COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
(MR JUSTICE JACKSON)
TCC 30/05 HT-05-82
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE CHADWICK
LORD JUSTICE MOORE-BICK
|- and -
|DEVONPORT ROYAL DOCKYARD
Mr Nicholas Dennys QC and Mr Simon Lofthouse (instructed by Pinsent Masons of 100 Barbirolli Square, Manchester M2 3SS) for the Respondent
Hearing dates : 4 and 5 October 2005
Crown Copyright ©
Lord Justice Chadwick:
The underlying facts
"8. Devonport Royal Dockyard refits and refuels warships and nuclear submarines for the Royal Navy. In March 1997, DML purchased the dockyard from the Secretary of State for Defence. At the time when the dockyard was privatised, it was decided that the existing facilities should be upgraded and new facilities should be provided.
9. Part of the purpose of these works was to enable the dockyard to refit and refuel Vanguard class submarines, as well as Swiftsure and Trafalgar class submarines. The Secretary of State engaged DML to carry out the whole of these works under a modified engineering contract which contained a target cost mechanism.
10. DML engaged Carillion as subcontractor to carry out one part of the works, namely the upgrading of 9 Dock. The works to be carried out at 9 Dock included replacing the dock walls and base and constructing four new buildings. These works would provide facilities for refitting and refuelling Vanguard submarines. One of the new buildings was a decontamination building which would contain apparatus for removing nuclear contamination.
Carillion started work on 9 Dock under the provisions of a written instruction to proceed dated 18 November 1998. On 10 March 1999, DML and Carillion entered into a written sub-contract under seal, whereby Carillion undertook to carry out the works at 9 Dock as subcontractor. . . .
. . .
13. At the same time as entering into the subcontract, DML and Carillion also entered into a written agreement called the 'Alliance Agreement' dated 10 March 1999. The Alliance Agreement supplemented and in part superseded the provisions of the subcontract."
"17. Substantial delays occurred during the course of the works as a result of design matters for which Carillion was not responsible. Whether some lesser part of the delays can be blamed upon Carillion may be an issue between the parties for future resolution. Suffice it to say that during the course of the works a series of six amendments were made to the Alliance Agreement, which reflected the delays and cost overruns and which provided for additional payments to be made to Carillion."
"1. This amendment to the Target Cost and the Total Alliance Cost Provision is made 'on account' for the purposes of providing an interim uplift. It is provided on a 'without prejudice basis' and is subject to review arising out of the final agreement reached with the authority and DML and in accordance with this Alliance Agreement."
Amendment 3 was made at a time when DML was in negotiation with MoD for a substantial increase to the pricing of the main contract. In a letter to CCL of 3 July 2001, DML had written that, in the event that it negotiated a financial settlement with MoD, then the target cost in CCL's subcontract would be adjusted accordingly. A worked example was then set out, showing how the target cost might be increased. By amendment 3, target cost was increased to £81,715,695. The subcontractor's fee was increased to £4,780,273. The aggregate of those sums (the Total Alliance Cost Provision) was £86,495,968.
"Further to your letter . . . dated 12 October, we confirm receipt of your Calculation Sheet for the 'Carillion Alliance Final Option'.
The target cost of £97,717,515 is not agreed for the following reasons:
1. The Carillion Re-Price Value of £107,255,000 (excluding risk) that you have used is based on a Target Cost to Completion at the end of March 2001.
2. The amount included for 'Carillion Statistical Risk' is £1,931,579 whereas we advised DML on the 15 March 2001 of £5,069,940 as per the Risk Register. The Statistical risk using a 70 Percentile gives £5,464,000.
3. We do not accept the pro rata formula as we are not responsible for the cost growth and delays to the project. Since March 2001 we have been tasked to carry out works not anticipated nor included in the March 2001 cost forecast. The Combined Challenge Register of Threats, Opportunities and Variations entered on the Challenge Register since 2 April 2001 shows an estimated £9.266 million of extra cost.
4. On a regular basis since March 2001 we have been notifying you of the likely cost increases to enable you to take full account of them in your discussion with the MoD. . . .
These cost increases have been caused by instructions from your Project Manager, Variations, Scope Swaps, continuing Design Changes and further accelerative measures. The £9.255 million includes for some £3.830 million of additional work and scope swaps instructed by your Project Manager alone since March 2001.
Using the March Re Price Value and adding these costs we arrive at the following Target Cost.
|Re Price Value March 2001||107.255|
|Add Statistical Risk||5.464|
|Total Value March 2001 including Fee||113.183|
|Add for changes since March 2001|
|Estimated costs as Challenge Register|
|April to October 2001||9.266|
|Less Risk Register March 2001||(5.464) 3.802|
|Less Fee @ 6.2%||(6.830)|
|Target Cost (excluding fee and bonus)||110.153|
There are further risks to the Target Cost as shown on the current risk register of £3.8 million which needs to be taken account of for the purpose of gain share.
. . . "
"This amendment to the target cost and the total Alliance cost provision is made 'on account' for the purposes of providing an interim uplift. It is provided on a 'without prejudice' basis and is subject to review arising out of the final agreement reached with the authority and DML, and DML and Carillion in accordance with this Alliance Agreement." [emphasis added]
Adjudication under the statutory scheme
"1 (1) Any party to a construction contract (the 'referring party') may give written notice (the 'notice of adjudication') of his intention to refer any dispute arising under the contract, to adjudication.
(2) The notice of adjudication shall be given to every other party to the contract.
(3) The notice of adjudication shall set out briefly -
(a) the nature and a brief description of the dispute and the parties involved,
(b) details of where and when the dispute has arisen,
(c) the nature of the redress which is sought, and
(d) the names and addresses of the parties to the contract (including, where appropriate, the addresses which the parties have specified for the giving of notices)."
"7(1) Where an adjudicator has been selected in accordance with paragraphs 2, 5 or 6, the referring party shall, not later than seven days from the date of the notice of adjudication, refer the dispute in writing (the 'referral notice') to the adjudicator.
(2) A referral notice shall be accompanied by copies of, or relevant extracts from, the construction contract and such other documents as the referring party intends to rely upon.
(3) The referring party shall, at the same time as he sends to the adjudicator the documents referred to in paragraphs (1) and (2), send copies of those documents to every other party to the dispute."
When paragraph 7(1) is read with the earlier paragraphs of the scheme to which we have referred it is plain that it is the notice of adjudication, rather than the referral notice, which is intended to identify and describe the dispute.
"13. The adjudicator may take the initiative in ascertaining the facts and the law necessary to determining the dispute, and shall decide on the procedure to be followed in the adjudication. In particular he may -
(a) request any party to the contract to supply him with such documents as he may reasonably require including, if he so directs, any written statement from any party to the contract supporting or supplementing the referral notice and any other documents given under paragraph 7(2),
. . .
(f) obtain and consider such representations and submissions as he requires, and, provided he has notified the parties of his intention, appoint experts, assessors or legal advisers,
(g) give directions as to the timetable for the adjudication, any deadlines, or limits as to the length of written documents or oral representations to be complied with, and,
(h) issue other directions relating to the conduct of the adjudication.
14. The parties shall comply with any request or direction of the adjudicator in relation to the adjudication."
Paragraph 19 imposes a time-frame within which the adjudicator is to reach his decision:
"19(1) The adjudicator shall reach his decision not later than --
(a) 28 days after the date of the referral notice mentioned in paragraph 7(1), or,
(b) 42 days after the date of the referral notice if the referring party so consents, or,
(c) such period exceeding 28 days after the referral notice as the parties to the dispute may, after the giving of that notice, agree.
(2) . . ."
"20. The adjudicator shall decide the matters in dispute. He may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication or which are matters under the contract which he considers are necessarily connected with the dispute. In particular, he may –
(a) open up, revise and review any decision taken or any certificate given by any person referred to in the contract unless the contract states that the decision or certificate is final and conclusive,
(b) decide that any of the parties to the dispute is liable to make a payment under the contract . . . and, . . . , when that payment is due and the final date for payment,
(c) having regard to any term of the contract relating to the payment of interest, decide the circumstances in which, and the rates at which, and the periods for which simple or compound rates of interest shall be paid.
21 In the absence of any directions by the adjudicator relating to the time for performance of his decision, the parties shall be required to comply with any decision of the adjudicator immediately on delivery of the decision to the parties in accordance with this paragraph.
22. If requested by one of the parties to the dispute, the adjudicator shall provide reasons for his decision."
"23(2) The decision of the adjudicator shall be binding on the parties and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement between the parties."
" . . . The intention of Parliament in enacting the Act was plain. It was to introduce a speedy mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring the decisions of adjudicators to be enforced pending final determination of disputes by arbitration, litigation or agreement: see section 108(3) of the Act and paragraph 23(2) of Part 1 of the Scheme. The timetable for adjudications is very tight (see section 108 of the Act). Many would say unreasonably tight, and likely to result in injustice. Parliament must be taken to have been aware of this. So far as procedure is concerned, the adjudicator is given a fairly free hand. It is true (but hardly surprising) that he is required to act impartially (s 108(2)(e) of the Act and paragraph 12(a) of Part 1 of the Scheme). He is, however, permitted to take the initiative in ascertaining the facts and the law (s 108(2)(f) of the Act and paragraph 13 of Part 1 of the Scheme). He may, therefore, conduct an entirely inquisitorial process, or he may, as in the present case, invite representations from the parties. It is clear that Parliament intended that the adjudication should be conducted in a manner which those familiar with the grinding detail of the traditional approach to the resolution of construction disputes apparently find difficult to accept. But Parliament has not abolished arbitration and litigation of construction disputes. It has merely introduced an intervening provisional stage in the dispute resolution process. Crucially, it has made it clear that decisions of adjudicators are binding and are to be complied with until the dispute is finally resolved."
The referral to adjudication
"1. By this document Carillion Construction Limited ("Carillion") as Referring Party gives written notice of its intention to refer a dispute arising under the Alliance Agreement to adjudication.
2. The Alliance Agreement is an agreement in writing executed by the parties on 10 March 1999 and is a supplement to a Subcontract between the parties also executed on 10 March 1999. The Alliance Agreement has been subject to six written amendments executed by the parties (Amendments 1 to 6).
3. The subcontract works to be carried out by Carillion comprised the civil engineering elements of the substantial refurbishment and development of 9 Dock at Devonport Royal Dockyard which subcontract works formed part of Main Contract works being carried out by the Responding Party, Devonport Royal Dockyard Limited ("DML"), under contract to the Ministry of Defence ("MoD"). Carillion commenced the subcontract works in or around January 1999 and completed all works required of it by in or around August 2002.
4. Pursuant to clause 10 of the Alliance Agreement Carillion is entitled following completion to be paid Actual Cost (as defined) subject to a 70% 'gainshare' or 40% 'painshare' for under or overspend against a Target Cost. Carillion is further entitled to payment of a Fee. Clause 13 of the Alliance Agreement sets out the basis on which adjustments might be made to the Target Cost and Fee. Carillion contends that the parties amended the target cost machinery of the Alliance Agreement and in particular clause 10 such that there was to be a 'review' of the Target Cost arising out of an expected renegotiation of the terms of the Main Contract between DML and the MoD. Alternatively, Carillion contends that the target cost machinery (as amended) broke down and/or become inoperable such that Carillion is now entitled to be reimbursed Actual Cost together with a Fee. Finally, Carillion contends that the parties agreed Carillion would be paid a bonus of £1,500,000 for completion of Carillion's work sufficient to enable the first submarine to enter 9 Dock by a given date. Carillion contends that it has earned this bonus.
5. DML has, to date, paid to Carillion the sum of £110,000,000 excluding VAT in respect of the subcontract works carried out by Carillion.
6. The Alliance Agreement provides for disputes to be referred, inter alia, to an Alliance Board and Star Chamber, each comprising equal numbers of representatives from Carillion and DML, for resolution if that is possible.
7. A dispute has arisen between Carillion and DML as to whether any further sum is due to Carillion in respect of the subcontract works either pursuant to and/or as damages for breach of the Alliance Agreement (as amended by Amendments 1 to 6) and/or the Subcontract. The dispute and the constituent parts of it have been referred to the Alliance Board on, inter alia, 6 October 2003 and 9 November 2004 and to the Star Chamber on, inter alia, 28 October 2003 and 1 December 2004. The Alliance Board and Star Chamber have failed to resolve the dispute which Carillion now intends to refer to adjudication
8. The redress sought by Carillion is a decision that:
8.1 DML shall pay to Carillion the sum of £10,451,237.61 in respect of further amounts due (excluding bonus) pursuant to the Alliance Agreement (as amended by Amendments 1 to 6) and/or the Subcontract or such other sum as the Adjudicator may determine together with VAT thereon as applicable within 7 days of the Adjudicator's decision (or within such other period as the Adjudicator may decide); alternatively
8.2. DML shall pay to Carillion the sum of £10,451,237.61 (excluding bonus) as damages for breach of the Alliance Agreement (as amended by Amendments 1 to 6) and/or the Sub-contract or such other sum as the Adjudicator may determine together with VAT thereon as applicable within 7 days of the Adjudicator's decision (or within such other period as the Adjudicator may decide); and
8.3. DML shall pay to Carillion in respect of bonus the sum of £1,500,000 or such other sum as the Adjudicator may determine together with VAT thereon as applicable within 7 days of the Adjudicator's decision (or within such other period as the Adjudicator may decide); and
8.4 DML shall pay to Carillion interest on the above at such rates and for such periods as the Ajudicator shall determine or alternatively on the basis that Carillion is entitled to recover interest as part of Actual Cost.
8.5 DML shall pay the Adjudicator's fees and expenses and the fee charged by the nominating body in the sum of £250 plus VAT.
9. Carillion requests reasons for the adjudicator's decision."
"2.3 The dispute relates to the further sum(s) due and payable to Carillion under the Alliance Agreement, or as damages for breach of the Alliance Agreement and the underlying subcontract. Carillion considers that the resolution of the dispute raises the following issues:
2.3.1 What is the correct evaluation of final Actual Cost?
2.3.2 Whether the Target Cost can now be properly calculated and, if so, in what sum?
2.3.3 What is the correct evaluation of gainshare or painshare?
2.3.4 Is Carillion entitled to be paid the £1.5 million bonus?
2.3.5 How is the Fee to be calculated and in what sum?
2.3.6 Is Carillion entitled to details of the settlement that DML reached with the MoD?"
There followed nine paragraphs - paragraphs 2.4 to 2.12 – in which the attempts to implement the internal dispute resolution (and the failure of those attempts) are described. The relevance, in the present context, is the reference to the dispute notices – in which, it was said, "The parties set out the parties' respective cases in relation to these points [meaning the points identified at paragraphs 2.3.1 to 2.3.5]" - served in connection with the Alliance Board meeting of 9 November 2004 and to the minutes of that meeting.
"5.25 . . .
Final Actual Cost £112,983,839.00
70% of the difference between the Actual Cost and the Target Cost (70% (£113,953,000 - £112,983,839)) [if applicable] £678,412.70
100% of the Fee £6,788,985.91
5.26 Allowing for £110m paid by DML Carillion's net entitlement is £10,451,237.61."
The computation to support the figure (£112,983,839.00) for Final Actual Cost was set out in the preceding paragraph – paragraph 5.24. The basis upon which the figures for Target Cost and the Fee were computed was set out at, respectively, paragraphs 4.33 and 5.18 of the referral notice.
"4.33 . . . Carillion's letter of 30 October 2001 and the discussions which took place in the Alliance Board on the same day during which Carillion made clear to DML that in concluding its negotiations with the MoD DML should take account of the updated information which Carillion was providing to DML namely that taking into account Carillion's projections from March 2001 and adjusting them for additional costs incurred or anticipated for the period April to October 2001 the appropriate figure for the Target Cost would be £110,153m (the 'October Cost Projection'). Furthermore, in relation to further risks and uncertainties the current risk register held by the 9 Dock Alliance indicated a further £3.8m risk which needed to be taken account of. Thus, acting reasonably DML ought to have anticipated likely outturn costs of £113.953m (ie £110.153 plus £3.8m)."
"5.18 As set out above Carillion contends that it is entitled to a Target Cost of £113,953,000. The difference between this Target Cost and the Target Cost set in Amendment No 3 is £32,237,305.00. 6.2% of this figure equates to £1,998,712.91. Carillion's entitlement to Fee is therefore as follows:
|Fee on Amendment 3||£4,780,273.00|
|Fee at 6.2% of increase in Target Cost from Amendment 3|
"Carillion contends that the parties amended the target cost machinery of the Alliance Agreement and in particular clause 10 such that there was to be a 'review' of the Target Cost arising out of an expected renegotiation of the terms of the Main Contract between DML and the MoD."
In substance CCL's primary claim was to be paid what (as CCL alleged) would have been payable if the amended target cost machinery had been given effect. It was DML's rejection of that claim which was said to have given rise to the dispute – as appears from paragraph 7 of the notice of adjudication:
"A dispute has arisen between Carillion and DML as to whether any further sum is due to Carillion in respect of the subcontract works either pursuant to and/or as damages for breach of the Alliance Agreement (as amended by Amendments 1 to 6) and/or the Subcontract."
And it was on the basis of that claim that redress was sought in the amount (£10,451,237.61) specified in paragraphs 8.1 and 8.2 of the notice of adjudication.
"Alternatively, Carillion contends that the target cost machinery (as amended) broke down and/or become inoperable such that Carillion is now entitled to be reimbursed Actual Cost together with a Fee."
That claim is quantified at paragraph 5.27 of the referral notice:
"5.27 Alternatively, if Carillion is entitled to be paid its Actual Cost plus Fee of 6.2% then Carillion would be entitled to be paid £119,988,837 (£112,983,839 plus £7,004,998.02) which after allowing for £110,000,000 already paid would leave a net entitlement to £9,988,837."
As we have said, the computation to support the figure (£112,983,839) for Final Actual Cost was set out in paragraph 5.24. The Fee (£7,004,998) is 6.2% of that figure. [£112,983,839 x 6.2% = £7,004,997.50].
The course of the adjudication
"36 . . . In correspondence, DML's solicitors, Herbert Smith, disputed the jurisdiction of the adjudicator. However, they did not issue proceedings at that stage in order to resolve the matter. On 21st January, DML served its response in the adjudication, running to some 75 pages. In that response, DML disputed Carillion's various claims and also sought to set off damages for defects. DML included in its response a request that the adjudicator should give reasons for his decision.
37 . On 28th January, Carillion served its reply, which ran to 56 pages. On 11th February, DML served a rejoinder, which was 76 pages long.
38. The parties also sent lengthy and detailed letters to the adjudicator. They served numerous witness statements, expert reports and appendices. In all, the adjudicator was furnished with 29 lever arch files of materials.
39. Perhaps unsurprisingly, the adjudicator proposed an oral hearing in order to bring matters into focus. For reasons which are in dispute, that oral hearing did not take place. By letter dated 22nd February, the adjudicator proposed that in those circumstances the parties should provide written summaries of their cases. Wisely, the adjudicator directed that each summary should be limited to four pages in length. Each party duly served a written summary of its case.
40. The adjudicator requested and was granted two extensions of time totalling 42 days. Thus in all the adjudicator was allowed a period of ten weeks in which to consider the issues and produce his decision."
The adjudicator's decision
"4. A dispute has arisen between the Parties as to whether any further sum is due to CCL in respect of the subcontract works either pursuant to and/or as damages for breach of the Alliance Agreement as amended by Amendments 1 to 6 and/or the Subcontract."
He set out the issues which (as he thought) he had been asked by CCL to decide:
"Issue 1: Is CCL entitled to be paid an amount in excess of £110 million representing any sums due under the Alliance Agreement as amended, or alternatively by way of damages?
Issue 2: If so, what is the correct evaluation of any amount due to CCL?
Issue 3: Is CCL entitled to the payment of an amount of £1.5 million representing a bonus?
Issue 4: Is CCL entitled to the payment of a fee and if so what is the evaluation of that fee?"
Issues 1 and 2 may be seen as a re-formulation (without change in substance) of the issues which had been identified by CCL at paragraphs 2.3.1 to 2.3.3 of its referral notice:
" 2.3.1 What is the correct evaluation of final Actual Cost?
2.3.2 Whether the Target Cost can now be properly calculated and, if so, in what sum?
2.3.3. What is the correct evaluation of gainshare or painshare?"
Issues 3 and 4 are a restatement of the issues identified at paragraphs 2.3.4 and 2.3.5 of the referral notice. The remedies are those set out at paragraphs 8.1 to 8.5 of the notice of adjudication and at section 8 of the referral notice
Issue 1: CCL is entitled to be paid an amount in excess of £110 million representing sums due under the Alliance Agreement as amended.
Issue 2: The correct evaluation of the amount due to CCL in excess of £110M due to the undertaking of the Works is £1,167,436.00 plus any applicable VAT, exclusive of the Fee.
Issue 3: CCL is entitled to the payment of an amount of £1,500,000.00 representing a bonus.
Issue 4: CCL is entitled to the payment of a fee in the sum of £6,778,986.00 plus any applicable VAT."
He directed that DML pay to CCL within seven days of his decision the sum of £9,446,422, being the aggregate of (i) £7,946,422 (£1,167,436 + £6,778,986) and (ii) £1,500,000; and the further sum of £1,199,905 by way of interest on that sum. The total amount to be paid by DML to CCL under the adjudicator's decision was thus £10,646,327 (exclusive of VAT).
|Final Actual Cost||£112,983,839||£112,514,757|
|Unpaid primary cost||£3,662,251||£3,521,527|
The difference is attributable, solely, to the reduction in the figure for Final Actual Cost – which leads necessarily to a consequential increase in the figure for gainshare. As we have said, the reduction was conceded by CCL in the course of the adjudication.
|Final Actual Cost||£112,514,757|
|Gainshare :(70% x (£113,953,000 - £112,514,757)||£1,006,770|
|[Primary cost||£113, 521,527]|
|Less provision for defects||£2,354,091|
|Less already paid||£110,000,000|
"2.6 In line with these Objectives I am persuaded that it was the Parties' intention and by further agreement to revise Target Cost estimates as the project progressed and that this Objective was evidenced by progressive agreements to amend the Alliance Agreement principally by Amendments 1 to 6. It appears to me that these amendments were agreed and executed after exhaustive dialogue relating to costs and other issues between the Parties at the time, always with the provision that they were '. . . made "on account" for the purposes of providing an interim uplift . . .'
2.7 The Parties are in agreement that the works programme and costs changed during the life of the project and that many of those changes were outside the scope of the Alliance Agreement. In any event it is agreed that certain of the cost increases and delays were not the responsibility of CCL and do not form part of this Referral. It is the case that since late 2001 the Parties were involved in extensive dialogue with respect to what they considered to be necessary further amendments to both Actual Costs and Target Costs over and above those Amendments already agreed. I am not convinced by any argument that the relevant dialogue undertaken, as evidenced to me in these proceedings, changed the basic philosophy of the original Alliance Agreement at any stage. The relevant dialogue concerned both the Actual Costs and Target Costs. Any further agreement relating to those issues would have resulted in a further amendment to the Agreement and a revised adjustment of the Costs. However it is evident that the relevant dialogue did not produce a further agreement nor amendment to the Agreement. The failure to agree became a dispute which as I have mentioned above was presented to both the Alliance Board and the Star Chamber and now to this Adjudication."
"2.8 . . . the Parties were involved in a dialogue with respect to Actual Costs and Target Costs. Furthermore any review of the Agreement contemplated by any '… final agreement reached with the Authority and DML…' did either not take place as agreed or alternatively did not culminate in agreement but actually in a dispute. Accordingly any further amendment of the Alliance Agreement as contemplated by Amendments 1 to 6 did not take place."
It was that reasoning that led the adjudicator to conclude, at paragraph 2.9 and in answer to the issue which he had identified as Issue 1, that:
"2.9 . . . an entitlement exists under the Alliance Agreement to a review of the Total Amount due under the Agreement and that the Parties are in dispute regarding that Amount. Accordingly I do not need to consider the alternative case of damages."
"3.3. My consideration of the Target Cost concerns the dispute raised by CCL in relation to its revised valuation of the Target Cost as noted in its letter to DML dated 30 October 2001. I have been provided with an alternative calculation of Target Cost by DML after allowances for Provisional Sums and Scope Swaps. However as the dispute in this case concerns CCL's estimation of the cost I shall not consider the alternative calculation. I have read and taken into consideration the various witness statements and the detailed quantum observations of Mr Ennis with respect to the Target Costs and conclude that I prefer the position of CCL. It appears to me that the considerations of the Parties relating to the Target Cost were discussed at great length during 2001 and the calculations of CCL were ultimately submitted in October 2001 as a result of those discussions. The valuation takes into account revisions and changes to the Risk Register and Challenge Register and make revised calculations due to cost.
"3.4. I therefore decide that the revised target cost is £113,953,000."
"3.10 By considering the foregoing and the voluminous data with which I am provided in this case and the various statements made to the persons who were present at the time that the costs were originally compiled and audited, then I conclude that I prefer the quantum report of the Referring Party as adjusted to account for non conforming cost inclusions. Accordingly I decide that the final Actual Costs are £112,514,757.32."
"(1) The decision was made without and/or in excess of jurisdiction; and/or,
(2) The decision was made on an intrinsically unfair basis and/or in breach of the rules of natural justice; and/or,
(3) The decision is not compliant with the requirements of the Housing Grants, Construction and Regeneration Act 1996 and the Scheme for Construction Contracts Regulations 1998."
"1. The adjudicator's decision on target cost (as explained by [counsel] in oral argument) was a decision which was outside his jurisdiction and therefore should not be enforced."
2. The adjudicator's decision on target cost was reached in breach of the rules of natural justice and therefore should not be enforced.
3. The adjudicator's decision on allowance for defects was reached in breach of the rules of natural justice and not supported by any or any adequate reasons; therefore it should not be enforced.
4. The adjudicator had no jurisdiction to award interest."
As the judge explained, if the attack on the adjudicator's decision were to succeed under any one of the first three of those grounds, the decision would be unenforceable. But if the attack were to succeed on the fourth ground alone, then the award of interest would be severable and the balance of the decision could be enforced.
The judge's reasoning
"1. The adjudication procedure does not involve the final determination of anybody's rights (unless all the parties so wish).
2. The Court of Appeal has repeatedly emphasised that adjudicators' decisions must be enforced, even if they result from errors of procedure, fact or law: see Bouygues, C&B Scene and Levolux;
3. Where an adjudicator has acted in excess of his jurisdiction or in serious breach of the rules of natural justice, the court will not enforce his decision: see Discain, Balfour Beatty and Pegram Shopfitters.
4. Judges must be astute to examine technical defences with a degree of scepticism consonant with the policy of the 1996 Act. Errors of law, fact or procedure by an adjudicator must be examined critically before the Court accepts that such errors constitute excess of jurisdiction or serious breaches of the rules of natural justice: see Pegram Shopfitters and Amec."
We do not understand there to be any challenge to those general principles. They are fully supported by the authorities, as the judge demonstrated in his judgment.
"1. If an adjudicator declines to consider evidence which, on his analysis of the facts or the law, is irrelevant, that is neither (a) a breach of the rules of natural justice nor (b) a failure to consider relevant material which undermines his decision on Wednesbury grounds or for breach of paragraph 17 of the Scheme. If the adjudicator's analysis of the facts or the law was erroneous, it may follow that he ought to have considered the evidence in question. The possibility of such error is inherent in the adjudication system. It is not a ground for refusing to enforce the adjudicator's decision. I reach this conclusion on the basis of the Court of Appeal decisions mentioned earlier. This conclusion is also supported by the reasoning of Mr Justice Steyn in the context of arbitration in Bill Biakh v Hyundai Corporation  1 Lloyds Reports 187.
2. On a careful reading of His Honour Judge Thornton's judgment in Buxton Building Contractors Limited v Governors of Durand Primary School  1 BLR 474, I do not think that this judgment is inconsistent with proposition 1. If, however, Mr Furst is right and if Buxton is inconsistent with proposition 1, then I consider that Buxton was wrongly decided and I decline to follow it.
3. It is often not practicable for an adjudicator to put to the parties his provisional conclusions for comment. Very often those provisional conclusions will represent some intermediate position, for which neither party was contending. It will only be in an exceptional case such as Balfour Beatty v London Borough of Lambeth that an adjudicator's failure to put his provisional conclusions to the parties will constitute such a serious breach of the rules of natural justice that the Court will decline to enforce his decision.
4. During argument, my attention has been drawn to certain decisions on the duty to give reasons in a planning context. See in particular Save Britain's Heritage v No 1 Poultry Limited,  1 WLR 153 and South Bucks DC and another v Porter (No 2)  1 WLR 1953. In my view, the principles stated in these cases are only of limited relevance to adjudicators' decisions. I reach this conclusion for three reasons:
(a) Adjudicators' decisions do not finally determine the rights of the parties (unless all parties so wish).
(b) If reasons are given and they prove to be erroneous, that does not generally enable the adjudicator's decision to be challenged.
(c) Adjudicators often are not required to give reasons at all.
5. If an adjudicator is requested to give reasons pursuant to paragraph 22 of the Scheme, in my view a brief statement of those reasons will suffice. The reasons should be sufficient to show that the adjudicator has dealt with the issues remitted to him and what his conclusions are on those issues. It will only be in extreme circumstances, such as those described by Lord Justice Clerk in Gillies Ramsay [Gillies Ramsay Diamond and others v PJW Enterprises Limited  BLR 131], that the court will decline to enforce an otherwise valid adjudicator's decision because of the inadequacy of the reasons given. The complainant would need to show that the reasons were absent or unintelligible and that, as a result, he had suffered substantial prejudice."
"1. The adjudicator was required to determine the primary sum due to Carillion under the Alliance Agreement. This determination inevitably involved along the way making an assessment of the target cost. All this was spelt out in the notice of adjudication dated 4th January 2005.
2. In its notice of referral dated 6th January 2005, Carillion specifically asked the adjudicator to assess target costs in the sum of £113,953,000, as set out in Carillion's letter dated 30th October 2001. DML responded to this claim in its various written submissions to the adjudicator.
3. It is quite true that Carillion subsequently put forward an argument (based on recently disclosed documents concerning the settlement with MoD) that target costs should be £110 million. See paragraph 1.11 of Carillion's reply dated 28th January and section 11 of Carillion's summary dated 2nd March. Nevertheless, Carillion made it clear that it was not abandoning its original case on target cost. See Pinsent Masons' letter to the adjudicator dated 17th February 2005, which was copied to Herbert Smith. DML understood that this was the position, as can be seen from its rejoinder.
4. The method by which the adjudicator should determine target cost was a matter of controversy between the parties and ultimately for decision by the adjudicator. Both parties provided to the adjudicator voluminous factual and expert evidence to assist him in determining target cost by whichever route he chose to adopt. See, for example, the evidence of Mr Duckworth and Mr Ennis's comments on that evidence.
5. The adjudicator rejected Carillion's argument that a target cost of £110 million could somehow be derived from the documents disclosed concerning the settlement with MoD. In those circumstances, as Mr Dennys has argued, the adjudicator was quite entitled, if he saw fit, to assess target costs at £113.953 million in accordance with Carillion's letter dated 30th October 2001.
6. The adjudicator's assessment of target cost is highly likely to be revised either upwards or downwards, if and when an arbitrator or this court comes to determine the matters in issue between the parties. The adjudicator's approach to or assessment of target cost may well embody errors of both fact and law. This would be unsurprising in view of the statutory constraints under which he was operating and the sheer volume of evidence and intricate submissions which were thrust upon him. Nevertheless, any such errors of law and fact cannot be characterised as excess of jurisdiction."
The expression 'primary sum' in paragraph 1 of that citation means "the sum which is due to Carillion under clause 10 of the Alliance Agreement if one excludes the fee element" – as the judge explained at paragraph 16 of his judgment. It is the aggregate of final actual cost and the gainshare/painshare element. It is because it is impossible to compute the gainshare/painshare element without first determining a figure for target cost that the judge observed (correctly) that determination of the primary sum "inevitably involved along the way making an assessment of the target cost".
"97 . . . The first disregard was no more than the implementation of a decision of law. The adjudicator concluded that negotiations between DML and MoD could not impact upon the calculation of target cost under the Alliance Agreement and its amendments. In this respect, the adjudicator was rejecting an argument advanced by Carillion and accepting an argument which had been advanced more than once by DML. . . .
98. It was clearly an issue for the adjudicator to decide whether the negotiations between DML and MoD were relevant to the assessment of target cost and, if so, how. The adjudicator concluded that those negotiations were not relevant.
99. Whether the adjudicator was right or wrong in this conclusion cannot affect the validity of his decision. Having reached such a conclusion, the adjudicator, when assessing target cost, did not take into account the negotiations between DML and MoD. The adjudicator cannot be criticised for taking that course."
"101. . . . Mr Ennis [one of DML's expert witnesses] undertook an alternative calculation. He took the target cost contained in amendment 2 and adjusted that figure in accordance with clause 13 of the Alliance Agreement. For the purposes of this exercise, he disregarded amendments 3 to 6. . . . This alternative calculation produced a target cost of £81 million to £84 million. The adjudicator rejected the contractual basis of Mr Ennis's alternative calculation. Therefore the adjudicator did not make use of Mr Ennis's [calculation] in assessing target cost. There was nothing objectionable in the adjudicator adopting that course."
"(a) CCL's failure to identify the factual and legal basis of its claim meant that its claim should fail ...
(b) DML was not obliged to put forward the letter of 30th October 2001 to MoD, nor was it in a position to do so ...
(c) DML did not secure payment in the sum set out in the letter from MoD ...
(d) Even if DML were obliged to put forward the letter of 30th October, CCL's remedy would be the loss of the chance to fix a target cost based on those figures ...
(e) There was no obligation on DML to make disclosure of the DML -- MoD negotiation documents."
The judge rejected that criticism also (at paragraph 102 of his judgment):
"102. I turn now to the third disregard. The adjudicator was the recipient of literally hundreds of pages of legal argument. The parties' positions shifted as the adjudication progressed. By way of example, DML took numerous points of jurisdiction which were subsequently not pursued. The adjudicator did a remarkable job in keeping abreast of the battle and in keeping under control the torrent of incoming material. He made it plain in his written decision which arguments he accepted and how his figures were calculated. It is clear that the adjudicator was not persuaded by the five specific arguments mentioned in paragraph 28 of DML's skeleton argument. There was no need for the adjudicator specifically to recite and address those five arguments in his decision."
"105 . . . DML had proper opportunity to make representations concerning the assessment of target cost on the basis adopted by the adjudicator. Indeed DML did make such representations in the form of Mr Ennis's reports. "
"111. DML considers that the allowance made for defects should have been higher. Mr Furst mounts three separate attacks on the adjudicator's assessment of £2,354,091. These attacks are:
1. The Adjudicator focussed on DML's original defects claim of November 2004. He did not address the expanded defects claims of January and February 2005, despite the fact that these had been prepared after further and fuller investigation.
2. The adjudicator applied a reduction factor of 20 per cent to DML's original defects claim: '... in an attempt to more accurately reflect the regular and routine nature of the intended works and their actual cost.' . . . The adjudicator took this course without giving either party the opportunity to comment on his proposed reduction.
3. The adjudicator gave no, or no adequate, reasons for his decision in respect of defects."
"112. As to the first line of attack, it is clear from paragraph 3.12 of his reasons that the adjudicator specifically considered DML's expanded defects claims of January and February 2005. As can be seen from paragraph 3.17 of his reasons, the adjudicator considered that the defects alleged by DML in November 2004 had been properly notified to Carillion under clause 17(3) of the subcontract. However the adjudicator did not find that the second batch of defects (which came to light in or around January and February 2005) had been properly notified to Carillion. Furthermore, the adjudicator took the view that the only satisfactory evidence relating to defects was the evidence supporting the first batch of defects. See the last sentence of paragraph 3.17 and the second sentence of paragraph 3.18.
113. Although it is irrelevant to anything which I have to decide, I have read the evidence of Mr Evans and Mr Ennis supporting the second batch of defects. It can be seen that of the £21 million claimed for defects, only £56,614.10 had so far been expended. Also, the assessment of future remedial work involved a significant degree of speculation. See, for example, Mr Evans's report at bundle C, page 158. The adjudicator was perfectly entitled to find that the expanded defects claim had not been satisfactorily proved at that stage. The adjudicator may have been right or he may have been wrong in (a) his analysis of the effect of clause 17 of the subcontract and (b) his assessment of the expert evidence. These are two separate and independent justifications of the decision which the adjudicator reached. Whether the adjudicator was right or wrong in these matters, it cannot be said that he failed to consider and address DML's expanded claims for defects in the sum of about £20 million."
"115 The 20 per cent reduction in quantum which the adjudicator made was the result of casting a critical eye over the expert evidence. This is precisely the kind of exercise which one would expect the adjudicator (who is himself an experienced engineer) to undertake. It is unrealistic to expect an adjudicator, who is struggling under tight time limits with a growing mass of evidence and legal submissions, as well as a barrage of intricate correspondence, to contact the parties and to invite their comments on a matter of this nature."
And, at paragraph 116, of his judgment, the judge dismissed the third line of attack in these words:
"116 In my view, the reasons which the adjudicator gave for his decision on defects were perfectly adequate. The adjudicator explained why he rejected the expanded defects claim. He also explained the reduction factor which he applied to the original defects claim."
Permission to appeal
"3. This appeal relates to an adjudication which went seriously awry. In short:
a. The Adjudicator awarded the respondent ('CCL') more than CCL ended up claiming;
b. The Adjudicator expressly ignored all the arguments advanced by both parties as to the basis upon which Target Cost should be calculated;
c. Instead he decided that issue on a basis which had not been advanced by either party and which neither party had notice of;
d. The Adjudicator provided no reasons at all for rejecting the arguments put forward by the parties as to the basis upon which Target Cost should be calculated and/or his reasons are wholly inadequate;
e. Although the Adjudicator found there were defects, as contended for by DML, he evaluated the cost of remedying those defects at a figure well below the figures put forward, on a basis that neither party contended for and without providing any reasons at all for so doing;.
f. He also discounted that figure for a reason which neither party had advanced and without notice to the parties or giving them an opportunity to make representations;
g. . . .
4. This is not a case where the unsuccessful party is simply scrabbling around to find some argument, however tenuous to resist payment. It is submitted that it is clear that the Adjudicator's decision was arrived at in breach of the rules of natural justice and fails to comply with the very basic and fundamental requirements prescribed by the 1996 Act and Scheme, as interpreted by the Courts. A very serious injustice has resulted."
"12.37 . . . The dispute between the parties is very clearly identified at section 7 [of the notice of adjudication] in the following terms:
'A dispute has arisen between Carillion and DML in respect of the sub-contract works either pursuant to and/or as damages for breach of the Alliance Agreement (as amended by Amendments 1 to 6) . . .'"
And, in that context, as CCL asserted at paragraph 12.34 of that reply:
" 12.34 Carillion has maintained its position that in the absence of DML providing documentation and facilitating a review the Target Cost should be the figure of £113,953,000. . . ."
"Carillion rejects DML's assertions that new or different claims are advanced in the Reply. Carillion's claim for the purposes of this adjudication has always been:-
1. made under or for breach of the Alliance Agreement as varied by Amendments Nos 3 to 6; and
2. for the difference between the amount due under or for breach of the Alliance Agreement (as varied by amendments Nos 3 to 6) and the £110 million paid by DML to date."
That that was CCL's primary case was, again, confirmed in its summary of submissions dated 2 March 2005 – paragraphs 1(i), 3 and 4.
"2.2 Prior to amendment of the Alliance Agreement Target Cost could only be adjusted under clause 13. Contract Amendments No's 3-6 introduced an additional circumstance in which target cost might be adjusted i.e. upon the 'review' provided for by Contact Amendment No's 3-6 and under Clause 13 of the Alliance Agreement. This much is common ground. The principal issues that arise between the parties concern (a) how the 'review' element introduced by Contract Amendment No's 3-6 is properly to be construed, and (b) what occurs absent the contemplated review or absent any agreed result following the contemplated review."
And, at paragraph 1.2 of that summary:
"1.2 . . . Thus CCL argue (a) that unless Target Cost is adjusted to one or other of the sums claimed by it1 then it is entitled to be paid it's Actual Cost plus Fee . . .
1 I.e. the sum of £113.95m set out in its letter of 30 October 2001 or the sum of £110m paid by the authority to DML post agreement of the Revised D154 Contract "
The footnote to paragraph 1.2 of DML's summary of submissions contains a clear recognition by DML that CCL had not abandoned its primary claim based on target cost of £113.95 million.
"33. The Adjudicator expressly excluded from consideration two matters:
a The negotiations and settlement between DML and MoD ('the first disregard');
b DML's case as to how Target Cost should be calculated ('the second disregard').
And, in his decision, he did not refer to
c. DML's defences to CCL's primary claim ('the third disregard')."
"2.8 . . . any review of the Agreement contemplated by any '…final agreement reached with the Authority and DML…' did either not take place as agreed or alternatively did not culminate in agreement but actually in a dispute."
Accordingly any further amendment of the Alliance Agreement as contemplated by amendments 1 to 6 did not take place. The adjudicator saw it as his task to fill that lacuna by providing a figure of his own.
"17 . . . [The Adjudicator] appears to have proceeded on the basis that absent the review contemplated by the Amendments to the Alliance Agreement or any agreement between the parties following the contemplated review, it was open to him to and/or he was required to undertake such a review. In short what he appears to have done is to provide his own view of the adjustment that should be made to Target Cost on the basis of what he thought was "fair" without regard to the issues raised by the dispute referred to him and without regard to (and indeed in two respects expressly disregarding) the arguments of the parties. In this sense the Adjudicator performed a judgment of Solomon."
"20. The adjudicator shall decide the matters in dispute. He may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication or which are matters under the contract which he considers are necessarily connected with the dispute. In particular, he may –
(a) . . .
(b) . . .
(c) having regard to any term of the contract relating to the payment of interest, decide the circumstances in which, and the rates at which, and the periods for which simple or compound rates of interest shall be paid."
"1. As a matter of impression, this seems to me to be the more natural meaning of subparagraph (c), when read in the context of the whole of paragraph 20 of the Scheme.
2. In my view it is reading too much into the second and third sentences of paragraph 20 to hold that everything in subparagraphs (a), (b) and (c) must arise from some other express term of the contract.
3. It makes obvious commercial sense for an adjudicator to have the power to award interest. The Scheme takes effect as a set of implied terms in many construction contracts pursuant to section 114(4) of the 1996 Act. I would certainly expect the Scheme to include a power to award interest.
4. In my view, the phrase in paragraph 20(c) "having regard to any term of the contract relating to the payment of interest ..." means that if there is any such term, the adjudicator must have regard to it. In other words, the freestanding right conferred by paragraph 20(c) does not override any express term of the contract dealing with interest.
5. If paragraph 20(c) had the meaning for which [DML] contends, it would be unnecessary. The clause would be saying that which was self-evident."
"119. The background to this challenge is as follows: Carillion advanced a claim for interest in paragraph 8.4 of its notice of adjudication dated 4th January 2005. The basis of this claim was spelt out in paragraph 7.1 to 7.9 of Carillion's referral dated 6th January 2005, together with the appendices referred to in those paragraphs. Carillion relied upon paragraph 20(c) of the Scheme. On page 74 of DML's response, one finds the sentence:
'No sum is due and owing to CCL. Therefore the question of interest does not arise'
120. Despite ferreting through the bundles, I have been unable to find any other reference to interest in DML's various submissions to the adjudicator.
121. In paragraph 6.2 of his reasons, the adjudicator concluded in the absence of any submissions to the contrary from DML, that he had power to award interest under paragraph 20(c) of the Scheme. . . ."
It is of significance that DML did not dispute that the adjudicator would have power to award interest if he found monies to be outstanding under the agreement. Its position was that the question of interest did not arise because there were no monies outstanding.