10 reports from the courts

Reports from the courtsIn our latest reports from the courts Andrew Croft and Jennifer Webb of Beale & Company focus on a Scottish court ruling with relevance for adjudication in England; and on a rare example of a dispute under FIDIC contracts coming to the courts.

T Clarke (Scotland) Ltd v MMAXX Underfloor Heating Ltd [2014 CSIH 83; Lord Bracadale; Inner House

T Clarke (Scotland) Ltd (Clarke) was the M&E sub-contractor for the redevelopment of a school. Clarke appointed MMAXX Underfloor Heating Ltd (MMAXX) as the underfloor heating sub-subcontractor.

The sub-subcontract stated that for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996), the sub-subcontract would be a ‘construction contract’ and that disputes could be settled by adjudication.

Issues involving health and safety and payments arose on the contract. Between June 2013 and March 2014 nine adjudications were initiated, eight by MMAXX and one by Clarke. Clarke applied for an interim interdict (the Scottish equivalent of an interim injunction) to prevent MMAXX commencing further adjudications.

Clarke’s arguments included that MMAXX had acted in a malicious and improper manner in bringing the earlier adjudications, and was likely to do so again. Clarke argued that, on the balance of convenience, the interim interdict should be granted as it had incurred significant irrecoverable expense during earlier adjudications. MMAXX argued that the significantly greater costs of litigation would prejudice MMAXX and that it should not be deprived of its statutory right to adjudicate.

The Outer House found that MMAXX had not acted unreasonably and oppressively and that:

‘[t]he key consideration is that the grant of the interim interdict would prohibit the defender from initiating any further adjudication, no matter how genuine, no matter how well vouched.’

A court would only deprive a party of an express right conferred by Parliament, such as the right to adjudicate, in exceptional circumstances. Granting the interdict would prejudice MMAXX’s right to cheaper and speedier forms of dispute resolution.

Clarke appealed, on grounds including that the Outer House had failed to give sufficient weight to the argument that MMAXX was likely to use further adjudications to put commercial pressure on Clarke; and that it could not be assumed that litigation was more costly than adjudication.

DecisionThe Inner House upheld the decision. A prima facie case for granting an interim interdict was not demonstrated and the balance of convenience favoured MMAXX. Lord Bracadale stated:

‘[adjudication] is a right provided by Parliament and one which was incorporated into the contract … [T]he court should be slow to intervene in such a process.’

This case was distinguished from Mentmore Towers Ltd v Packman Lucas Ltd [2010] EWHC 457 (TCC) and Twintec Ltd v Volkerfitzpatrick Ltd [2014] EWHC 10 (TCC), which granted injunctions restraining parties from proceeding with an adjudication. These related to present adjudications, not an interim interdict/injunction against any future adjudication, ‘no matter how genuine and well vouched’.

SignificanceAlthough a Scottish court decision, it provides useful guidance for the English courts. This case demonstrates a reluctance to interfere in the adjudication process; particularly where this will prohibit future reference to adjudication. Those who have entered into a contract

January/February 2015

reports from the courts 11

which is subject to adjudication with a ‘vexatious litigant’ may be more likely to succeed in staying adjudication once commenced than seeking an injunction preventing future adjudications.

Peterborough City Council v Enterprise Managed Services Ltd [2014] EWHC 3193; TCC; Edwards-Stuart J

Peterborough City Council (the Council) appointed Enterprise Managed Services Ltd (EMS) to design and supply a solar energy plant under a contract (the Contract) based on the FIDIC General Conditions of Contract for EPC/Turnkey Projects (FIDIC Silver Book). Under the Contract if the plant failed to generate 55kw by 31 July 2011 EMS would pay liquidated damages of circa £1.3 million.

Clause 20.2.1 of the Contract required disputes to be adjudicated by a Dispute Adjudication Board (DAB) in accordance with cl 20.4, and cl 20.2.5 provided for the parties to enter into a Dispute Adjudication Agreement with the adjudicator(s) in the form contained in the appendix. Clause 20.8 entitled a dispute to be referred to the courts if there is no DAB in place ‘by reason of the expiry of the DAB or otherwise’.

The Council alleged that the plant had not achieved the target of 55kw in the required time scale. A dispute arose concerning the Council’s right to recover circa £1.3 million in liquidated damages and EMS’ payment application for £658,935, which the Council was refusing to pay due to its claim.

In July 2014 EMS gave notice of intention to refer the dispute to adjudication. The Council subsequently commenced proceedings in the courts. EMS applied to stay the proceedings to allow for referral to the DAB.

The Council argued that cl 20.8 provides an ‘opt-out’ as the words ‘or otherwise’ applied where a DAB was not ‘in place’ either after a dispute had arisen or at the time a party not wishing to adjudicate commenced litigation. The Council argued that the DAB could not be ‘in place’ until the Dispute Adjudication Agreement was agreed and signed and that cll 20.4 to 20.7 of the Contract were unenforceable for uncertainty, as if an unsuccessful party fails to comply with the DAB decision, the successful party’s remedy is another DAB referral.

EMS argued that cl 20.2.1 was a mandatory requirement to refer disputes to the DAB before

commencing proceedings and the parties could not have intended to be able to ‘opt out’ of the DAB process. If this were the case, the dispute resolution procedure in cll 20.2 to 20.7 was redundant.

DecisionEdwards-Stuart J granted a stay for adjudication under the terms of the Contract. The Contract required disputes to be determined by adjudication and amicable settlement, and only failing that, by litigation. The effect of cl 20 was for adjudication to be a condition precedent to court proceedings. It was further held:

‘sub-clause 20.8 … probably applies only in cases where the contract provides for a standing DAB, rather than the procedure of appointing an ad hoc DAB after a dispute has arisen’ (emphasis added).

A potential ‘gap’ may exist in cll 20.4 to 20.7 if arbitration is the final method of dispute resolution, but not where the final method of dispute resolution is litigation, as it was here. A court can order specific performance of the adjudicator’s decision; an arbitrator may not have such a right.

As the Dispute Adjudication Agreement was incorporated into the Contract, it did not matter that it was unsigned; a party who did not sign without good reason could be compelled to do so by specific performance. It was held:

‘there is a presumption in favour of “leaving the parties to resolve their dispute in the manner provided by their contract”.’

SignificanceThis case provides guidance as to the court’s treatment of the dispute resolution procedure in the FIDIC Silver Book. The decision confirms that where the English courts are chosen as the final method of dispute resolution, it is likely that resolution by a DAB will be a condition precedent to commencing proceedings in the FIDIC Silver Book. Where arbitration is the final form of dispute resolution under the FIDIC Silver Book, the parties should consider the judge’s comments in relation to cll 20.4 to 20.7 and ensure that there is a clear remedy for a party’s failure to comply with the DAB’s decision (such as a right to commence court proceedings in those circumstances only). CL