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OUTER HOUSE, COURT OF SESSION
[2008] CSOH 179
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CA144/08
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OPINION OF LORD GLENNIE
in the cause
CUROT CONTRACTS
LIMITED,
T/A DIMENSION SHOP
FITTING
Pursuers;
against
CASTLE INNS (STIRLING)
LIMITED, T/A CASTLE LEISURE GROUP
Defenders:
ннннннннннннннннн________________
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Pursuers: S. Smith; MacRoberts
Defenders: Anderson, Q.C., Simpson; Dundas & Wilson
16 December 2008
[1] On 24
and 29 August 2007,
the parties entered into a contract, in terms of which the pursuers, as
Contractor, agreed to carry out certain construction works for the defenders,
as Employer, at certain bar and nightclub premises at Princes
Street, Falkirk. The contract was on the Scottish Building
Contract with Quantities form for use in Scotland 2005 with Contractor's Design
Portion, and SBC/Q/Scot (Revised May 2006), March 2007 Edition as
amended and supplemented by the parties.
The contract provided that, if a dispute or difference arose thereunder,
either party was entitled to refer it to adjudication under Part 1 of the
Schedule to The Scheme for Construction Contracts (Scotland)
Regulations 1998 ("the Scheme") made under Section 114 of the Housing
Grants, Construction and Regeneration Act 1996.
[2] During
the course of carrying out works under the contract, the pursuers made a number
of interim applications for payment. The
present dispute concerns Interim Application No. 21, which the pursuers
made on 31 July 2008. In response to that Interim Application, the
defenders' quantity surveyor issued Interim Valuation No. 21, which
valuation was confirmed by the defenders' architect and contract administrator
on 4 August 2008 by
Interim Certificate and Direction No. 21.
The pursuers were dissatisfied with the amount certified and, on 9 September 2008, served a Notice
of Adjudication on the defenders. On 27 October 2008 the Adjudicator
made his decision. He held that the
pursuers (referred to in the adjudication as "the Referring Party") were
entitled to payment from the defenders ("the Respondents") in respect of Interim
Application No. 21 in the sum of г444,744.15 plus VAT. It is agreed that VAT on that sum amounts
to г77,830.23.
[3] In
terms of paragraph 23(2) of Part 1 of the Scheme, the decision of the
adjudicator is binding on the parties, and they are obliged to comply with it,
until the dispute is finally determined by legal proceedings, by arbitration
(if that is an agreed method of resolving disputes) or by agreement. Accordingly, it was incumbent upon the
defenders, if they wished to resist paying the amount determined by the
adjudicator, to take steps to challenge his decision. Equally, it was open to the pursuers, if the
defenders failed to pay the amount determined by the adjudicator, to bring
proceedings for payment. On 30 October 2008 the defenders
lodged a petition for judicial review seeking reduction of the adjudicator's
decision. On the hearing before Lord
Hodge of a motion for interim suspension, a first hearing of the petition was
fixed for 25 November 2008. Almost immediately thereafter, the pursuers
issued a summons in the commercial court seeking payment of the sums awarded by
the adjudicator. Defences were lodged;
and at a preliminary hearing on 21
November 2008 it was agreed that there should be a debate in that
action to come before the court at the same time as the first hearing in the
petition. On 25 November 2008, I heard parties both on the
debate in the commercial action and at the first hearing of the petition. For convenience, the argument took place by
reference to the issues in the commercial action, it being agreed that if I
held in favour of the pursuers in the commercial action, it would follow as a
matter of course that the petition would be dismissed. I shall therefore continue to refer to the
parties as they are referred to in the commercial action, as "pursuers" and
"defenders".
[4] Although
a number of arguments were taken by the defenders in their pleadings, the only
one ultimately pressed was that the adjudicator in his decision had exceeded
his jurisdiction. Paragraph 12 of
the Part 1 of the Scheme requires the adjudicator to decide the matters
referred to him in accordance with the relevant terms of the contract and the applicable
law. Mr Anderson QC, for the
defenders, referred to West v Secretary of State for Scotland 1992 SC 385 at 413 where the First Division identified "a failure to understand the
law" as something which might amount to an excess of jurisdiction for the
purposes of judicial review; but he accepted that, as the law had developed in
Scotland in relation to adjudications, not every error of law on the part of an
adjudicator made his decision ultra vires.
Provided that the adjudicator had asked
himself the right question, his decision was not to be regarded as ultra vires on the ground merely that he
gave the wrong answer: see Gillies Ramsay
Diamond v PJW Enterprises Ltd 2004
SC 430 at paras.[39]-[41] per the Lord Justice-Clerk (Gill). A similar approach has been taken in the
English cases: see C&B Scene Concept
Design Ltd. v Isobars Ltd. [2002]
BLR 93 and Carillion Construction Ltd. v Devonport Royal Dockyard Ltd. [2006] BLR 15 to which I was referred by Mr Smith for the pursuers. The defenders were obliged to submit in this
case, therefore, not just that the adjudicator had erred in law but that he had
effectively ignored the contract and decided the case on the basis of what he
perceived to be just and reasonable.
[5] It
is necessary to summarise the relevant contract terms. Articles 1 and 2 of the Articles of
Agreement provide that the Contractor shall carry out and complete the works
for a sum (the "Contract Sum") of г4,547,963.30 "or such other sum as shall
become payable under this Contract".
Section 4 is headed "Contract Sum and Adjustments" and deals with what
is included in the Contract Sum and in what circumstances the Contract Sum may
be adjusted. Clause 4.1 of Section 4
provides that the quality and quantity of work included in the Contract Sum is
deemed to be that set out in the Contract Bills. I should mention at this stage that included in
the contract documents alongside the Contract Bills, which are in the usual
form, is a schedule (the "Fit Out Budget Costs schedule"), divided between a
"Carcassing Cost Plan" and a "Fit Out Cost Plan", costed respectively at
г679,988.00 and г1,100,120.00. The Fit
Out Budget Costs schedule has figures in a column headed "Cost Plan" against
items such as raised floors, ceilings, ramps, doors, windows, screens, etc.,
without any of the detailed quantities and prices as are shown against other
parts of the work in the Contract Bills and, except in one case, without any
express qualification that the figures are provisional. Clause 4.2 provides that the Contract Sum
shall not be adjusted or altered otherwise than in accordance with the contract
terms. The relevant terms are in Clause
4.3 of Section 4, which sets out in detail how and in what circumstances the Contract
Sum is to be adjusted. It provides for
adjustments in respect of Variations to the works, as well as for other
deductions from and additions to the Contract Sum (for example in respect of
Provisional Sums and Approximate Quantities in the Contract Bills). There is no express reference here to the Fit
Out Budget Costs schedule. Variations are
dealt with in section 5. In clause 5.2
of that Section it is made clear that Variations valued under the contract for
the purpose of adjustments to the Contract Sum require to be instructed by the
Architect or Contract Administrator or subsequently sanctioned by him in
writing. Clause 3.12 of Section 3 states
that such instructions have to be in writing. Clause 3.14.4, as amended, provides that no
addition to the Contract Sum can be claimed by reason of any sanction given by
the Architect or Contract Administrator "unless the Contractor shall have requested
such sanction from the Architect/Contract Administrator in writing within 14
days of the commencement of the relevant work."
[6] Interim
Application No.21 was accompanied by a spreadsheet giving a breakdown of the
sums claimed. This spreadsheet started
with a Main Contract Summary, showing the Contract Sum broken down under
different headings, and then listed additions and omissions resulting from
re-measurement. No difficulties arise
from this. Heading 3 was "Architects
Instructions", divided into "A. Architect's Instructions", "B. Instructions
Confirmed in Site Minutes" and "C. Instructions Confirmed by Architect's
letter/ drawing issue". For present
purposes nothing turns on A and B.
However, amongst the items listed under head C were a number which had
no reference to any letter or drawing.
These were items within the ambit of the Fit Out Budget Costs schedule. The Employer contended that there was no
basis in terms of the contract for the Contractor to claim these sums. The contract was a fixed price contract
subject to the agreed machinery for price adjustment. These claims for additional payment did not
fall within the agreed price adjustment provisions.
[7] In
the Referral Notice, in terms of which the dispute was referred to the adjudicator,
the pursuers claimed payment of a balance of г840,501.87 allegedly owing to
them, as set out in their Interim Application No.21. Their main complaint was that, in arriving at
a valuation in respect of that Interim Application, the respondents had altered
their approach from that adopted in dealing with earlier Interim
Applications. That change of approach,
as I understood it, was that there was now a refusal to certify additional sums
referable to the items and figures set out in the Fit Out Budget Costs Schedule
on the basis that the Contract Sum adjustment mechanism did not give the
pursuers any right to seek payment of such additional sums. The pursuers contended that that schedule
comprised "merely a series of items (each of which could be described as a
trade section of the fit out works) with a sum against each item entered in a
column headed 'Cost Plan'." They said
that after commencement of the works, the defenders issued on an on-going basis
Bills of Quantities relative to those items for pricing by the pursuers. The pursuers priced and returned the Bills of
Quantities as requested. Thereafter,
following any necessary discussion and negotiation, the defenders accepted the
priced Bills of quantities and instructed the pursuers to proceed. All the Interim Applications to date had
included claims for work done on the basis of the prices set out and agreed in
these post-commencement Bills of Quantities and had been valued on the basis
that such work was properly to be included.
The question of personal bar was raised.
The Response by the defenders bore out this analysis of where the
dispute lay. The defenders argued that
the contract was a lump sum fixed price contract and that no change could be
made to the Contract Sum unless the requirements of the contract were met. They said that the pursuers required to demonstrate
"that any adjustment to the Contract Sum is by way of instructed Variation
sanctioned in writing by the Architect/ Contract Administrator or by way of
other mechanisms noted in Clause 4.3."
The valuation had been prepared on this basis. The fact that previous Interim Valuations and
Certificates had included amounts referable to the sums in dispute was no
obstacle to the matter being re-visited at a later stage. Thereafter in the parties' submissions the
dispute focused largely on whether or not the contract was a "lump sum fixed
price" contract as the defenders alleged.
The pursuers in their Reply to the defenders' Response, pointed out that
the Fit Out Budget Costs consisted of a series of allowed sums for items on
which they had no input, and pointed out that Bills of Quantities had been
issued by the defenders for the works referred to after execution of the
contract, and the pursuers had carried out the work on this basis. There was a Response by the defenders taking
the same point that instructions had to be in writing and retrospective
sanction had to comply with clause 3.14.4 as amended.
[8] The
adjudicator held that the pursuers were entitled to payment in respect of
Interim Application No 21 in the sum of г444,744.15 plus VAT and interest. In his Reasons for his decision the
adjudicator dealt with the above point in Section 6, under the heading
"Contract Formation (Lump Sum?). In
short, his reasoning was as follows. The
SBCC form used was a fixed price contract with adjustments only by express
provisions of the contract. Although
clause 4.1 said that the quality and quantity of the work included in the
Contract Sum was deemed to be that set out in the Contract Bills, that was not
in fact the case, since part of the work was set out by way of the Fit Out
Budget Costs schedule which contained, instead of descriptions of quality and
quantities, a brief description of elements of the structure with lump sums set
against each. After the contract was
let, the defenders produced Bills of Quantities for each element of the Fit Out
Budget Costs based on drawings produced as the design developed, and the
pursuers priced those Bills. Those
priced Bills were used for the previous Interim Applications and
Certificates. Against this background,
the adjudicator made the following findings:
"6.7 I consider that the form of contract used
by the parties was not appropriate as the information available at tender stage
was insufficient to produce detailed Contract Bills for all the work required
to be included in the contract and that in order to circumvent the problem with
the lack of information and presumably to enable a quick start on site, the
parties would appear to have substituted the cost plan [viz. the Fit Out Budget
Costs schedule] in lieu of the Contract Bills required by the form of contract.
6.8 In view of the parties differing views on
the matter, it is necessary for me to decide whether both parties, at the stage
of entering into the contract, considered that the [Fit Out Budget Costs
schedule] was to be adjusted only by variation instruction, the [defenders']
position, or by the revised sums derived from the priced bills of quantities
post contract after the design had been finalised, the [pursuers'] position.
6.9 After reviewing the submissions ... and the
statements of the parties and their representatives at the Hearing it is clear
that, at the stage of entering into the contract, the parties were in agreement
with [the pursuers'] position as outlined above. ...
...
6.11 [The defenders] now say that whatever the
parties thought was the contractual position at the time of entering into the
contract is irrelevant and that the clauses in the contract should be strictly
applied. In normal circumstances I would
accept that position but [the defenders'] interpretation of the contract
suggests, in essence, that no matter how varied the quality or quantity of the
[Fit Out Budget Costs schedule], no adjustment of the Contract Sum is possible
because there is little, if any, specification or quantities attached to the
[Fit Out Budget Costs schedule] and that it is not possible to ascertain if the
quality or quantity in the bills of quantities priced post contract differs
from that in the [Fit Out Budget Costs schedule]. I am reluctant to construe the contract in
this way for obvious reasons of reasonableness.
6.12 [The defenders themselves do] not apply the
conditions of contract strictly in that [they have] allowed sums as variations
without a written instruction for additional work identified in minutes of
meetings ... and for additional work identified in letters or on revised
drawings ...
6.13 In view of [the defenders'] acknowledgement
that a revised drawing, in itself, may be a variation instruction, I have taken
the view that the drawings produced post contract, upon which the bills of
quantities were prepared and priced, may be construed as variation
instructions. I acknowledge that these
post contract drawings have not been presented to me in this adjudication but
it is clear that both parties were aware of these drawings by the existence of
the priced bills of quantities on which they are based."
He therefore valued the variations
to the Fit Out Budget Costs schedule in the same manner as other variations in
coming to his decision. He also went on
in para.6.15 to say that he would, if he was wrong in that reasoning, have
applied the principle of personal bar to the circumstances described above and
found for the pursuers (in the amount which he determined) on that basis.
[9] Mr
Anderson submitted that in this reasoning the adjudicator had simply ignored
the contract and decided the issues between the parties on the basis of what he
considered was reasonable. He referred
to the last sentence of para.6.11 in particular: "I am reluctant to construe
the contract in this way for obvious reasons of reasonableness". It was clear from this that he was putting
that above the contract. In the
paragraphs leading up to and including para.6.7, the adjudicator had found that
the contract was, as the defenders contended, a fixed price lump sum contract. He then simply ignored that because it drove
him to a result which he did not consider reasonable. This amounted to an excess of jurisdiction. It was not for the adjudicator to decide
whether the contract was appropriate or not, nor whether the result of applying
the contract terms was reasonable.
[10] I do not accept that this is the correct analysis of the
adjudicator's reasoning. It seems to me
that the adjudicator, in paras.6.1 - 6.11, approaches the question as one of
construction. He does not find that the
contract is a lump sum fixed price contract.
He simply finds that the form used was a form for a lump sum fixed price
contract. He then points out that,
despite the terms of clause 4.1, not all the work was set out in the Contract
Bills. It is in light of these
observations that he says in para.6.7 that the form of contract used was
inappropriate. That does not mean he is
disregarding it. Rather, as he makes
clear in para.6.8, he looks to see whether on a proper construction, the
parties are to be taken to have agreed that the Fit Out Budget Costs schedule
was to be adjusted (a) only by variation instruction or (b) by the revised sums
derived from the priced bills of quantities post contract after the design had
been finalised. The former was the
defenders' position, the latter was that of the pursuers. Having heard parties' submissions and oral
statements, he answered this question in favour of the pursuers: para.6.9. That is where he reaches his decision. In para.6.11 he explains further why he
rejects the defenders' contentions on this point. He says, in effect, that the defenders' are
adopting an over-literal construction which produces a wholly uncommercial
result. I am conscious that I am
paraphrasing what he says, but this seems to me to convey the essence of his
reasoning. He would be reluctant to
construe the contract in a way that produces so unreasonable a result. That is a perfectly legitimate consideration
to take into account in considering the proper construction of the contract:
see L. Schuler A.G. v Wickman Machine Tool Sales Ltd. [1974] AC 235 at 251. I do not consider that
his remarks about "reasonableness" at the end of para.6.11 can properly be
understood as showing that he was disregarding the terms of the contract. Whether or not the adjudicator gave the right
answer, and I should not be taken as even hinting at any disagreement with it,
he clearly asked the right question, namely what was the proper construction of
the contract, and answered it. He did
not seek to replace the contract terms with his own notions of what was
reasonable. I therefore reject this
challenge to the adjudicator's decision.
[11] Had I not rejected the defenders' argument on this point, I
would still have had to decide whether to grant decree for the amount awarded
or reduce the decision. In para.6.15 the
adjudicator indicates that he would, in any event, have upheld the pursuers'
argument on personal bar. That is, so it
seems to me, an alternative ground of decision.
It was one to which he was entitled to come. For that reason, I would in any event have
rejected the challenge to the decision and found in favour of the pursuers.
[12] I should add that Mr Anderson also pointed out that, in so far
as in para.6.13 of his reasons the adjudicator relied on the drawings (which
were not before him, but were admitted to exist) as constituting written
instructions, he went beyond the arguments raised by the pursuers at the
adjudication. Mr Smith accepted that
this was correct. It does not seem to me
that this affects my conclusions on the issue argued before me. Mr Anderson rightly did not raise this as a
discrete point justifying reduction of the decision, and I consider that it
does not contaminate any other aspect of the adjudicator's reasoning. Indeed, it proceeds on the premise, contrary
to his conclusions on construction, that a written instruction was required
before the additional sums could be allowed.
[13] The consequence of my decision is that I would propose to grant
decree in favour of the pursuers in the commercial action in the sums claimed
in the first and second conclusions; and to refuse the prayer of the petition
for reduction of the decision. However, in
accordance with the agreement of the parties, I shall put both cases out By
Order before pronouncing any such decrees.
