respect of an issue which arose from the October 2011 contract.  It was not disputed by the respondents that if the issue determined did not arise from that contract, the adjudicator had acted ultra vires.

 

Submissions for the Appellants

[11]      Senior counsel for the appellants submitted that the issue determined by the adjudicator was one which had arisen under some other contract, not under the October 2011 contract.  In support of that submission, he prayed in aid the wording of clause 27.  It demonstrated that the October 2011 contract did not permit variations.  The word “variation” was not being used in the strict sense of the matters referred to being susceptible to further instruction from the employer but so as to allow for the respondents finding that their guess as to what work might be required proved to be wrong and accordingly having reserved to themselves the right to re- tender.  “Re–quote” meant re-tendering and the conclusion, therefore, of a fresh contract.  That would exclude the risk of the operation of the inclusive price principle, as referred to by Hudson (Building and Engineering Contracts (12^th edition) paragraph 5-025).  He did not shrink from the logical outcome of his submission being that every alteration in detail as between the bill of quantities and the work actually required to achieve the supply and installation of the specified items would require there to be a re-tendering process.  His response was that what would happen in practice would be that that would put commercial pressure on the appellants to agree new rates with the existing sub-contractor rather than going to the length of finding a new one.

[12]      When asked what would be the position if the sub-contractor subject to clause 27 did not re-quote but went ahead and did the work, his submission was that such work would still be outwith the original contract.  There was, he submitted, no power to vary, no power of re-measurement and no power to adjust payment.  The adjudicator had, he submitted, misunderstood clause 27.

[13]      With reference to the terms of paragraph 64 of the adjudicator’s reasons, senior counsel submitted that the reference to the items being “similar” to those itemised in the bill of quantities showed, self-evidently, that on the adjudicator’s own assessment, the dispute could not be a dispute under the October 2011 contract; finding that they were “similar” to the items specified in the contract excluded the possibility of them being covered by that contract.   With reference to paragraph 65 of the adjudicator’s reasons, senior counsel submitted that he had failed to appreciate that clause 27 did not use the language of variation; that meant that it did not empower the employer under the sub-contract to require the sub-contractor to carry out additional work and the disputed items, being additional work, were not covered by the October 2011 contract at all.

[14]      In the course of submissions, senior counsel referred to the Carrillion Construction Limited case (in support of his submission about paragraph 87 to which we refer above), and Rok Building Ltd v Bestwood Carpentry Ltd [2010] EWHC 1409 (TCC) (in support of a submission that where a contract did not contain any express or implied right to issue variations, any work carried out other than that specified in the contract would have been executed and effected pursuant to some other and different contractual regime). He did not accept that the Rok decision could be distinguished on its facts or that the issue of law that arose was any different from that in the present case. We disagree. The issue of law concerned in Rok concerned the need for a construction contract to be in writing and, that being so, what degree of specification of terms was required. Whilst, arguably, the issue here is a similar one, the context in Rok, was rather different. The decision was clearly driven by the substantial difference between the very limited work contracted for (labour only, involving the supply of six joiners) and the work for which payment was being claimed (labour including the supply of more than fifteen joiners, materials, and the work done to carry out more than twenty specific post contract instructions for which no foundation had been laid in the written contract).

 

Submissions for the Respondents

[15]      Counsel for the respondents submitted that the appeal should be refused.  He referred to two of the principles discussed by Chadwick LJ at paragraph 52 of the Carrillion Construction Limited case, namely that adjudicators’ decisions must be enforced even if they result from errors of procedure, fact or law and that judges must be astute to examine technical defences with a degree of scepticism consonant with the policy of the Housing Grants, Construction and  Regeneration Act 1996 so errors of law, fact or procedure must be examined critically before a court accepts that they constitute excess of jurisdiction or serious breaches of the rules of natural justice.  He also referred to paragraph 87 for his response to the appellants’ submission about the applicability of certain of the observations made there, to which we refer above. 

[16]      Counsel submitted that where the adjudicator referred to the works for which the respondents were claiming being “similar” to those in the bill of quantities, read in context, that showed that his assessment was that they were so similar as properly to be regarded as being the same as the contract works.  Whilst there were variances as between the details of nine of the items given in interim application no. 4 and the bills of quantities, when the documents were actually examined it was plain that they were sufficiently similar so as to constitute contract work.  The construction which the appellants sought to place on clause 27 – particularly their construction of the expression “re-quote” - was not commercially sensible. Quite apart from anything else, it would have the result of requiring there to have been nine contracts in addition to the October 2011 contract.   So to construe the clause would be to put obstacles in the way of sensible commercial dealing.  Reasonable businessmen would have been more likely to intend the construction contended for by the respondents.  The correct approach was to read clause 27 as providing for the inherently provisional nature of a contract such as the October 2011 contract and allowing for variances in, for instance, dimensions to be subject to a price alteration determined in a normal valuation procedure, all within the ambit of the October 2011 contract.  He referred, in support of that submission, to observations made by Akenhead J, in Supablast (Nationwide) Limited v Story Rail Limited [2010] BLR 211 at paragraph 29:

“29. One must bear in mind that variations, that is additional, altered, substituted or omitted works, are very common and almost invariably feature in payment disputes between construction contract parties……..Generally an adjudicator properly appointed under the original contract between the parties to the adjudication will have jurisdiction to determine whether or not particular work was or was to be treated as a variation under or pursuant to that original contract.”

 

The assessment of whether or not the disputed items were work carried out pursuant to the October 2011 contract was, he submitted essentially, a question of fact and was for the adjudicator to determine.  It could not, once the very limited nature of the differences between the items and the bill of quantities was acknowledged, together with the need to give a commonsense reading to the expression “re- quote”, be said that his assessment was wrong.  That meant that, in all respects, the adjudicator did not err in his determination of the jurisdiction issue nor did the sheriff or sheriff principal do so.

 

Discussion and Decision

[17]      There is a wealth of judicial commentary on the nature of adjudication within which there is a common theme from which we see no reason to depart, namely, that it must be recognised that it is only in a very limited class of cases that the court will refrain from enforcing adjudicators’ determinations. That class is, as we have already indicated, limited to where it is clear that the decision is one which the adjudicator had no jurisdiction to make or where there has been a clear breach of natural justice (see: Carrillion Construction Limited at paragraph 87).  That is not a harsh approach.  Adjudication, a sui generis system of dispute resolution (see: Diamond v PJW Enterprises Ltd 2004 SLT 430 at para 20 per Lord Justice-Clerk Gill), is intended to provide for the swift interim resolution of a construction contract dispute pending its definitive resolution by litigation, arbitration or agreement.  Fairness is provided for not only by reason of the fact that if either party does not accept the outcome and decides to litigate, matters are considered afresh but also by provisions such as those to the effect that the determination is to be by an appropriately skilled person who must act impartially and avoid incurring unnecessary expense[1].  Thus, the adjudication procedure ought not to be derailed by the pursuit of technical legal arguments, particularly where those arguments are patently without merit.

[18]      We are, accordingly, disappointed, to say the least, to find that that is precisely what has occurred in the present case.  The appellants’ grounds of appeal have delayed payment of the sums determined by the adjudicator as being due, for almost nine months.  Yet they were wholly lacking in substance and it was not at all difficult to accept that the respondents’ submissions were well founded. 

[19]      Overall, we consider that this case provides a good example of what may occur in the context of a contract where some or all of what is estimated for is, as Mr Borland put it, inherently provisional.  The works in this case involved alterations to an old building and it seems unsurprising that, in the course of the contract, the dimensions of glazed items actually required were not identical to what was written in the bill of quantities and product specification; hence the reference in clause 27 to “variations” which, we accept, can properly be regarded as being in the sense of variance rather than where a change is dependent on a specific employer’s instruction.  However, on the facts, as shown by the documents, the dimensions could not be said to be so different as to require to be classed as other than part of the October 2011 contract works. Senior counsel for the appellants did not present any argument to the effect that the assessment of whether or not the works performed were within the contract or not was not fact sensitive;  to the contrary, he seemed to accept that that matter was a question of fact for determination by the adjudicator .  In the end of the day, the focus of the appellants’ arguments was on the expression “re-quote” which led to what we consider amounted to a ludicrous proposition that that showed that two commercial parties intended that every time there was going to be any difference between the dimensions stated in the bill of quantities for, say, a glazed screen and those actually required (once the space could be finally measured prior to installation), work would have to stop and a re-tendering process be entered into.

[20]      We should add that we were mystified by the fact that the appellants’ conceded, without explanation, that payment was due for item 8 on the list on page 2 of interim application no 4, notwithstanding that it suffered from the same supposed difficulty as the other items, namely that there was a change in dimensions as between it and the bill of quantities. We agree with Mr Borland that that did seem to undermine the appellants’ whole approach.

[21]      In all the circumstances, we have no hesitation in refusing the appeal. We advised, at the end of the appeal hearing, that that was our decision and, counsel for the respondents having moved for the expenses of the appeal, which motion was not opposed, we also awarded those expenses to the respondents.