Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 77
CA7/10	OPINION OF LORD MENZIES in the cause RBG LIMITED Pursuer; against SGL CARBON FIBERS LIMITED Defender: ­­­­­­­­­­­­­­­­­________________

Pursuer: M Hamilton; Maclay Murray and Spens LLP

Defender: Howie QC; MacRoberts LLP

22 June 2010

Introduction

[1] In 2008 the parties entered into a contract whereby the pursuer agreed to carry out certain works within the defender's premises. The contract was in the form of an NEC 3 Engineering and Construction Contract June 2005 Option C as amended, incorporating the Contract Data and Form of Tender and the Works Information. It included Option W2 which entitled either party to refer a dispute to an adjudicator at any time. A dispute over the pursuer's entitlement to a change in the Completion Date and to be paid sums set out in certain invoices together with interest thereon arose, and by Notice of Adjudication dated 19 November 2009 the pursuer gave the defender notice of its intention to refer this dispute to adjudication. An adjudicator was appointed, and by referral notice dated 25 November 2009 the pursuer referred the dispute to him. On 18 January 2010 the adjudicator notified the parties of his decision on this dispute (subject to a correction made on 29 January 2010, which is not relevant to the present proceedings). The contract provided that the decision of the adjudicator is binding on the parties unless revised by an arbitral tribunal, and is enforceable as a matter of contractual obligation. The adjudicator found that the Completion Date should be altered and that the defender should pay to the pursuer certain sums together with interest. The defender has declined to pay these sums, and the pursuer has accordingly raised the present action for payment of these sums.

[2] The matter came before me for debate. Senior counsel for the defender invited me to sustain the defender's first plea-in-law, being a general plea to the relevancy, and to dismiss the action. He also invited me to set aside the decision of the adjudicator ope exceptionis, either on the ground that the adjudicator had failed to exhaust his jurisdiction, or on the ground that he had acted in breach of natural justice, and to sustain the defender's fifth plea-in-law which failing its fourth plea-in-law. Counsel for the pursuer invited me to repel the defender's pleas-in-law, to sustain the pursuer's first plea-in-law and to grant decree de plano.

Submissions for the defender

[3] Senior counsel's primary submission was that the adjudicator had failed to exhaust the jurisdiction conferred on him by the Notice of Adjudication; he had failed to consider all the evidence, and had misconstrued the extent of the dispute between the parties and so unjustifiably restricted the material which he considered. Alternatively, he was in breach of the principle of natural justice that required him to hear both parties.

[4] The adjudicator was bound to decide all issues referred to him: he must exhaust the reference. If he failed to do so, his decision was as void as it would be if he had exceeded his jurisdiction. Moreover, the adjudicator could not determine with binding effect the extent of his own jurisdiction: the limits of his jurisdiction were determined by the Notice of Adjudication and could not be narrowed or extended by the adjudicator's misconstruing those limits - the determination of his jurisdiction was ultimately a matter for the court (Ballast Plc v The Burrell Co (Construction Management) Limited, 2001 SLT 1039 at paragraphs 39-42, and before the Inner House at 2003 SC 279 at paragraphs 17-20).

[5] The extent of the adjudicator's jurisdiction is to be found in Parts 3 "the dispute" and 4 "redress sought" in the Notice of Adjudication (number 6/6 of process). Clause 3.3 and following clauses set out five invoices which were the subject of applications by the pursuer for payment by the defender, together with dates on which payments were due, and interest provisions. In clause 3.11 the pursuer accepted that certain credits were due to the defender, which fell to be deducted from the payments sought in the adjudication. Clause 3.12 focused the dispute as follows:

"A dispute has accordingly arisen between the parties regarding the Referring Party's entitlement to a change in the Completion Date to 16 January 2009 and to be paid the sums set out in Invoices 1 to 5 (under deduction of the credits mentioned above), with interest."

[6] The adjudicator's jurisdiction was therefore to determine, in respect of each of the five invoices, what sum of money, if any, the pursuer was entitled to be paid under the contract. (The point about a change in the Completion Date is not relevant to the present proceedings). This required the adjudicator to consider each invoice individually and consecutively; he had to consider all arguments for the pursuer that the whole amount was payable, but he also had to consider the arguments for the defender - Construction Centre Group Limited v Highland Council 2002 SLT 1274 at paragraph [19]. The adjudicator was therefore bound to consider the argument advanced by the defender that there had been overpayment to the extent that even if the work charged for in these invoices had been carried out and the sums in respect thereof were accurately stated, no further payment was due. It does not appear that the adjudicator did this. He appears to have decided that this was beyond his jurisdiction. He misconstrued the extent of his jurisdiction.

[7] The contractual mechanism for assessing the amount due at each assessment date, and for payment thereof, is set out in clauses 50 and 51 of the NEC 3 Option C Contract. The amount due is stated to be the Price for Work Done to Date, ("PWDD") plus other amounts to be paid to the Contractor, less amounts to be paid by or retained from the Contractor. Clause 11.2 (29) defines the PWDD as "the total Defined Cost which the Project Manager forecasts will have been paid by the Contractor before the next assessment date plus the Fee." Clause 11.2 (23) and (25) give the definitions of Defined Cost and Disallowed Cost as follows:

"(23) Defined Cost is

the amount of payments due to Subcontractors for work which is subcontracted without taking account of amounts deducted for

·       retention,

·       payment to the Employer as a result of the Subcontractor failing to meet a Key Date,

·       the correction of the Defects after Completion,

·       payments to Others and

·       the supply of equipment, supplies and services included in the charge for overhead cost within the Working Areas in this contract and

·       the cost of components in the Schedule of Cost Components for other work

less Disallowed Cost.

(25) Disallowed Cost is cost which the Project Manager decides

·       is not justified by the Contractor's accounts and records,

·       should not have been paid to a Subcontractor or supplier in accordance with his contract,

·       was incurred only because the Contractor did not

·       follow an acceptance or procurement procedure stated in the Works Information or

·       give an early warning which this contract required him to give

and the cost of

·       correcting Defects after Completion,

·       correcting Defects caused by the Contractor not complying with a constraint on how he is to Provide the Works stated in the Works Information,

·       Plant and Materials not used to Provide the Works (after allowing for reasonable wastage) unless resulting from a change to the Works Information,

·       resources not used to Provide the Works (after allowing for reasonable availability and utilisation) or not taken away from the Working Areas when the Project Manager requested and

·       preparation for and conduct of an adjudication or proceedings of the tribunal"

[8] The assessment of what requires to be paid to the contractor at each assessment date therefore involves an exercise in calculating an accumulating total. Assessing the PWDD requires consideration of Defined Cost less Disallowed Cost. The amount is accumulating and the contract provides for correction of mistakes by the project manager. In determining the dispute referred to him, the adjudicator required to consider the accumulating balance, and decide whether the PWDD was correctly stated in the relevant invoices. In terms of clause W2.3(4) he was entitled to review and revise any action or inaction of the project manager related to the dispute. He was therefore obliged to consider whether the project manager had made any errors when calculating the PWDD, and to revise or correct these errors. The position of the defender before the adjudicator was that the pursuer had already been paid too much, and there was an error in the accumulating value of the contract. This alleged overpayment was something which the adjudicator was obliged to consider when reaching his decision.

[9] It does not appear that the adjudicator did consider this argument about earlier overpayment. He confined his consideration to the sums sought in the invoices, but did not have regard to disallowed costs or overpayments (or at least most overpayments) at an earlier stage of the works. He appears to have adopted this position because he believed that it was beyond his jurisdiction to look to earlier overpayments, and that this would require to be determined in another procedure. In paragraph 3.12 of his decision letter (number 6/3 of process) he stated that he did not accept the assertion for the pursuer that having agreed PWDD, the agreement is final and PWDD may not be revisited. However, at paragraph 3.14, in relation to a file regarding disallowed costs, the adjudicator states:

"I have taken account of the content of this file in respect of the invoices forming the matters in dispute, but have not taken account of its content in relation to earlier invoices except in connection with labour charges. Its other content relating to earlier invoices will have to be progressed outside this adjudication."

[10] Senior counsel observed that it was difficult to understand what distinguished labour charges from other costs, and why the adjudicator should feel able to have regard to earlier labour charges but not to other earlier overpayments. This, however, was not directly to the point - the passage quoted was resonant of declinature to entertain the arguments and evidence put before the adjudicator by the defender in relation to earlier overpayments. It was clear from the last sentence of paragraph 3.12 of his decision that the adjudicator was not prepared to look behind the figure of £9,692,261 identified as the PWDD as at 31 December 2008 (which figure appears in the pursuer's invoice dated 9 February 2009 (number 6/15 of process). The adjudicator took this as his starting point and was not prepared to look behind it, although he observed (in the first sentence of paragraph 3.13) that "it may be that, outside this adjudication, SGL will be able to demonstrate that the above amount of £9,692,261 contains overpayment." The adjudicator appears to have proceeded on a misconstruction of his jurisdiction. The dispute which was referred to him required him to reach a decision on the argument of previous overpayment, but he has decided that he cannot (or will not) do so.

[11] It was nonetheless curious that, having taken this view as to his jurisdiction, the adjudicator proceeded to look behind the figure for PWDD at December 2008 in respect of certain items, having decided that he had no jurisdiction to do so. At paragraph 3.50 he proceeds to do precisely what he indicated earlier that he could not do, and identified overpayments in respect of site labour and welding equipment in the previous figure for PWDD, for which he makes adjustment in the following paragraphs. Senior counsel submitted that it was not open to the adjudicator to make adjustments for certain overpayments and not consider the arguments and evidence in relation to other overpayments. It was not clear from the adjudicator's reasoning whether he took the position that he could not look at earlier overpayments (in which case he had misconstrued his jurisdiction, and his position could not be reconciled with his having taken account of earlier overpayments for site labour and welding equipment) or that he would not look at these earlier overpayments (in which case he had acted in contravention of the principles of natural justice by refusing to have regard to arguments and evidence from one of the parties). The content of paragraph 3.71 of his reasons does not shed much light on this question. He states there:

"I am unable to carry out a detailed examination of all materials, invoices and payments throughout the duration of the contract and will not estimate what that might be. I say this because to do so and include it in my decision would severely limit the Parties' ability to carry out the same exercise in establishing the final Price for Work Done to Date outside this adjudication."

However, the way in which he approached the areas of dispute in other paragraphs (notably 3.75, 3.76, 3.80 and 3.85) is perhaps consistent with the view that he considered (wrongly) that these matters were outwith his jurisdiction.

[12] For these reasons senior counsel moved me to sustain the first plea-in-law for the defender and dismiss the action. He moved me to set aside the adjudicator's decision ope exceptionis on the ground that he had failed to exhaust his jurisdiction, and sustain the defender's fifth plea-in-law, on the basis it was to be assumed that the adjudicator had proceeded on a misunderstanding of his jurisdiction, not a wilful refusal to consider the arguments and evidence advanced on behalf of the defender. However, if I were to take the view that the adjudicator was aware of the proper extent of his jurisdiction but had wilfully refused to consider the arguments and evidence of the defender, senior counsel moved me to sustain his fourth plea-in-law on the ground of breach of natural justice.

Submissions for the pursuer

[13] Counsel for the pursuer submitted as a general proposition that the court should only interfere with an adjudicator's decision in the rarest of circumstances, where it was plain that the question which the adjudicator had decided was not the question referred to him, or the manner in which he has gone about his task was obviously unfair - Carillion Construction Limited v Devonport Royal Dockyard Limited [2005] EWCA Civ 1358, [2006] BLR 15, at paragraph 35. As long as the adjudicator has answered the correct question, his decision cannot be challenged on the ground that he has answered it incorrectly - Gillies Ramsay Diamond v PJW Enterprises Limited 2004 SC 430 at paragraphs [40] - [42].

[14] In the present case, the parties had agreed to vary the payment procedure set out in the NEC Option C Contract, as explained at paragraph 3.4 of the Notice of Adjudication. Instead of assessment and certification by the Project Manager, the parties agreed that at the end of each month the pursuer's application for payment would be discussed with the defender's quantity surveyor; once a figure was agreed, the pursuer would send an invoice to the defender, which would then be paid. The sum paid to date, and the PWDD, were matters of agreement between the parties. This was part of the argument advanced on behalf of the pursuer at the adjudication. The adjudicator was not being asked to consider previous overpayments; he was being asked to consider the five invoices in question. Although the defender did argue that he should consider earlier alleged overpayments, he reached a view on this argument. Whether his view was right or wrong is immaterial - only if he clearly failed to answer the question put to him would the court be entitled to interfere in his decision.

[15] The defender argued in the adjudication (under reference to the clause 50 mechanism) that the amount due for payment was a cumulative amount to date, which meant that it was not enough for the adjudicator to consider only the information submitted in support of these five invoices, but rather that he had to look at the cumulative value and so had to look to information relating to previous invoices. The defender's position was that the contract terms had not formally been varied, and what had been done between the parties' quantity surveyors was merely an ad hoc arrangement which had no contractual effect. The adjudicator looked only at the five invoices, and regarded evidence about previous overpayments as irrelevant. If that was an error, it was an intra vires error which could not be corrected by this court.

[16] Looking to the adjudicator's decision, it was clear from paragraph 3.2 that he had considered all the material and submissions in coming to his decision, and he had proceeded on the basis of the changes agreed by the parties regarding agreement of sums due. He had taken as his starting point the PWDD amounting to £9,692,261 (as stated in the last sentence of paragraph 3.12); by using this as his starting point he clearly had regard to how payment had been dealt with in practice. This was a view which he was entitled to take in light of the parties' submissions to him.

[17] Properly viewed, this was not a question relating to the adjudicator's jurisdiction. In order to decide whether payment was or was not due in terms of these invoices he had to take a view as to how the payment mechanism of the contract operated. His decision to reject the defender's evidence regarding earlier overpayment was made once he had decided how the payment mechanism operated in fact. If he made any error, it was within his jurisdiction to do so and could not be overturned. He began his substantive assessment of the amounts claimed in invoice 3 at paragraph 3.25 of his decision. Inevitably he only dealt with disallowed costs where there was an amount to pay; if he was to consider disallowed costs on previous invoices, he would have required to have seen those invoices and a summary of disallowed costs, which were not before him. In paragraph 3.50 he identified an error in principle as to how payments in relation to site labour and welding equipment had been assessed in the past, and he made reductions to reflect this; there was therefore a logical basis for his approach. I was referred to the five propositions put forward by Jackson J in Carillion Construction v Devonport Royal Dockyard, which were quoted with approval by the Court of Appeal in that case (at paragraphs 53 and 84). In the present case, the adjudicator's analysis of the facts and law was carried out in the exercise of his jurisdiction, so it cannot have any effect on the validity of his decision.

[18] Turning to the alternative submission for the defender based on a breach of the principles of natural justice, counsel submitted that it was clear from his decision that the adjudicator had considered all of the submissions for the defender, but had rejected part of these as irrelevant. He stated that he had considered all the materials and submissions in coming to his decision, and the presumption must be that he has done what he has said he has done. It was apparent from paragraph 3.14 of his decision that he had taken account of all the relevant material, but had not allowed or accepted it all. Some matters he rejected as irrelevant. He was entitled to do this. In any event, esto the adjudicator acted in breach of natural justice, any such breach was not material in the context of his decision as a whole. Even if a breach of the principles of natural justice occurred, it must be substantial and relevant; if it is not relevant to the decision reached by the adjudicator, it must be ignored - Costain Limited v Strathclyde Builders Limited 2004 SLT 102, at paragraph [28].

[19] For these reasons counsel for the pursuer moved me to grant summary decree in terms of the conclusions of the summons, or alternatively to repel the defender's plea-in-law, to sustain the first plea-in-law for the pursuer and to grant decree de plano.

Reply for the defender

[20] Either the adjudicator decided that he was not entitled to look at evidence of earlier overpayments, or he decided that he was entitled to look at this evidence but only have regard to some of it. He indicated at paragraph 3.14 of his decision that there were some matters of which he was not going to take any account, but he did not accept the assertion made on behalf of the pursuer that any agreement between the parties' quantity surveyors as to PWDD was final and PWDD may not be revisited. Indeed, he did revisit it, by make reductions for site labour and welding equipment. If the figure of £9,692,261 was sacrosanct, he would not have been able to do this. The argument that what the adjudicator was doing was merely an interpretation of the contract is inconsistent with the terms of paragraph 3.12 of his decision.

[21] The Carillion case was considering the situation in which there was no dispute about jurisdiction but there was an argument about breach of natural justice where an adjudicator has not had regard to a body of evidence. However, where jurisdiction was concerned, an adjudicator has no right to be wrong. If the adjudicator in this case was correct about the extent of his jurisdiction, it is inexplicable that he felt able to have regard to some past overpayments and to make reductions to reflect these, but he declined to look at other possible overpayments and reductions. Senior counsel opposed the motion for summary decree and renewed his motion.

Discussion

[22] It should be noted at the outset that there is a clear distinction between the way in which the courts will deal with a challenge to an intra vires error by an adjudicator on the substantive points referred to him, and the way in which the courts will deal with a challenge to the effect that his decision is a nullity on the ground that the adjudicator has acted ultra vires - for example, by acting in breach of natural justice, or in excess of jurisdiction, or in failure to exercise jurisdiction. In the former category the courts have repeatedly stated that they will not intervene in an intra vires error of law. That position is clearly and authoritatively stated in Gillies Ramsay Diamond at paragraphs [40] - [42]. That falls to be contrasted with the latter category, where it is argued that an adjudicator's decision is a nullity. In such a case, it is for the court to consider issues such as jurisdiction and natural justice, and to decide whether the decision of the adjudicator is vitiated as a result. This is clearly stated in Ballast Plc v The Burrell Company, by Lord Reed in the Outer House at paragraphs [39] - [40] and by the Inner House at paragraphs [17] - [20].

[23] The observations of the Inner House at paragraph [19] of their Opinion in Ballast are particularly relevant to the present dispute, and I repeat them here in part:

"It is important to recognise that the powers of the adjudicator, if categorised as a question of jurisdiction, are focused by the dispute set out in the Notice of Adjudication...but those claims, in our opinion, are essentially for valuation in respect of work done. However, the validity of the claims made may well depend upon the terms of the contract or at least the basis upon which they are contractually asserted. As regards jurisdiction, accordingly, it is our opinion that the adjudicator, while restricted to issues focused in the dispute, has nevertheless both the power and duty to determine whether or not a claim that is put forward in respect of valuation of work done is validly asserted under the contract. He must answer that question either in the affirmative or the negative. He cannot decline to address it, which is what the adjudicator in fact did in this case. He appears to have proceeded upon the basis that because it was asserted that some claims or some parts of the claim were not necessarily based on the contractual written terms, that went beyond his jurisdiction. In our opinion his power is based on the notice of dispute which identified the question which the adjudicator had to address."

[24] In the present case the question which the adjudicator had to address is focused in paragraph 3.12 of the Notice of Adjudication. This raises the question of the pursuer's entitlement to be paid the sums set out in invoices one to five (under deduction of the credits mentioned above), with interest. The contractual mechanism which regulates the assessment of entitlement to be paid these sums is based on an accumulating PWDD. It was argued for the pursuer before the adjudicator that once agreed between the parties' quantity surveyors, PWDD assessed at any particular moment was fixed and could not be revisited. The adjudicator rejected this argument, for understandable reasons: given that entitlement to be paid in terms of these invoices is based on an accumulating total, and given the provision in the contractual mechanisms for subsequent correction of errors (which provision extends to the adjudicator himself by reason of clause W2.3(4)) it is difficult to see how he could have reached another conclusion. However, the consequence of that conclusion is that in order to answer the dispute focussed in Clause 3.12 of the Notice of Adjudication the adjudicator required to revisit PWDD and considers whether it contained any elements of overpayment. This was necessary because the pursuer's entitlement to payment under these invoices depended on the accumulating total which was PWDD being accurately stated. The contractual mechanism provided that this was not to be fixed but was subject to review and correction, and that this could be carried out by the adjudicator himself.

[25] The response by the defender to the pursuer's claim for payment under these invoices is that, whether or not the invoices themselves are correctly vouched, no payment is due because of earlier overpayment. Even if this was not a matter encompassed within the dispute as defined in paragraph 3.12 of the Notice of Adjudication, I consider that this falls within the scope of the adjudication and the adjudicator was bound to consider evidence and submissions about it. I agree with the observations of Lord Macfadyen in Construction Centre Group Limited v Highland Council at paragraph [19]:

"...that the scope of an adjudication is defined by the Notice of Adjudication, but I also agree that any ground that may be founded on by the responding party to justify his position also falls within the scope of the adjudication.....if the notice raises the issue whether a particular sum is due by the employer to the contractor, it seems to me to be axiomatic that the adjudicator must entertain any relevant defence on which the responding party wishes to rely in arguing that that sum is not due."

[26] For the reasons which I have given above, I consider that the question of whether the PWDD on which these invoices were based was over stated because of earlier overpayments is indeed a question that falls within the scope of the adjudication as defined in the Notice of Adjudication. However, even if it did not, on the basis of Lord Macfadyen's views quoted above, with which I agree entirely, the question of earlier overpayment was clearly a relevant defence relied on by the responding party, and it required to be entertained by the adjudicator.

[27] I do not find it easy to understand the position adopted by the adjudicator on this point. He did not accept the pursuer's assertion that an agreement as to PWDD was final and may not be revisited, but he goes on to state that, for the purposes of this adjudication, he took the PWDD amounting to £9,692,261 as the starting point of his calculations. He goes on to state in the following paragraph that it may be, outside this adjudication, that the defender will be able to demonstrate that this amount contains overpayment, but he declines to consider overpayment (subject to two exceptions). The reason that he does so appears to be that he considers that it would be beyond his powers to do so. He observes in relation to the file of disallowed costs at paragraph 3.14 that "its other content relating to earlier invoices will have to be progressed outside this adjudication." And at paragraph 3.71 he observes that:

"I am unable to carry out a detailed examination of all materials, invoices and payments throughout the duration of the contract and will not estimate what that might be. I say this because to do so and include it in my decision would severely limit the parties' ability to carry out the same exercise in establishing the final Price for Work Done to Date outside this adjudication."

The adjudicator therefore appears to decline to have regard to evidence regarding alleged earlier overpayments because he did not regard it as being within the scope of his adjudication, but rather envisaged that it would be revisited in another adjudication or similar procedure. If that was his view, it is difficult to understand how he felt able to make reductions in his starting point PWDD to reflect what he found to be overpayments in respect of site labour and welding equipment resulting in an overpayment of PWDD.

[28] I accept what was submitted on behalf of the pursuer, on the basis of Carillion Construction, that it is only in the plainest of cases that the court should interfere with an adjudicator's decision. However, I regard the present case as falling within that minority in which an adjudicator's decision is vitiated and is a nullity. The adjudicator had power to, and was bound to, consider the evidence and submissions of the defender relating to alleged earlier overpayment. He could not properly answer the question put to him regarding the pursuer's entitlement to be paid in terms of these invoices unless he did so. I find it difficult to reach a view as to the cause of his failure, which could be either a misunderstanding of the extent of his jurisdiction, or a breach of natural justice. The fact that he did have regard to earlier overpayments in respect of site labour and welding equipment might be thought to suggest that he understood that his jurisdiction empowered and obliged him to consider earlier overpayments; however, it may be simply indicative of an element of confused thinking. On balance I am prepared to apply the presumption in favour of propriety, and hold that this was a failure to exhaust his jurisdiction as a result of a misconstruction of his remit, rather than a breach of natural justice.

[29] As I was addressed on the point, I should observe that if I had found this was a breach of natural justice, I should have regarded it as both substantial and relevant. I agree with the observations of Lord Drummond Young in Costain Limited v Strathclyde Builders Limited at paragraph [28], but the circumstances of the present case are far removed from those of Black v John Williams & Co (Wishaw) Limited 1923 SC 510. If there was a breach of natural justice in the present adjudication, I do not consider that it could properly be regarded as de minimis; moreover, it would amount to the denial of a fair opportunity to the defender to present its case. If I had required to consider this case as a breach of natural justice, I should have held that the requirements for such a breach were made out. However, I prefer to proceed on the basis that this was a failure to exhaust jurisdiction because of the adjudicator's misunderstanding of his true jurisdiction.

[30] I shall therefore sustain the first and fifth pleas-in-law for the defender, repel the pleas-in-law for the pursuer, refuse the pursuer's motion for summary decree and dismiss the action.