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

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		23 September 2014

Mr Justice Ramsey

Introduction

1. This Part 8 claim raises an issue of the extent to which the rights of a third party enforceable under the Contracts (Rights of Third Parties) Act 1999 ("the 1999 Act") can be determined by adjudication under an express term contained within the agreement between the original contracting parties. The issue requires consideration of the relevant agreement, the 1999 Act and the nature of adjudication proceedings.

Background

2. By a deed of appointment dated 28 January 2008 ("the Appointment") between Barclays PLC and the Claimant, Hurley Palmer Flatt Limited ("HPF"), HPF agreed to provide mechanical and electrical engineering design services in relation to the design and construction of a new data hall at a data centre for Barclays PLC.
3. Disputes have arisen concerning the chilled water system and it is said that the system was and remains unstable, being subject to fluctuations in the rate and direction of the flow of chilled water. This has led to a claim against HPF valued at over £4 million.
4. Clause 14 of the Appointment provides for assignment by Barclays PLC ("the Client") and third party rights. HPF is described as "the Consulting Engineer" in the Appointment. Clause 14.3 contains the following provision:

"Any Affiliate with a direct interest in the Project shall be entitled to enforce the terms of this Agreement as "Client" always provided that the Consulting Engineer shall be entitled [to] rely on the equivalent defences in respect of such liability which it has against the Client."

5. The Defendant, Barclays Bank PLC ("Barclays") is accepted to come within the definition of "Affiliate".
6. Third party rights are also dealt with in the Appointment as follows:

(1) Clauses 2.3: "Unless expressly stated otherwise in this Agreement, nothing in this Agreement confers or is intended to confer any rights on any third party pursuant to the Contracts (Rights of Third Parties) Act 1999."

(2) Clause 14.2: "Save as expressly provided in Clause 14.3 and Clause 10 (Collateral Warranties) nothing in this Agreement shall confer or purport to confer on any third party any benefit or right to enforce any terms of this Agreement."

7. The Appointment includes a provision for adjudication which includes the following clauses:

(1) Clause 27.1: "The adjudication provisions contained in Part 1 of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (S.I. 1998/649) (the Scheme) shall apply to this Agreement."

(2) Clause 27.3: "The decision of the adjudicator shall be binding on the parties unless and until the dispute is determined by legal proceedings or by agreement."

8. On 11 August 2014 Hogan Lovells International LLP gave a notice of adjudication on behalf of Barclays, seeking damages against HPF in relation to the claim of defects in the chilled water system based on rights as an Affiliate under the Appointment. Miss Finola O'Farrell QC was appointed as adjudicator. By a referral dated 18 August 2014 the dispute was referred to the adjudicator.
9. By these Part 8 proceedings commenced on 26 August 2014 HPF has sought a declaration that Barclays is not entitled to commence adjudication proceedings against HPF and that consequently the notice of adjudication and referral notice were ineffective and the adjudicator does not have jurisdiction to determine the claims.
10. The issue in these proceedings is whether or not the rights given to Barclays as a third party Affiliate include the right to have liability under the Appointment determined by adjudication under the provisions of clause 27.

Submissions on behalf of HPF

11. Mr Justin Mort QC, who appears on behalf of HPF, refers to the background to the 1999 Act in the Law Commission Report No 242 (1996), Privity of Contracts: Contracts for the Benefit of Third Parties. He also referred to the policy considerations which led to the provisions as finally included in the 1999 Act, as explained in the full Explanatory Notes to that Act.
12. He submits that under the 1999 Act the enforcement of Barclays' rights under clause 14.3 of the Appointment has to be by court proceedings. Whilst the 1999 Act made express provision in relation to arbitration clauses so that a third party would be treated for the purpose of the Arbitration Act 1996 as being a party to the arbitration agreement, there is no equivalent provision relating to adjudication. Rather adjudication remains a contractual dispute resolution method between the original contracting parties. He says that, as is common ground, Barclays cannot bring itself within section 108 of the Housing Grants, Construction and Regeneration Act 1996, as amended, as being a party to a construction contract with implied rights of adjudication.
13. He submits that the policy of the 1999 Act is that it does not impose a burden on third parties. The adjudication agreement in the Appointment is, he says, a combination of obligations and rights and any agreement purporting to make a third party a party to an adjudication agreement with the necessary burdens would be ineffective. He further submits that, on its terms, Clause 27.1 of the Appointment and its reference to the Scheme for Construction Contracts ("the Scheme"), which is stated to apply to parties to a construction contract, is inapplicable to the relationship between Barclays and HPF as Barclays is not a party to the Appointment.
14. He also refers to section 7(4) of the 1999 Act which states that a third party shall not be treated as a party to the contract for the purpose of any other Act or any instrument made under any other Act. He submits that this means that Barclays is not to be treated as a party to a construction contract for the purpose of the Scheme as incorporated in Clause 27.1 of the Appointment. He refers to the terms of the Scheme which imposes obligations on a party. He also refers to the obligation to repay sums later found to have been overpaid as a result of an adjudication decision, as dealt with in the recent cases of Aspect Contracts (Asbestos) Limited v Higgins Construction PLC [2013] EWCA Civ 1541 and Walker Construction (UK) Limited v Quayside Homes [2014] EWCA Civ 93. He says that the burden of these obligations could not be imposed under the 1999 Act and he refers to paragraphs 14.15 to 14.19 of Law Commission Report No 242.

Submissions on behalf of Barclays

15. Mr Andrew Fenn, who appears on behalf of Barclays, submits that Barclays has a right to adjudicate as a freestanding procedural right as part of the benefit given to Barclays under Clause 14.3 of the Appointment. He refers to section 1(4) of the 1999 Act and submits that the position is analogous to the position on assignment and Barclays is entitled to adjudicate under the terms of Clause 27 of the Appointment. Alternatively, he submits that the right to adjudicate under Clause 27 is a procedural qualification to the right to claim damages granted under Clause 14.3 of the Appointment.
16. He relies on section 1(4) of the 1999 Act which provides:

"This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract."

17. He says that, as a result, Barclays' substantive rights to damages under Clause 14.3 are subject both to the rights of adjudication under the Appointment as well as the rights of commencing court proceedings. He submits that, if it wishes, Barclays is entitled to "stand in the shoes" of the Client under the Appointment and can therefore commence adjudication.
18. He refers to the decision of Colman J in Nisshin Shipping Co Limited v Cleaves and Company Limited [2003] EWHC 2602 (Comm) in which he drew attention to the "conditional benefit" principle adopted in Law Commission Report No 242 at paragraphs 10.24 to 10.32, as reflected in section 1(4) of the 1999 Act. He also referred to the Explanatory Notes to section 8, which draw upon an analogy of an assignee who may be prevented from unconscionably taking a substantive benefit free of its procedural burden, referring to the decision of the Court of Appeal in DVA v Voest Alpine, The Jay Bola [1997] 2 Lloyds Rep 279. He submitted that, applying these principles, section 1(4) of the 1999 Act carries with it the right to enforce substantive rights by adjudication.
19. He submitted that section 7(4) of the 1999 Act was irrelevant because Barclays was not seeking to rely on section 108 of the Housing Grants, Construction and Regeneration Act 1996 or the statutory Scheme but on a term of the Appointment. He submitted that there was no difficulty raised by the obligation imposed on a party to an adjudication because section 1(4) of the 1999 Act meant that the right to adjudication was subject to such obligations.

Decision

20. The starting point in considering the rights of Barclays under the Appointment is the term in Clause 14.3 of the Appointment. When read with Clauses 2.3 and 14.2 of the Appointment, it is evident that Clause 14.3, so far as material to this case, contains the full scope of Barclays' right to enforce any term of the Appointment. Clause 14.2 makes that clear and I consider that Clause 2.3, on its true construction, means that, with the express exception in this case of Clause 14.3, no rights are conferred on a third party which are enforceable under the 1999 Act.
21. The Appointment contains some 31 Clauses some of which relate to substantive terms and give rise to potential liability of HPF as the Consulting Engineer towards Barclays PLC as the Client. Other provisions contain rights which may be characterised more as procedural rights. These include, for instance, the ability of Barclays PLC as the Client to suspend the performance of HPF's Services (Clause 18.1) or to terminate the Consulting Engineer's appointment (Clause 19.2).
22. I consider that the wording of Clause 14.3 strongly indicates that it is the terms of the Appointment which relate to the Consulting Engineer's liability to the Client which are intended to be enforced under the terms of Clause 14.3. That clause provides that Barclays shall be entitled to enforce the terms of the Appointment "always provided that the Consulting Engineer shall be entitled [to] rely on the equivalent defences in respect of such liability which it has against the client". The reference to "such liability" strongly indicates, in my judgment, that the intention was that the rights to be enforced under Clause 14.3 were the rights giving rise to liability by the Client against the Consulting Engineer not the procedural rights such as those in Clause 27.
23. On that basis I do not consider that Barclays was given a right to enforce the terms of the Appointment by adjudication under Clause 27. As a result I do not consider that Mr Fenn is correct in his submission that Barclays has a freestanding right to enforce the adjudication provision in the contract under the terms of Clause 14.3. If I were wrong in this conclusion then I consider that, for the reasons given below, the adjudication clause in Clause 27.1 would not be applicable to the relationship between Barclays as a third party and HPF.
24. Under the 1999 Act section 1(1) provides that

"Subject to the provisions of this Act, a person who is not party to a contract (a "third party") may in his own right enforce a term of the contract if-

(a) the contract expressly provides that he may…"

25. Section 1(4) then sets out the basis on which a third party can enforce a term of a contract. As the Explanatory Notes to the 1999 Act state, section 1(4) clarifies section 1(1) so that a third party's right of enforcement is subject to the contract terms and conditions. The Explanatory Note also states:

"It is open to the parties to limit or place conditions on the third party's right; for example, if he wishes to enforce the right he is to do so by way of arbitration and not litigation."

26. In this case the relevant rights that Barclays seeks to enforce do not, in my judgment, engage the conditions within section 1(4) of the 1999 Act. As stated in the Explanatory Note, a classic case where this provision would be engaged would be if there were an arbitration clause. Where there is such a clause section 1(4) of the 1999 Act does not permit a third party to enforce a term of the contract otherwise than subject to and in accordance with that relevant arbitration clause.
27. In the present case I do not consider that there is any such condition on the rights under Clause 14.3 of the Appointment or that there is any limitation on the way in which the rights under Clause 14.3 can be enforced.
28. Adjudication, unlike arbitration, is not a mandatory alternative way in which a party to a contract has to enforce its rights. Adjudication is a voluntary method of dispute resolution in the sense that one party to a contract may, but is not obliged to, have a dispute temporarily resolved, pending a final determination by the courts or, if applicable, arbitration. It therefore differs in nature from the terms of an arbitration clause under which a party's rights can only be determined by arbitration.
29. The provision as to adjudication in Clause 27.1 merely says that the adjudication provisions contained in the Scheme shall apply to this agreement. The Scheme provides at paragraph 1(1) of Part I as follows:

"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."

30. That provision reflects the terms of section 108 of the Housing Grants, Construction and Regeneration Act 1996 which provides that a party has a right but not an obligation to refer a dispute to adjudication. I do not consider that there is the type of conditional benefit envisaged by section 1(4) of the 1999 Act which links the enforcement by Barclays of its rights under Clause 14.3 of the Appointment with the adjudication provision in Clause 27. The right of the third party to enforce a term of a contract in this case is not required to be subject to or in accordance with adjudication under Clause 27.
31. As explained by Tomlinson LJ in Fortress Value Recovery Fund 1 LLC v Blue Skye Special Opportunities Fund LLP [2013] EWCA Civ 367, Law Commission Report No. 242 recommended that arbitration agreements should fall outside the scope of the proposed reforms. This was because the proposed reforms were concerned only with the conferring of rights and benefits on third parties and not with the imposition of duties. However an arbitration agreement could not operate satisfactorily unless any entitlement of the third party to submit to arbitration carried with it a duty on the third party to submit to arbitration. In the draft bill attached to the Law Commission Report there was no provision equivalent to section 1(4) of the 1999 Act which is tied in to the conditional benefit principle which applies in the case of arbitration clauses where the third party's benefit is conditional upon it being enforced by way of arbitration. It seems that the reference in Nisshin at [36] to section 1(4) being in the text of the bill recommended by the Law Commission is not correct.
32. However the inclusion of section 1(4) of the 1999 Act in itself is not sufficient to achieve the conditional benefit in relation to arbitration. As stated in the Explanatory Note to section 8 of the 1999 Act, without the provisions of that section, an arbitration agreement made between the parties to the contract would not apply as between the third party and one party to the contract. The wording of the arbitration clause would simply not otherwise be applicable. The case of Nisshin illustrates that difficulty.
33. It is therefore necessary, in order to ensure that the provisions of the Arbitration Act 1996 apply in relation to third party rights under the 1999 Act, to have an additional provision to section 1(4) of the 1999 Act to make the provisions of the Arbitration Act applicable. It would not apply because a third party is not a party to the arbitration agreement between the contracting parties, as explained in paragraph 33 of the Explanatory Notes.
34. It was therefore necessary to incorporate sections 8(1) and 8(2) in the 1999 Act so as to allow the third party to be able to enforce its rights under the contract by way of arbitration. Clause 8(1) is therefore drafted in the following terms

"Where-

(a) a right under section 1 to enforce a term ("the substantive term") is subject to a term providing for the submission of disputes to arbitration ("the arbitration agreement"), and

(b) the arbitration agreement is an agreement in writing for the purposes of Part I of the Arbitration Act 1996,

the third party shall be treated for the purposes of that Act as a party to the arbitration agreement as regards disputes between himself and the promisor relating to the enforcement of the substantive term by the third party."

35. The relevant part of the Explanatory Notes at paragraph 34, under Arbitration provisions, explains the position in the following terms:

"Subsection (1) deals with what is likely to be the most common situation. The third party's substantive right (for example, to payment by the promisor) is conferred subject to disputes being referred to arbitration (see section 1(4)). This section is based on a "conditional benefit" approach. It ensures that a third party who wishes to take action to enforce his substantive right is not only able to enforce effectively his right to arbitrate, but is also "bound" to enforce his right by arbitration (so that, for example, a stay of proceedings can be ordered against him under section 9 of the Arbitration Act 1996). This approach is analogous to that applied to assignees who may be prevented from unconsciously taking a substantive benefit free of its procedural burden (see, for example, DVA v Voest Alpine, The Jaybola [1997] 2 Lloyd's Rep 279)."

36. As Toulson LJ, as he then was, said in Fortress Value at [42]

"Section 8(1) is aimed at the situation in which a contract contains a promise by the promisor, P, to confer a conditional benefit on a third party, T: that is, a substantive benefit, subject to a procedural condition that T may enforce it only by a particular process, i.e. arbitration."

37. That passage also emphasises the importance of the procedural condition, that is that the benefit can only be enforced by arbitration which, as stated above, is an important difference between arbitration and adjudication. It also shows that the provisions of section 8 of the 1999 Act are essential in giving the third party the status of a party to the arbitration agreement so that the conditional benefit referred to in section 1(4) can properly be effected. Without that change the terms of the arbitration clause would not apply to the third party and therefore the conditional benefit would be subject to a condition, that is arbitration, which could not be complied with by a third party as it would not be a party to an arbitration agreement.
38. In Nisshin it was the combination of the conditional benefit in section 1(4) and the approach of section 8(1) being analogous to that applied to assignees that meant that the broker in that case was both obliged to and entitled to refer the relevant disputes in relation to its benefit to arbitration.
39. Mr Fenn referred to the passage in the judgment of Colman J at [42] dealing with section 8(1) where he said, in relation to the broker's rights, that:

"…by reason of the underlying policy of the 1999 Act expressed in section 1(4) he is confined to the means of enforcement provided by the contract to the promisee, namely arbitration, he is to be treated as standing in the shoes of that promisee for the purpose only of the enforcement of the substantive term."

40. I do not consider that this passage means, as Mr Fenn submits, that the existence of section 1(4) of the 1999 Act in itself gives rise to the ability of the third party to "stand in the shoes" of the promisee for the purpose of the arbitration clause. Rather it is clause 8(1) of the 1999 Act which gives rise to that position and brings in the analogy to assignment. Whilst section 1(4) of the Act sets out the underlying policy that the third party is confined to the means of enforcement provided by the contract to the promisee namely arbitration, it would be ineffective unless the third party is also treated as a party to the arbitration agreement.
41. It follows that for that reason I do not accept Mr Fenn's submission that if, contrary to the way in which I have construed section 1(4), it was applicable to make the rights under Clause 14.3 of the Appointment conditional upon adjudication, it would mean, without more, that Barclays had the right to enforce its benefits in adjudication in accordance with Clause 27. Section 1(4) of the 1999 Act alone would not be sufficient to permit Barclays as a third party to refer its disputes with HPF to adjudication.
42. Without an equivalent of section 8 of the 1999 Act so as to make the provision as to adjudication applicable to the relationship between Barclays as third party and HPF the terms of the adjudication provision would not be applicable.
43. The Scheme which was incorporated in Clause 27, as quoted above, refers in paragraph 1(1) of Part I to a party to a construction contract being able to give written notice to refer disputes to adjudication. Barclays, the third party is not a party to a construction contract. Equally paragraph 1(2) states that the notice of adjudication should be given to every other party to the contract. It is evident both from those provisions of the Scheme and from the provisions of the appointment such as Clause 27.3 that Clause 27 is simply inapplicable to the relationship between Barclays, as third party and HPF. That is why, in the case of arbitration, the provisions of section 8 of the 1999 Act were included. No consideration was given to the position in relation to adjudication or other means of ADR within the 1999 Act.
44. As a result I do not consider that Barclays either has a freestanding right derived from Clause 14.3 of the Appointment or a right derived from Clause 14.3 and section 1(4) of the 1999 Act so as to give it a right to enforce its rights under Clause 14.3 by referring any disputes to adjudication under Clause 27.
45. I should, for completeness, deal with two points which were raised by Mr Mort in the course of argument. First he submits that the remedies available to a third party are limited to those which are set out in sections 1(5) and 1(6) of the 1999 Act. He refers to the Law Commission Report at paragraphs 3.32 and 3.33 where they initially recommended that a right to enforce the contract should mean a right to all remedies given by the courts for breach of contract. They also stated that, by referring to the remedies given by the courts for breach of contract, they meant to exclude termination of a contract for substantial breach by the promisor.
46. For that reason section 1(5) of the 1999 Act provides that:

"For the purpose of exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly)."

47. Clause 1(6) then deals with the ability of a third party to enforce a term of a contract which excluded or limited liability.
48. Mr Fenn referred to a passage from the judgment of Hobhouse LJ in DVA v Voest Alpine at page 286 where he said this:

"Where the assignment is the assignment of the cause of action, it will, in the absence of some agreement to the contrary include as stated in s.136 all the remedies in respect of that cause of action. The relevant remedy is the right to arbitrate and obtain an arbitration award in respect of the cause of action. The assignee is bound by the arbitration clause in the sense that it cannot assert the assigned right without also accepting the obligation to arbitrate. Accordingly it is clear both from the statute and from a consideration of the position of the assignee that the assignee has the benefit of the arbitration clause as well as of other provisions of the contract."

49. He submitted that the reference to "remedy" in that passage showed that the right to arbitrate or, in this case, the right to adjudicate should similarly be treated as a remedy available to a party to enforce the terms of the contract.
50. I consider that, in context, the reference to remedy in section 1(5) of the 1999 Act is different to the reference to remedy in the passage in DVA v Voest Alpine. Section 1(5) makes it clear that the remedy refers to remedies available in an action for breach of contract rather than a remedy in the form of a method of dispute resolution, such as an ability to arbitrate, adjudicate or go to court.
51. In those circumstances, whether or not sections 1(5) and 1(6) are exclusive of the remedies available, on which I do not need to come to a final conclusion, I do not consider that a remedy in the adjudication clause is the remedy available to enforce a term of the contract unless it comes both within section 1(4) of the 1999 Act and is given effect, as between the third party and the promisor, either on its terms or by way analogous to an assignment as in the case of arbitration under section 8 of the 1999 Act.
52. Secondly Mr Mort relies on section 7(4) of the 1999 Act which is in the following terms:

"A third party shall not, by virtue of section 1(5) or 3(4) or (6), be treated as a party to the contract for the purposes of any other Act (or any instrument made under any other Act)."

53. He submitted that, for this reason, the Scheme as incorporated in Clause 27(1) of the Appointment could not apply and he made a similar submission in relation to the reference to the Arbitration Act 1996 in paragraph 24 of the Scheme (as unamended). Whilst I consider that section 7(4) would preclude the provisions of section 108 of the Housing Grants, Construction and Regeneration Act 1996 and the Scheme from applying so as to treat Barclays as a party to a construction contract, I agree with Mr Fenn that Clause 7(4) is not relevant here. Clause 27 of the Appointment incorporates the statutory provisions as terms of the Appointment. In this case it is the issue of whether Clause 27 applies to Barclays as a term of a contract rather than a question of whether Barclays as a third party is treated as a party to adjudication because of the Housing Grants, Construction and Regeneration Act 1996 or the Scheme as a Statutory Instrument.

Conclusion

54. For the reasons set out above I have therefore come to the conclusion that HPF is entitled to the declarations that it seeks and I therefore propose to make declarations that:

(1) Barclays is not entitled to commence adjudication proceedings against HPF;

(2) Barclays' notice of adjudication dated 11 August 2014 and its referral notice dated 18 August 2014 are ineffective;

(3) Miss O'Farrell QC, the adjudicator, does not have jurisdiction to determine such claims.

55. This case has raised yet another issue where the position under the provisions of the Arbitration Act 1996 is dealt with but where the position under the deceptively simple "Adjudication Act" in the provisions of section 108 of the Housing Grants, Construction and Regeneration Act 1996 is not. It therefore falls to the court, as in the case of other issues such as limitation, to fill in the gaps in the case of adjudication.