England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
TECHNOLOGY AND CONSTRUCTION COURT

		St Dunstan's House 133- 137 Fetter Lane London EC4A 1HD
		25th March 2011

Mr Justice Akenhead :

Introduction

1. These Part 8 proceedings are brought by PC Harrington Contractors Limited ("Harrington"), who were sub-contractors employed by Multiplex Constructions (UK) Limited ("Multiplex") in relation to certain aspects of the Wembley Stadium project. Harrington were also contractors or subcontractors retained on two other projects, one at Mansfield and the other at Liverpool, but it has been agreed for the purposes of today that the Wembley history, contract and issues are representative of the other two. It is, therefore, unnecessary to go into any detail on the Mansfield and Liverpool contracts and issues that arise on those. This is, however, to be a judgment on all three projects, but by looking at Wembley I can deal with all the issues on the other two projects as well. Harrington were, as I have said, the subcontractor retained by Multiplex and Tyroddy Construction Limited ("Tyroddy") were fix-only, reinforcement sub-subcontractors retained by them on that project.
2. These proceedings relate to the enforceability of the adjudicator's decisions arising out of adjudications on all three projects that were commenced by Tyroddy against Harrington earlier this year. Issues are raised on the enforceability of those decisions, which were made in favour of Tyroddy and also issues are raised as to the interpretation or the impact of the sub-subcontract that existed between them.

The History and the Contract

3. I deal here only with Wembley for the reasons I have indicated. It is clear that at some stage prior to 6 June 2003, Harrington had approached Tyroddy with a view to them quoting for the provision of labour and small tools in relation to the fixing of steel reinforcements for various parts of the Wembley project. Thus it was, on 6 June 2003 that Harrington effectively sent an order by way of letter confirming rates

"for providing all labour and small tools necessary to offload, check, distribute and fix steel reinforcement on the above contract from your commencement on this project on 9th June 2003."

There are then set out the various reinforcement bar diameters and rates per tonne that were to be applicable to Tyroddy's work and other rates such as a day work rate was also set out in that letter. There then appears this:

"The above rates are fixed for the duration of our works. Valuations will be weekly and subject to 5% retention for a period of six weeks from your Commencement Date and will then be twice monthly, subject to 5% retention."

Various other matters were called for in this letter, but it seems clear that Tyroddy started their work thereafter. It is accepted that this letter evidences the contractual terms between the parties.

4. Following the commencement of work, there was an agreement between the parties by which it is accepted that the retention was to be reduced to 3%. It is clear from the interim valuations that were issued by Harrington that a retention of 3% was used.
5. The first valuation took place for the period ended 15 June 2003. Harrington issued what was called a "Subcontractor's Payment Certificate" and the form of that certificate was to identify a figure for the value of measured works, day works and materials on site, and on this Certificate No. 1 £41,400 was identified. The words "On Account" are handwritten beside this figure. That was subject to a retention of 3%, which reduced the gross amount to £40,158. There were then deductions of 18% to reflect an income tax reduction. That may have something to do with labour only subcontracts. To the net resulting figure VAT is added and payment of, in this case, £39,957.21 was said to be due and payable to Tyroddy by Harrington. Indeed, the box says "Cheque enclosed".
6. It is clear that the works proceeded over the next year or two and thus it was that what was apparently the last certificate from Harrington was issued on 28 May 2006. It is said to be Payment No. 111 and it may be that payments had been made previously on a weekly or fortnightly basis. Again, the format is identical and, as before, against the value of "measured works, day works and materials on site" there has been written in hand the words "on account". That identified a retention at 3% of £66,628.50.
7. For reasons it is unnecessary for me to go into (and, indeed, there is not much evidence before me about it), following the completion of their work by Tyroddy, no final accounting process was embarked on. There is no evidence before me that Tyroddy made a claim for any more money, but the position was that, on this project as on the other projects, the retention remained as retention. Thus it was that, four and a half years later, Tyroddy decided that it wished to refer a number of these contracts to adjudication, in effect, to claim for the outstanding retentions. In so far as the Wembley project was concerned, that adjudication was instituted by a Notice of Intention to Adjudicate on 17 January 2011.

Adjudication

8. The Notice of Adjudication was encouragingly simple. It said:

"2. The Contract provided for the deduction and retention at 5%. There was no express provision for the release of such retention.

3. PCH have failed to repay any or all or the retention. As a consequence, a dispute exists as to the method and timing in which the retention should have been repaid…

6. The Adjudicator is asked to decide that the retention should have been repaid by reason of an implied term and what that term shall be.

7. The Adjudicator is asked to decide the final dates or date that the retention should have been repaid.

8. The Adjudicator is asked to decide that the total retention of £66,628.50 or such other sum as the Adjudicator shall decide is to be repaid forthwith."

Claims for interest and the Adjudicator's fees and expenses were also identified.

9. Mr Doherty was appointed as the Adjudicator and the Referral Notice was dated 20 January 2011. Paragraphs 2.3 and 4 of the Referral Notice were as follows:

"2.3 The contract at the bottom of the first page provides for the deduction of 5% retention. In fact retention was deducted at 3%. Tyroddy aver that consequently a term must be implied for such repayment. Tyroddy further aver that the correct term to be so implied should be based on normal trade custom and practice. Such normal trade custom and practice requires the payment of ½ of the sum withheld upon completion of the contract and the balance 12 months thereafter or upon making good defects, whichever is the later…

4.1 The Adjudicator is asked to decide that the retention should have been repaid by reason of an implied term and that that term should be as described in paragraph 2.3 above or such other implied term as the Adjudicator shall decide.

4.2 The Adjudicator is asked to decide the final dates or date that the retention should have been repaid..

4.3 The Adjudicator is asked to decide that the total retention of £66,628.50, or such other sum as the Adjudicator shall decide, is to be repaid forthwith…"

10. That was met by the Response of Harrington, the relevant paragraphs of which were as follows:

"1.8. The amount to be paid to Tyroddy would be established from the amount of reinforcement fixed by Tyroddy at the agreed rates and for the Slipform walls at the rates to be agreed. In order to ascertain Tyroddy's final account, the quantity of steel and mesh that Tyroddy fixed would therefore be required to be established…

1.11. As the entire valuation of all of the work carried out by Tyroddy is therefore presently no more than an 'on account' assessment of Tyroddy's overall entitlement under the Contract, including the amount of retention, the amount of money that Tyroddy is properly entitled to be paid under the Contract, including the amount of retention that may become due, cannot be established until the final account is agreed. Tyroddy therefore has no basis for asserting that the amount of money retained on the basis of an on-account valuation have become due to Tyroddy until the final account is agreed.

1.12.Consequently, as the final account has not been ascertained and agreed, any amount that may be owed to Tyroddy by way of retention or otherwise has not been established and as such cannot become due. Tyroddy therefore has no basis to assert that it is due any amount under the Contract-at this stage…

1.15. This adjudication which has suddenly been instigated by Tyroddy is therefore in contradiction with the previous normal dealings and with the agreement on the payment of retentions arising from the overpayment at Crossharbour. This adjudication is an ill founded and opportunistic ambush on P.C. Harrington by Tyroddy in whose full knowledge the entire valuation in respect of the Contract is 'on-account' and that it has not submitted or proposed a final account for the Contract and that the final account is not agreed and as a consequence, the value of the retention has not been ascertained, or agreed or otherwise established.

1.16. Finally, Tyroddy in attempting to utilise an unsubstantiated, interim 'on-account' valuation of its works as its basis to assert an entitlement to a final payment of retention, is fundamentally flawed. P.C. Harrington here by disputes that the valuation of the last interim 'on-account' valuation is the correct and proper value of the Contract…

2.3. ..P.C. Harrington accepts that it has not paid the 'on-account' retention of £66,628.50. P.C. Harrington submits that until such time as the final account is agreed, the amount of the retention that will or may become due, cannot be ascertained and until then cannot become due and/or be paid…

2.7. …P.C. Harrington accepts that the Contract sets out the frequency of payments but does not set out the final date for payment…P.C. Harrington denies however that any payment is due to Tyroddy because the final account is not agreed or otherwise established and therefore the amount of the retention that is or may become due is not agreed or otherwise established. Consequently P.C. Harrington asserts that until an amount is agreed or otherwise established it cannot become due and as such no payment is due to Tyroddy…

2.10. P.C. Harrington denies the assertion from Tyroddy that as a consequence of there not being an express provision in the Contract for the repayment of the retention that a term must be implied for such repayment…

2.20. P.C. Harrington denies that the amount of retention stated on Certificate 9171, or any other amount of it has become due to Tyroddy. The final account for the works is not agreed and as a consequence the final amount of retention has not been established and therefore any retention cannot become due…

3.6. P.C. Harrington asserts that the works carried out by Tyroddy have not been measured and as a consequence the correct and proper value of Tyroddy's works under and in accordance with the Contract has not been established. See statement from Mr Tony McGann in Appendix 5 at paragraphs 14 to 33 as evidence of this assertion.

3.7.P.C. Harrington asserts that Tyroddy has not submitted a final account, but the final account is not agreed and as a consequence that any further amounts that may become due to Tyroddy have not been this ascertained and established. See statement from Mr Tony McGann in Appendix 5 at paragraphs 14 to 33 as evidence of this assertion. As a consequence no further amounts can become due to Tyroddy until such time as the final account is agreed or otherwise ascertained…

4.6. Tyroddy has failed to present a final account for the works it has completed in order to establish and agree with P.C. Harrington the correct and proper value of the works carried out and completed under the Contract.

4.7. P.C. Harrington asserts that in the absence of an agreed final account, or in the absence of Tyroddy providing evidence of the correct and proper value of the works it carried out, the value of the works as stated on Sub-Contractor Payment Certificate No 9171 is and remains an interim 'on-account' value and is therefore subject to re-measurement of the quantities of reinforcement actually and properly fixed by Tyroddy in order to establish the correct and proper value of their works.

4.8. P.C. Harrington asserts that until the final account is agreed, the amount becoming due to Tyroddy cannot be established and therefore Tyroddy cannot assert and has no basis to assert that the amount retained under… Certificate No 9171, or that any other amount, has become due to Tyroddy…

4.13. P.C. Harrington asserts that in the absence of an express provision in the Contract for the release of the retention, any implied term must include a requirement that the final account must be agreed or settled in order to ascertain the value of any retention becoming due under the Contract.

4.14. P.C. Harrington asserts that the Adjudicator cannot and should not, on the basis of natural justice, imply a term into the Contract that would result in Tyroddy being placed in a position in which Tyroddy could assert monies have become due to it on the basis of interim 'on-account' valuations without ever having provided P.C. Harrington with a final account or any details to enable a final account to be agreed and without ever having to establish or demonstrate the correct and proper valuation for the works it carried out under the Contract…

5.0 The Decisions Requested by P. C. Harrington

5.6. The Adjudicator is asked to decide the amount of the final account under the Contract and from which to decide the amount of retention, if any becoming due to Tyroddy.

5.7 The Adjudicator is asked to decide that the amount of retention that becomes due for payment to Tyroddy is calculated from the value of the final account for the works, less the amount paid to date to Tyroddy as evidence from Sub-Contractors Payment Certificate 9171.

5.8 The Adjudicator is asked to decide in the event that the amount of the final account decided by the Adjudicator is less than the amount previously paid to Tyroddy, that Tyroddy should forthwith pay P.C. Harrington the amount of the difference plus VAT."

Paragraphs 5.1 to 5.5 deal with the issue that has been raised by Harrington which relates to the terms as to when and how the final account should be ascertained and its impact on Tyroddy's, entitlement.

11. That was met by Tyroddy's Reply to that Response, dated 11 February 2011. The salient parts of this are as follows:

"1.3. PCH have at several times during the course of this adjudication referred to their alleged claim to recover substantial sums on other contracts with Tyroddy, on the grounds that their valuations have been found to be incorrect and that as a consequence Tyroddy have been over paid. It is now claimed that a similar error has been made on this contract. That this error should have been made at this time, some 5½ years after PCH's last valuation, may be regarded with suspicion. It is Tyroddy's contention that this claim is both out of time and defectively calculated and as a consequence the Adjudicator should find the claim unfounded.

1.4. PCH have incorporated three witness statements from the team which on their own case jointly and severally have so mismanaged their valuations of Tyroddy's work that PCH now considers that Tyroddy has been over paid on not one but four contracts to a value in excess of £600,000. The Adjudicator may view with considerable scepticism the reliability of statements made by witnesses who can claim to have performed so poorly in the past. Further if the first valuation was wrong then the Adjudicator should place little or no reliance in a revised one.

2.3… By the express wording of the contract PCH undertook to value the work. To the extent they claim that their certificates were not accurate valuations of the work they were in breach of contract and may not now benefit from their breach by claiming that their certificates were not proper valuations of the work as carried out in all circumstances. It is also correct to say that Tyroddy did not make formal applications for payment. However PCH are incorrect in stating that they could not base valuations on the actual quantity of reinforcement. PCH with a site quantity surveyor was in fact much better placed and better qualified to value the work, both as to reinforcement delivered and that actually fixed than was Tyroddy's visiting director…

5.3. It is to be inferred from paragraph 16 that PCH issued 111 certificates without once checking that the total being certified was correct. These 111 presumably were prepared by Mr McGann and authorised by Mr Wood …if this is correct then it would appear that PCH are author of their own misfortune by reason of their mismanagement and incompetence …

5.10 Two possible conclusions may be drawn from Mr McGann's statement:-

1. That he has been either grossly negligent or grossly incompetent having overvalued the work on the Wembley contract by over £¼ million at 2005 values.

Or

2. That his revaluation is a complete fabrication.

Whichever of the above is correct and Mr McGann having been employed by PCH for 8 years suggests that he is not regarded as being incompetent, the Adjudicator must find Mr McGann's evidence unreliable and reject it."

12. Unexceptionably, apparently, at the time, Harrington served a Rejoinder on 14 February 2011. The following paragraphs were contained within that document:

"2(d)(iii) It is clearly established that an interim certificate is no more than a provisional estimate of the amount to which a contractor (or in this case a subcontractor) is entitled by way of instalment…Tyroddy's attempt to escalate an interim (and "on account") valuation to the status of a final certificate is contrary to established authority…

2(d)(v) in relation to the timing issue the facts of Cantrell v Wright & Fuller… makes it clear that slippage where there is a prescribed timetable for the issue of certificates is not conclusive. Tyroddy cannot rely on slippage as evidence of complicity, all the more so when the owners of taking the next step (submission of its final account claim) rested with Tyroddy.

2(d)(vi) As a matter of fact, the last in time certificates cannot be the final account in circumstances where PC Harrington has now established that Tyroddy has been overpaid in respect of its work, and Tyroddy has failed to show that the certificate in question accurately reflects the correct value (and indeed suggest in its Reply, at paragraph 2.2, that the last certificate is wrong)…

Page 13: Both Tyroddy and the Adjudicator have now been given the information required to assess PC Harrington's valuation of the final account. PC Harrington's evidence on the point is unchallenged.

Page 16: Ultimately, the Adjudicator should not lose sight of the fact that this is, to all intents and purposes, a claim for "money due". Subject to the fact that Tyroddy has not sought to refer to the Adjudicator its entitlement to a certificate relating to final account/retention issues, the exercise the adjudicator is being asked to undertake is to determine whether the amount claimed by Tyroddy is due to it. PC Harrington says it is not due, for the reasons set out in the evidence it has submitted. But, far from PC Harrington benefiting from its breach (as Tyroddy claims), the reality is that Tyroddy is seeking to be unjustly enriched, that is to be paid a sum to which, on the taking of the final account, it is not due. The Adjudicator should not go down that path.

Page 21. If, as a matter of taking a proper account between the parties, retention (or the amount of retention apparently withheld under earlier certificates) is not due because there has been an overvaluation of Tyroddy's account during the course of the contract, then as a matter of fact, that amount cannot have been withheld from Tyroddy's account and cannot therefore be due for repayment."

At Pages 24 to 27, Harrington sought to support Mr McGann's evidence against the assertions and aspersions made by Tyroddy.

13. Mr McGann's witness statement, which was served with the Response, dated 4 February 2011, went in some detail into the value of the work carried out by Tyroddy. It purported to analyse the tonnage provided and, therefore, by reference to the rates agreed between the parties, how much was payable. It dealt also with site instructions and day works as well as in effect a cross-claim for work which should have been done by Tyroddy said to have been done by another sub-subcontractor called Camcai. That cross-claim was for just over £20,000. In conclusion, he said:

"93. A proper ascertainment for works completed at the Wembley National Stadium by Tyroddy after 9 June 2003 will show an entitlement to a final account value in the sum of £1,929,235.53 as set out above.

94. As a result, Tyroddy had been overpaid the sum of £225,085.97, which is now due and owing to PCH."

14. The Adjudicator then produced his decision on 21 February 2011. Subject to arguments about fairness, there is no other challenge to his jurisdiction. In this regard, I refer to the following paragraphs:

"THE DISPUTE

8. The Notice of Adjudication states that:- " PCH have failed to repay any or all of the retention withheld. As a consequence a dispute exists as to the method and timing in which the retention should have been repaid. "

9. The Referral specifically request my decision(s) on the implied term governing when

a. retention should be paid;

b. The final date(s) of payment;

c. the sum that is payable forthwith;

d. the interest due; and

e. that the Responding Party is liable for my fees and expenses…

MY DECISION

14. I decide that the retention should have been repaid in accordance with an implied term of half of the retention monies should have been paid at completion of the subcontract works and the remainder 12 months later.

15. I decide that the final dates of payment were: 14 June 2006 for the first moiety; and 14 June 2007 for the remainder.

16. I decide that the total retention of £66,628.50 is to be paid forthwith by PCH to TCL…

REASONS

22…My reasons follow.

23. The matters to be considered in my Decision included:-

Does a Dispute exist?

What's the matter resolved by a Settlement Agreement?

What is the Dispute?...

What is the correct quantification of Retention?

To whom does the Retention along?

What is the purpose of Retention?

When is retention due for release?...

Is set-off allowed under this contract claims on another contract?...

27. The dispute, as described in the 'Notice of intention to refer a dispute to adjudication' concerns the release mechanism for the retention monies held on this contract in the sum of "… £66,628.50. The directions requested from the Adjudicator, in my opinion, merely categorise the stages in the release of that retention, or such other sum-if it is considered due.

28. The alternative arguments put forward by the parties do not alter this basic premise. There is only one dispute. This involves the release of the retention certified by PCH on Certificate 9171 for work up to 28th May 2006 which remains unpaid. TCL requesting my directions for "… method and timing in which the retention should have been repaid" are no more than highlighting the steps I must investigate, review and then decide upon before making my Decision. "

What is the correct quantification of retention?

29. The retention was quantified by PCH, on the Certificate 9171 for "... Period Ending 28^th May 2006" and that is the sum requested by TCL, "... or such other sum is the Adjudicator shall decide ..." PCH aver that this is an "On-Account" sum, only becoming due when there is an agreed final account. PCH further complain that TCL never made any applications or produced a final account that could be checked and agreed-this appears to be the reason no agreed final account exists. PCH aver that this is what was expected of TCL but PCH fail to show any contractual obligation on TCL to provide any such application.

30. PCH has a contractual duty to carry out valuations of the works but has only now, in the Response, produced a "Final Account". PCH aver, in the alternative, that monies only become due when released on a "back-to-back" basis with the principal subcontract. I have found that none of these scenarios satisfy the requirements of Section 110 of the Housing Grants, Construction and Regeneration Act 1996… in not providing the certainty of an adequate mechanism for when payments become due. I am satisfied that PCH quantified retention on 28 May 2006 and has had adequate time since to provide and agree a Final Account-their failure to do so is unfortunate. The "Final Account" now produced is not 'agreed' and is not based upon the terms of the contract, examples being the remeasure of reinforcement "fixed" as opposed to the contractual agreement to "…offload, check, distribute and fix..."…PCH also now introduce other contractors claimed 'costs' as 'contracharges' all of which impact on the remeasure. This is a new claim, unsubstantiated and not having been crystallised as a dispute. These points have not been argued through by the parties. TCL dispute this 'final account' and as such I consider that any eventual final account dispute is another dispute and outwith this matter….

32. TCL dispute that this new 'final account' is a proper valuation of the works and avers that Certificate 9171 was correct. I consider any dispute as to the value of the works produced by 'the new final account' to be another dispute outwith this matter. I am also swayed by the draft statement of account prepared by PCH "…at 15^th July 2010…" which "…records the agreed value of retention monies held… Wembley Stadium…66,628.50"

33. I do not accept the abatement to value exercise carried out by PCH, primarily because it is not agreed but also contractually flawed and outwith this dispute. I accept the interim value of retention as that certified by PCH on certificate 9171 as £66,628.50…

35. This dispute concerns the release of retention as measured and certified by PCH on an interim basis-it is neither 'final' nor to be considered as evidence of any 'final' figure in this matter. It is not necessary, nor within my remit in this matter, to decide on a final account value.

45. I have considered the cross-claim from PCH of the claimed overpayment on the project, on the Crossharbour project and on the other 'overpaid' projects- and in the absence of an 'Agreed Settlement' have reviewed the principles to be satisfied, as set out in Keating 18-050:-…

b. Abatement "…applies only to matters that go to reduce the value of the work performed…" The claimed final account exercise is not agreed or do I accept that it abates the value in relation to this dispute at this time

These Proceedings

15. These proceedings were commenced by the Claimant, Harrington, on 7 March 2011 as Part 8 proceedings. Without going through the not insubstantial Particulars provided as part of those Part 8 proceedings, Paragraph 61 sets out the relief that is sought as follows:

"61.1.A declaration that, on a true and proper construction of the Wembley, Mansfield and Liverpool Contracts Tyroddy's claims for release of retention monies allegedly due from [Harrington]:

(i) are dependent upon first ascertaining the total sum properly due to Tyroddy in respect of those works and the amounts paid to them in respect of those works; and

(ii) could legitimately be met by [Harrington] relying on any cross-claim amounting to a set-off permissible under the contract and/or any right of retainer which could be levied against the retention fund, and Tyroddy's right to the former could not and cannot be determined without resolving the latter…

61.2 A declaration that, in refusing to consider the question of the final account and its ascertainment-of which the retention formed one part-and in refusing to consider the defence of set off retainer available to [Harrington] in the Wembley, Mansfield and Liverpool Adjudications, the Adjudicator has committed a material breach of natural justice, in consequence of which the Adjudicator's Decisions are unenforceable."

16. So far as today's proceedings are concerned, it is accepted that I cannot and should not deal with the relief sought in Paragraph 61.3, which will be addressed, if necessary, on another day.
17. Essentially, the arguments between the parties (and I summarise them relatively briefly) are, from Harrington's standpoint, that as a matter of substantive law, or in the light of what the contract means, it is entitled to raise the true value of the final account as a defence by way of abatement, set-off or otherwise to defeat the claim for payment of the retention. Secondly, it is said that the Adjudicator committed a clear breach of natural justice in construing his jurisdiction so narrowly as to disregard Harrington's defence that the release of the retention could not be divorced from the taking of the final account.

The Law

18. The law in relation to unfairness has attracted judicial attention virtually since the Housing Grants, Construction and Regeneration Act 1996 came into force. I am not going to refer in this judgment to the many cases in which unfairness has been mooted and in a relatively few instances it has been decided that there has been sufficient unfairness as to justify a refusal on the part of the Courts to enforce adjudication decisions. I refer however to the case of CJP Builders Limited v William Verry Limited [2008] BLR 545, in which the Court was concerned with what was said to be unfairness in circumstances in which the Adjudicator, albeit wholly honestly, decided that the Adjudication rules were such that he was put in a position that he could not consider a response that had been served a few hours late under the rules. In his view, he could not properly take into account the defence which the defending party had put in. In that judgment, I said as follows:

'83. Reliance was placed upon my observations in Cantillon Ltd v Urvasco Ltd [2008] BLR 250 at Paragraph 57:

"From this and other cases, I conclude as follows in relation to breaches of natural justice in adjudication cases:

(a) it must first be established that the adjudicator failed to apply the rules of natural justice;

(b) any breach of the rules must be more than peripheral; they must be material breaches;

(c) breaches of the rules will be material in cases where the adjudicator has failed to bring to the attention of the parties a point or issue which they ought to be given the opportunity to comment upon if it is one which is either decisive or of considerable potential importance to the outcome of the resolution of the dispute and is not peripheral or irrelevant.

(d) whether the issue is decisive or of considerable potential importance or is peripheral or irrelevant obviously involves a question of degree which must be assessed by any judge in the case such as this.

(e) it is only if the adjudicator goes off on a frolic of his own, that is wishing to decide a case upon a factual or legal basis which has not been argued or put forward by either side, without giving the parties an opportunity to comment or, where relevant put in further evidence, that the type of breach of the rules of natural justice with which the case can be Balfour Beatty Construction Company Limited v The London Borough of Lambeth was concerned comes into play. It follows that, if either party has argued a particular point and the other party does not come back on the point, there is no breach of the rules of natural justice in relation to thereto."

The Cantillon case was concerned with an allegation that the adjudicator had made his decision upon the factual or legal basis not argued or put forward by either side without giving the parties opportunity to comment or address. That is not the case here…

85. As to whether the breach was a material one, on analysis the only point put forward by CJP is that the Adjudicator's decision in the second adjudication demonstrates that the Adjudicator would probably have found against Verry even if he had considered the Response in the first adjudication. CJP argues that the onus of proof must be on Verry to show that the breach was a material one and that the adjudicator would have reached a different decision. I am satisfied that the breach here was a material breach:

(a) In itself, the failure to disregard the whole of Verry's response both as to argument and as to evidence was and must have been material. There comes a point when a breach of the rules of natural justice is so pervasive that the only proper conclusion to come to is that the breach is material.

(b) It is not necessary for the Court to go so far as having to investigate the facts to determine whether the adjudicator would have reached a different decision in substance if he had considered the Response. All one need say (and I do) is that there was a real possibility that the adjudicator could have reached a different decision. I am satisfied that there is a real (as opposed to fanciful) possibility in this case.

(c) Because Verry decided to stop participating in the second adjudication part way through, there is no telling what the adjudicator would have decided if Verry had pressed its case with force and logic throughout the remainder of the adjudication.'

19. Other cases include Pilon Limited v Breyer Group plc [2010] BLR 452, which is also of some relevance in this context and which itself refers to a number of the cases relied upon by the parties here, such as Thermal Energy Construction Limited v AE & E Lentjes UK Limited [2009] EWHC 408 and Quartzelec Limited v Honeywell Control Systems Limited [2009] BLR 328; and a number of other cases. I refer in particular to paragraph 22 of the judgment in the Pilon case, where Coulson J said as follows:

"22. As a matter of principle, therefore, it seems to me that the law on this topic can be summarised as follows:

22.1. 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.

22.2. 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."

20. I have also been referred to an unreported decision of HHJ Gilliland QC in Manchester in Humes Buildings Contractors Ltd v Charlotte Homes (Surrey) Limited which was handed down on 4 January 2007. Again, this was a case in which the Adjudicator took it upon himself not to take into account defects which were put forward by the defending party as a defence because he formed the view that a Notice of Withholding would have been necessary. However, it was common ground that he, the Adjudicator, had not raised the materiality of a Withholding Notice with the parties. At Paragraphs 20 and 25 of that decision, HHJ Gilliland QC said as follows:

"20. The next ground relied on by the defendant is that of breach of natural justice. The position is that neither the claimant nor the defendant in the adjudication had suggested that any withholding notice was necessary before the question of defective work or the deduction of liquidated damages could be taken into account. It is clear that the point about the need for a withholding notice was a point taken by the adjudicator himself. The adjudicator during the adjudication did not raise the point with the parties and it is clear that the defendant did not have any opportunity to make submissions to the adjudicator on his rejection or proposed rejection of the defendant's claims for defects and liquidated damages. If a court had acted in this way and decided issues on a ground which had not been raised before it and where the parties had not been given an opportunity to make submissions on the point, there is little doubt but that the decision would be open to challenge on the grounds of breach of natural justice. The issue in the present case is how far the principles which a court would be expected to follow apply to an adjudication…

25. In my judgment what the adjudicator has done was manifestly and seriously unfair to the defendant. The defendant's claims that the claimant's work was defective was an important part of its defence. The defendant claimed the defects amounted to £135,916.48 and if that was correct the amount of any award in favour of the claimant would have been very significantly reduced. The adjudicator however rejected this claim (and any balance of the claim for liquidated damages) without considering it upon its merits as in my judgment he should have done. The defendant has been deprived of any opportunity of persuading the adjudicator that his view of the law was incorrect and the consequence is that the adjudicator has excluded a very substantial part of the defence without any consideration of its merits for reasons which are wrong in law. There is nothing to suggest that the defendant should have realised that the adjudicator might be of the view that a withholding notice was necessary before he could consider these claims. In my judgment the failure of the adjudicator to raise the point with the parties and to invite their comments before issuing his decision was so unfair to the defendant that the court should not enforce the decision summarily. It would be a strong thing to hold a party to a decision which is obviously wrong on an important part of the defendant's case when the defendant has not had any opportunity to address the adjudicator on the point. There is nothing in Carillion which compels such a result. It cannot in my judgment be said that the defendant at trial would not have a reasonable prospect of establishing its defence that the adjudicator had reached his decision in serious breach of the rules of natural justice and that in the circumstances the decision is not binding."

Discussion

21. I have heard detailed and very well presented arguments by both Counsel in this case. I have unfortunately come to the view that the Adjudicator in this case unwittingly fell below the standards which are required to enable the decision or decisions to be enforced. My reasons are as follows.

(a) One has to be very careful in comparing documents which are exchanged between the parties in adjudication with pleadings in Court, or indeed even in arbitration. That is because they are not pleadings as such, but they are documents in terms of the Referral, the Response, the Reply and, if there is one, a Rejoinder, that should set out in comprehensible form what each party's case and defence respectively is. But they should not be construed as if they were commercial contracts or as if they were pleadings in the Court sense of the term. There are no strict rules in adjudication as to how these documents should be drafted.

(b) I have formed the view that it was sufficiently clear from the Response that Harrington was really taking two broad points. One was that there was in effect a term of the contract that the retention would not fall due unless and until the final account process had been gone through and either completed or the final account had been ascertained by one means or another. That was the first area of defence, but I think that it is sufficiently clear from the Response and attached evidence that Harrington was also saying that, by one means or another, one should look at what the true value of the final account was and, if the gross sum ascertained or found to be due was less than the amount which had been the subject matter of the interim certificates, then to that extent the amount due as retention would reduce. When one compares that with the amount of money that has been paid, it is possible at least that there would be nothing due to the sub-subcontractor in this case. That is particularly made clear by Paragraphs 5.6 and 5.7 in which the Adjudicator was asked to decide the amount of the final account under the contract between the parties and to decide what, if any, retention was or remained due.

(c) For better or for worse, Harrington's case that the true value of the work done was less than the gross sums previously certified was a defence to Tyroddy's claim and as such it was incumbent on the Adjudicator to adjudicate upon it. The fact that this defence had not been specifically raised both for the initiation of the adjudication does not put it outside the jurisdiction of the adjudicator. The referred dispute essentially related to the non-payment of sums previously certified by way of retention.

(d) The Adjudicator decided clearly and indeed understandably that there was no implied term or term of the contract that payment of retention monies should await some future final accounting process. That is clear, it seems to me, from Paragraphs 14 and 15. But he also identified, at Paragraph 23, that one of the matters that he had to address was "What is the correct quantification of retention?" Another matter was "Is set-off allowed under this contract for claims on another contract?" In my view, he made it clear that he regarded that process of determining the final account as outside the adjudication which he was dealing with and outside his jurisdiction. He, therefore, then went on, in effect, to ignore the final account evidence as such, although there are some signs in the decision that he did not think an enormous amount about the evidence that had been put forward by Harrington. That said, for instance, at Paragraph 33, in dealing with an abatement to value exercise, he said:

"I do not accept the abatement to value exercise carried out by PCH primarily because it is not agreed, but also contractually flawed and outwith this dispute."

He said earlier at Paragraph 30, with Tyroddy ("TCL"):

"TCL dispute this final account and, as such, I consider that any eventual final account dispute is another dispute and outwith this matter."

This wholly honest view was wrong however because the second and factual limb of Harrington's defence, namely as to what the true value of the final account was, was in fact, subject to proof, a viable defence to Tyroddy's claim.

(e) It seems to me, therefore, that, by wrongly deciding that this was a matter outside his jurisdiction, he put himself in the position whereby he did not consider the final account evidence and argument in any detail or indeed really at all. He has, therefore, put himself in a comparably similar position to the adjudicators in the CJP v William Verry and the Humes Building Contractors cases in that, by ruling on his jurisdiction in such a way that he has denied himself the opportunity to consider the merits of the exercise which Harrington had asked him to determine, he has committed a breach of natural justice.

(f) There is a further ground. The Adjudicator clearly from the decision took it upon himself to deal with the final account exclusion as a matter of jurisdiction without giving either of the parties the opportunity to be heard on that point. I have no doubt that, if Tyroddy had been asked about this jurisdictional matter, it might or might not have agreed, but it is clear that Tyroddy had not taken a jurisdictional objection to the introduction by Harrington of the evidence and argument about the final account. Tyroddy's position, which is wholly understandable, was that the final account exercise evidenced by Mr McGann had obviously been done almost five years after completion and, therefore, was not credible. It was prepared to hang its hat on that apparently forceful point. It may be that Tyroddy would have made a point on jurisdiction to agree with the Adjudicator's initial view, but I cannot speculate about that. Certain it is that Harrington would have had something to say about it. So that is another ground on which this Adjudicator, who I accept has acted wholly honestly in any event and transparently, has unwittingly failed to follow the rule of natural justice, which is to deal with matters which are properly before him and to give the parties the opportunity to be heard on something such as the jurisdictional issue. That would, therefore, mean that these three decisions are not enforceable on that ground.

(g) These points are material and certainly more than peripheral breaches of the rules of natural justice. It is not possible or desirable for the Court to say or guess what the Adjudicator would have done if he had considered the "final account" exercise on its merits.

The consequence of the above is that on this ground the decisions of the Adjudicator should not be enforced. The findings which I have made are not intended to suggest that the Adjudicator is in some way inherently unfit to adjudicate on other disputes between the parties. This is because the breaches of natural justice here are technical, albeit important, and do not involve any personal condemnation, because the Adjudicator clearly acted honestly and transparently, albeit wrongly.

The Contract

22. I now turn to the substantive matter, which is the interpretation of the contract. The way that the Part 8 relief is sought is on the basis of a true and proper construction of the contract. I deal with the contract first. That is evidenced by the letter of 6 June 2003 which I referred to above. The parties' agreement was clearly that there would be a retention. The document refers to 5%, but it is common ground that it was reduced to 3% on Wembley, and indeed on the other two projects it was identified as 3%. So the retention was 3%. There was nothing expressed in the contract about when the retention would be payable. It is undoubtedly the case that it is common, if not the invariable practice of the construction business, that the first half or "moiety" of retention is released on practical completion. That can be in the case of a sub-sub-contract practical completion of the sub-subcontract works, or it can be the completion of the sub-contract or even main contract works. The second half or moiety of retention is then released on the completion of the defects liability period. Again, that is sometimes the sub-sub-contract defects liability period and sometimes the sub-contract or main contract defects liability period. Sometimes the second half of the retention is payable only on the issue of the Certificate of Making Good Defects. Sometimes, the contracts talk in terms of the retention being held on trust by the party up the contractual chain. But there is none of that expressed in this contract.
23. Undoubtedly retention is intended to be something which is held back; that is what the word "retention" means. It provides some security for the sub-contractor, Harrington in this case, against such matters as defects, delays and other sorts of cross-claims. But it is equally clear that the process that follows completion does usually involve a final accounting between the parties. There is no mention of a final accounting period here as such.
24. I am wholly satisfied, and this is primarily a legal view, that there is no implied term or term of the contract by way of construction that the retention is only payable once the final accounting process has been finalised. It is not necessary to imply any such term because retention money really represents a credit that is already due to the sub-subcontractor in this case. It will broadly be payable following completion when the sub-sub-contractor wishes to claim for it after completion; it will be payable by implication by Harrington within a reasonable time of completion by Tyroddy. At that stage, it may be met by a defence which may in part be abatement, a set-off or counterclaim or it may raise valuation issues; however, there is no need to imply a term and I certainly cannot construe any of the words that are used here to say that retention only becomes payable at some future final accounting stage. There is no room either by way of interpretation of the words used or by way of implication to imply any such term.
25. The next issue is the declaration sought. The language in which it has been couched may be (and I attach no criticism for this) slightly infelicitous:

"On a true and proper construction of the contracts, Tyroddy's claims for release of retention monies allegedly due from PCH could legitimately be met by PCH relying on any cross-claim amounting to a set-off permissible under the contract and/or any right of retainer which could be levied against the retention fund and Tyroddy's right that the former could not and cannot be determined without resolving the latter."

26. I am not satisfied as such that, "on a true and proper construction", one can reach that conclusion. That said, it seems to me, and I have heard argument to this effect from both sides, that it must be open to a contractor up the chain (Harrington in this case) to raise by way of defence a case that the retention monies claimed by the sub-sub-contractor (Tyroddy in this case) are not due because there has been an overvaluation in the past of the work carried out by Tyroddy. I do not think that that arises "on a true proper construction of the contracts", but I do think that it arises as a matter of law. How one puts that case as a matter of law, whether it is by way of abatement or by way of set-off for a restitutionary claim perhaps does not matter, but that it can be seems to me to be abundantly clear. The right to do so is not excluded by the wording used by the parties in Harrington's letter of 6 June 2003. It follows from such well known cases as Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 that ordinary common law and equitable rights are not excluded unless there is very clear wording in the contract; there is not only no clear wording here, there is no wording at all in the contractual documentation which bars, prevents or limits Harrington from raising that as a defence. As I have said, it does not really matter how one formulates the defence, but it does not arise on a true and proper construction of the contract; it arises as a matter of law on a basis which has not been excluded by the contract between the parties. It is clear here that the interim payments were intended to be on account and it follows that a later accounting process, whether it is by way of a final or interim account, could change earlier certified amounts upwards or downwards. The interim payments on account are not in some way final, binding or conclusive.
27. It follows that, subject to wording, I would be prepared to grant a declaration in the form set out in Paragraph 61.2 of the Part 8 claim, although the relief sought would need an amendment, but I will hear argument from the parties as to whether it is appropriate or necessary for there to be another declaration to reflect what I have decided on the right to raise overpayment in some way as a defence. It may be that what I have said is enough for the Adjudicator in the current case.
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