Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2013] CSOH 54
CA43/12	OPINION OF LORD MALCOLM in the cause WHYTE AND MACKAY LTD Pursuers; against BLYTH & BLYTH CONSULTING ENGINEERS LTD Defenders: ________________

Pursuers: Reid QC, Broome; McClure Naismith LLP

Defenders: J Wolffe QC, Balfour; Simpson & Marwick

9 April 2013

[1] The pursuers have raised an action on the commercial roll seeking to enforce an adjudicator's decision which requires the defenders to pay almost £3 million to the pursuers. The defenders are consulting engineers. In 2004 they designed the structure of a new bottling plant at the pursuers' Grangemouth premises. The pursuers state that the foundations are defective, thereby causing a high degree of settlement, with consequential damage to the building and associated offices.

[2] A claim in damages was intimated in early 2011, several years after the completion of the contract. The agreement between the parties contained a provision for the determination of disputes by adjudication. (In the absence of that, a similar provision would have been implied under and in terms of the Housing Grants, Construction and Regeneration Act 1996). On 2 March 2012 the pursuers referred the dispute to an adjudicator appointed by the Chartered Institute of Arbitrators. On 9 April 2012, after a site inspection and a hearing on factual and legal issues, he issued his decision, the sum awarded to be paid "forthwith". In the defences to the present action, it is submitted that the court should not enforce the decision. It is said that the adjudicator failed to give adequate reasons for the determination, and in any event, to enforce it would be incompatible with the defenders' rights under the European Convention on Human Rights and Fundamental Freedoms.

[3] The defenders have lodged a counterclaim seeking a declarator that the pursuers have not sustained any loss or damage as a result of any breach of contract on the part of the defenders. They are of the view that, if the award stands and is enforced, they require to take the lead in having the merits of the dispute finally resolved. There is a concern that, if and when the pursuers receive payment of almost £3 million, they might demonstrate little enthusiasm for proceeding to the next stage. In due course the counterclaim was answered by the pursuers and a debate assigned in the principal action.

[4] In an appendix to this opinion, I have narrated the procedure before the adjudicator; the pursuers' claim; the issues between the parties; the submissions made to the adjudicator; and the adjudicator's decision and reasoning.

The submissions for the defenders at the debate

[5] Mr Wolffe QC summarised the background to the case as follows. The work was completed in January 2006. Settlement was observed in about 2009, and a claim intimated in January 2011. The adjudication began in February 2012, albeit an earlier adjudication raised in November 2011 was aborted. It was stressed that, on the adjudicator's findings, the pursuer will not be out of pocket for some 20 years. In his summary calculation of the award, the adjudicator found that £894,674 was the cost saving enjoyed by the pursuer in not incurring the additional piling work etc. As at today's date, and for many years to come, that cost saving means that, notwithstanding any remedial works, the pursuers will suffer no loss. Furthermore, the major head of claim, amounting to £1,885,227, will not be incurred until 2035/6. The two final heads allowed on page 5 of the award, namely for reinstatement and for loss of use, come close to the total amount allowed by the adjudicator, showing that the cost savings can be set against almost all of the works to be done prior to the final year of the lease. Even to take the most pessimistic view regarding the progress of litigation, this matter could be resolved through the courts to a conclusion long before the pursuer is out of pocket.

[6] Mr Wolffe suggested that to enforce this award would be a disproportionate interference with the defenders' right to their possessions. This is not the kind of dispute that construction adjudication was designed to address. It is in this context that the court requires to decide whether it is prepared to enforce the adjudicator's award. Adjudication is supposed to be an interim remedy based on a rough and ready process. A court decree is warrant for diligence against the defenders' assets. In the present circumstances the defenders have had to take the initiative by raising the merits of the dispute for consideration by the court. They run the risk of the pursuers becoming insolvent or, for some other reason, being unable to repay the award at the conclusion of the whole process. It would be a remarkable coincidence if, at the end of the day, the adjudicator's decision is correct in every respect. On the contrary, it is bound to be wrong. The court should not "rubber stamp" the award. Only a court decree can be described as reflecting "the true state of affairs", in the sense of a proper application of the law to the facts of the case. If one thinks of an adjudication as a provisional interim remedy, there are analogies to be drawn with diligence on the dependence of a court action, in which questions of proportionality and justification will predominate.

[7] Mr Wolffe made reference to the relevant statutory framework, including sections 104 and 108 of the 1996 Act, and to the judgment of Dyson LJ in Connex South Eastern Limited v MJ Building Services Group PLC [2005] 1 WLR 3323. Counsel accepted that the Act allows a party to a construction contract to require a dispute to be referred to adjudication "at any time" - even long after the completion of the work. Despite the underlying purposes and benefits of adjudication, Parliament chose not to limit the compulsory process to disputes arising during the progress of the construction works. However, none of this prevents the court from holding that Convention rights prevent enforcement by the court of an adjudicator's award. Reference was made to section 6 of the Human Rights Act 1998. Given the compulsory nature of the statutory scheme, no issue of waiver arises. The tight timescales for an adjudication create an obvious risk of injustice. Reference was made to the cases of Ritchie Brothers v David Philip (Commercials) Ltd 2005 1 SC 384 at paragraphs 27/8, Diamond v PJW Enterprises Ltd 2004 SC 430 at paragraphs 36 and 43, and Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2006] BLR 15 at paragraphs 84/8. Reliance was also placed upon Lord Hodge's decision in Integrated Building Services Engineering Consultants Ltd v Pihl UK Ltd [2010] BLR 622.

[8] Turning to the challenge based upon the terms of the decision itself, the submission was that the adjudicator did not address the contention that it was for the pursuers to prove that they would have carried out the piling works, had they been specified by the defenders. The adjudicator had simply failed to apply his mind to this line of defence, which could provide an answer to the whole claim. In addition, there was no indication that he had considered the submission concerning a discount for the immediate payment of damages in respect of sums to be incurred by the pursuers many years in the future. Counsel also observed that the adjudicator had adopted an odd approach to the question of deducting the extra cost of the project, had piling been both specified and constructed. Mr Wolffe relied upon Carillion Construction, (paragraph 85); Pihl UK Ltd v Ramboll [2012] CSPH 139, (paragraphs 23/4); Ballast plc v Burrell Co (Construction Management) Ltd 2003 SC 279 (paragraphs 19/20); and Carillion Utility Services Ltd v SP Power Systems Ltd [2012] SLT 119, (paragraph 26).

[9] Mr Wolffe then turned to his submission based upon article 1 of the first protocol to the Convention (A1P1). He stressed that this would have been presented even had the adjudicator's reasoning been flawless. The relevant law is set out in Lord Reed's judgment in AXA General Insurance Ltd v The Lord Advocate 2012 SC (UKSC) 122, especially at paragraphs 107/8 and 114. The question comes to be whether the interference with the defenders' possessions involved in enforcing the award is justified, is in accordance with the law, and is a proportionate act in pursuit of a legitimate aim. An exercise by the court of its powers prima facie engages A1P1. The adjudication requirements for construction contracts are compulsory, notwithstanding the inability of an adjudicator to identify the true legal rights and obligations of the parties.

[10] In the present case enforcement of the award would not promote any of the legitimate aims and purposes which underpin the 1996 Act. There is no issue of ensuring cash flow during the progress of the works. There is no need for an interim or provisional award. The whole matter could be litigated to a conclusion many years before the pursuers sustain any loss in terms of remedial works, both interim and final. This is a very unusual aspect of the present case. It provides a clear point of distinction from the circumstances in Diamond.

[11] Even if a legitimate aim can be identified, an unfair burden would be placed upon the defenders if the award were to be enforced. Enforcement would be a disproportionate act. The defenders would have no security for repayment after final determination of the matter. Reference was made to the case of Aston Cantlaw and Wilmcote Parochial Church Council v Wallbank [2004] 1 AC 546 (paragraphs 71/2, 91 and 133/4). Mr Wolffe did not attack the legality of the legislation itself, given the court's ability to refuse enforcement and thereby prevent a breach of Convention rights. In the particular circumstances of the present case, there is no proper justification for enforcement. The adjudicator's award does not identify the parties' true legal rights and obligations. There is no other satisfactory public interest justification for enforcement.

[12] Turning to his submissions under article 6(1) of the Convention, Mr Wolffe submitted that, although the decision of the adjudicator in the present case is a provisional decision, article 6 is engaged. This submission was made under reference to the Grand Chamber decision in Micaleff v Malta (2010) 50 EHRR 57, paragraphs 74-89. If the decision is enforced, it will require the immediate payment by the defenders to the pursuers of a substantial sum of money. Payment would be immediately enforceable by diligence. If the pursuers were to become insolvent, the defenders' position may well have been irreversibly prejudiced. Mr Wolffe recognised that, at least prior to Micaleff, the general approach was that article 6 did not apply to provisional or interim decisions - see, for example, Elanay Contracts Ltd v The Vestry [2001] BLR 33. However in the light of the decision in Micaleff, this line of authority can no longer be regarded as sound.

[13] According to Mr Wolffe there is no question of waiver by the defenders of their rights under article 6, given that, in the absence of the parties' contractual agreement to an adjudication procedure, such would have been implied by virtue of the 1996 Act. Reference was made to Ballast plc v The Burrell Co (Construction Management) Ltd 2001 SLT 1039, per Lord Reed at paragraph 28 (on appeal 2003 SC 279). It was submitted that the proceedings before the adjudicator did not amount to a "fair and public hearing... by an independent and impartial tribunal established by law." The adjudicator did not enjoy institutional safeguards, such as security of tenure, and thus cannot be regarded as independent and impartial in Convention terms. The hearing before him was not public, nor was judgment pronounced publicly. Adjudication subordinates obtaining the correct outcome for a quick result. It is capable of working substantial injustice, particularly given the risk of the pursuers' subsequent insolvency.

[14] Mr Wolffe recognised that the matter is now before a Convention compliant court, but, unless the court investigates the merits, it will not be exercising the necessary "full jurisdiction": cf Albert v Belgium
[1983] 5 EHRR 533 at paragraph 29. This is not the kind of case where a limited judicial review type jurisdiction will suffice. Reference was made to various decided cases in support of this proposition. In short, to act compatibly with article 6, the court would be obliged to investigate and determine the key issues of fact and law required to resolve the civil rights and obligations at stake. Reference was made to Tsfayo v The United Kingdom (2009) 48 EHRR 18 at paragraphs 46/8.

[15] Acknowledging that in Micaleff the Grand Chamber recognised that in exceptional cases it may not be possible to comply immediately with all the requirements of article 6 (paragraph 86) Mr Wolffe submitted that the present is not an exceptional case. The works were long ago completed. This is a claim for damages for professional negligence when the employer is not currently out of pocket, and will not be for many years to come. In such circumstances the relevant issues of fact and law should be determined by an article 6 compliant tribunal.

The submissions on behalf of the pursuers

[16] Mr Reid QC submitted that the decision, though not perfect, was adequate, and the procedure was fair. The circumstances of the present adjudication are neither special nor particular. The underlying philosophy of the Act, and of adjudications in general, is the promotion of the speedy provisional resolution of disputes concerning construction contracts. The purpose is to improve the efficiency of the industry and encourage early final resolutions. All of this justifies any interference with the defenders' Convention rights. If the defenders' arguments based upon ECHR are upheld, this would undermine the entire statutory scheme.

[17] Turning to the challenge based upon the criticisms of the adjudicator's reasoning, reliance was placed upon the cases of Diamond and Ramboll. The court must assume that the adjudicator took into account all relevant information. His decision should be enforced unless it is incoherent, in the sense that it cannot be understood. The adjudicator appreciated the questions which he had to address, and he answered them in a comprehensible manner. The court should not be tempted into addressing the merits of the case, for example by considering whether the adjudicator's reasoning is correct.

[18] Mr Reid acknowledged the very tight time limits imposed by the legislation. However, before the 1996 Act, the delay and costs inherent in arbitration and litigation were bringing the construction industry to its knees. A quick and cheaper method for resolving such disputes was badly needed. A review of the working of the Act carried out by Sir Michael Latham concluded that, generally, the scheme was working well, and most adjudications were treated as resolving the parties' dispute.

[19] The adjudicator is not confined to the figures suggested by the parties, nor to their overall approach to the dispute. The adjudicator did address the issue of deducting the extra costs which would have been incurred had the piling been constructed. While there is a certain logic in his approach, it matters not if the court is in disagreement with it. The adjudicator was entitled to make a broad assessment.

[20] As to the defenders' "no loss" argument, this was a quantification issue, not a matter of causation. The adjudicator considered that the defects in the building constituted a loss to the pursuers. He specifically relied upon the absence of piling in the design for the bottling plant. As to cost savings, he noted that there had never been any piling associated with that plant. He addressed the issues of causation and remoteness. The latter is not an easy area, even for experienced lawyers. The adjudicator referred to a passage in an opinion of Lord Drummond Young. It is clear that he rejected the "no loss" argument. He dealt with causation issues in a coherent manner.

[21] Mr Reid acknowledged that the adjudicator did not mention the issue of a discount, but no figures were ever put to him. He was not told what to do with the Ogden Tables. If he made a mistake in not making an allowance for early payment, that was an error which he was entitled to make - see Diamond. The court cannot interfere. The adjudicator's reasoning should not be assessed by reference to the standards expected of a judge. His reasoning can be brief, and he can use his own experience and knowledge. Reference was made to Lord Hodge's opinion in Carillion at paragraphs 21/32.

[22] Turning to the submissions based upon article 6, Mr Reid observed that the key issue appeared to be whether the adjudicator was or was not a "tribunal established by law". All the other article 6 rights were either present or waived. According to Mr Reid, the adjudicator does not have to be such a tribunal, but if he does, "all the boxes are ticked". Reference was made to Micaleff (paragraphs 80/81 and 86). The adjudicator is impartial and independent. The overriding requirement is speed. The effectiveness of the whole scheme depends upon it. It is an exceptional scheme dealing with specific problems in the construction industry.

[23] Here the award was reached relatively quickly after the dispute arose. Any risks arising from the subsequent insolvency of the pursuers are no worse than those inherent in, for example, the grant of interim interdict, which can be gained on no stronger basis than the presentation of a prima facie case and an assessment as to the balance of convenience. There is no prohibition on the recovery of damages until the claimant is out of pocket. The claim arises now and can be enforced. To put in piling now would cost in the region of £45 million, thus the claim has been restricted in a manner which means that the work will be carried out at the end of the lease. Reference was made to Diamond at paragraphs 22/3. Insolvency is simply a risk of business life, not, in itself, a reason to refuse enforcement of this award.

[24] Returning to the question of whether an adjudicator is a tribunal established by law, Mr Reid observed that there is no question of dependence upon the executive. An adjudicator is established under the regime set out in the 1996 Act and subsequent regulations. In the present case he was appointed by the nominating body. He is an independent and fit person. Reference was made to The Regent Company v Ukraine (application 773/03) at paragraph 54, and Bramelid and Malmstrom v Sweden (1983) 5 EHRR 249 at paragraph 37.

[25] As to the defenders' A1P1 case, Mr Reid indicated that he was content to approach matters on the basis set out by Lord Reed in AXA. He noted that the defences gave no specification of the assets said to be the subject of the unlawful interference. Counsel raised the issue about professional indemnity insurance, and pointed to para.8.4 of the Memorandum of Appointment, which required the defenders to have appropriate insurance arrangements. As to the aim of any interference, adjudication is a speedy mechanism for settling construction disputes on a provisional interim basis. Adjudicator's decisions are to be enforced pending final determination. This is a matter of social and economic policy, subject only to limited judicial review. Reference was made to AXA at paragraphs 31/32, 36, 124/6, 131 and 134. The legislature enjoys a wide margin of appreciation. There is a reasonable foundation in the public interest. It is a matter of respecting the will of the democratic body.

[26] As to proportionality, Mr Reid submitted that Parliament was best placed to decide the boundary between the demands of the general interest of the community on the one hand, and protection of an individual's fundamental rights on the other. The court should be slow to find any lack of proportionality in the adjudication regime. Parliament did not exclude either professional negligence or future loss claims from the compulsory scheme. None of this results in an unfair balance.

[27] In the event that the view is that the adjudicator is not a tribunal established by law, no objections have been taken until now. The issue has been waived, thus there can be no infringement of the Convention by enforcing the award, since any right to object is extinguished. It does not revive in the court. Mr Reid submitted that the article 6 objection should have been raised before the adjudicator. Reference was made to various cases including Specialist Insulation Ltd v Pro-duct Fife Ltd 2012 BLR 342; Hamilton v Ferguson Transport (Spean Bridge) Ltd 2012 SLT 715; Pauger v Austria 25 EHRR 105; and Stretford v Football Association Ltd [2007] Bus LR 1052.

Mr Wolffe's response to Mr Reid's submissions

[28] Mr Wolffe stressed that this is a very unusual case. The main elements in the heads of loss do not arise until 2035/6. The cost savings flowing from the absence of piling in the bottling plant more or less balance out the costs of the interim measures. The A1P1 argument addresses the particular circumstances of this claim and this adjudication. Enforcement of the award would allow the pursuers to attach the defenders' possessions, which would be a clear interference. The fact that the defenders are insured is of no relevance. In any event there is an excess. The courts provide a "safety valve" which can prevent an unfair burden falling on one individual. If it wished, Parliament could have chosen to make an adjudicator's award directly enforceable. Instead it gave this jurisdiction to the court.

[29] The question of waiver is not a jurisdictional point. It would be a breach of A1P1 for the award to be enforced. The court has an independent obligation to act compatibly with ECHR. Nothing done or not done before the adjudicator can stop this objection being raised at this stage. Alternatively the adjudicator is a public authority. The court can make the system article 6 compliant by the way it approaches the issue of enforcement of adjudicator's awards. If the adjudicator is a public authority and the award is in breach of ECHR, then the award should be reduced. However, it is sufficient for present purposes to proceed upon the basis that article 6 requires the court to refuse enforcement of the adjudicator's award and to proceed now to resolution of the merits of the case.

Decision on the reasons challenge

[30] Authoritative guidance on the proper approach to challenges of this nature has been provided in the case of Diamond by the then Lord Justice Clerk, Lord Gill. His Lordship indicated that, unless an adjudicator's reasons suggest otherwise, it will be assumed that he has considered any relevant information submitted to him (paragraph 28). An incorrect answer to a question put to the adjudicator is not a basis for resisting enforcement of his award (paragraph 41). In paragraph 31 it is explained that the reasons given for an adjudicator's decision must

(a) demonstrate that the adjudicator has dealt with the issues remitted to him,

(b) show what his conclusions are on each issue, and

(c) a reasonable reader must be able to make sense of them.

[31] The focus of Mr Wolffe's challenge concerned the adjudicator's failure to deal with important issues put before him. One of the main lines of defence was that substantial cost savings had been achieved during the valuation engineering exercise by deleting piling from the construction project, all notwithstanding the known risks. Against this background, and given the extra costs involved in the construction of piling to the bottling hall and associated areas, the pursuers had to satisfy the adjudicator that, if such piling had been indicated by the defenders, the pursuers would have decided to proceed with its construction. The defenders claim that, as with the ancillary building, and despite the risk of settlement, if regard is had to all the circumstances the reasonable inference is that the pursuers would not have been prepared to incur the delays and the additional costs involved in such piling. Thus, even if the defenders were at fault in producing a design which did not specify piling, there was no causative link with any damage to the buildings, nor to costs to be incurred by the pursuers. Such loss and damage would have occurred in any event.

[32] It is plain from the written submissions presented to the adjudicator (see the appendix) that this was a key part of the defenders' case. If made out, it would be a complete answer to the claim. However, one looks in vain for any indication that the adjudicator considered and reached a decision on this line of defence. He observed that piling was never suggested for the bottling hall and office areas; but the argument is that, if it had been specified, it would not have been constructed. The adjudicator noted that a ground investigation report included an assessment of potential foundation options, and that the settlement to be expected regarding the floor slabs was unlikely to be acceptable. This is relevant to whether the defenders failed in their duty of reasonable care and skill - and to be fair it is mentioned in that context - but it does not bear upon the aforesaid line of defence.

[33] The adjudicator addressed the question of causation, but, for whatever reason, did not mention the defenders' submissions on the above issue. In their written Note of Argument to this court, the pursuers state:

"Moreover, if the adjudicator had inferred, as the defenders seems to contend he ought to have done, that even if piling had been specified it would not have been installed, the pursuers' loss would have been substantially the same. They would have received a defective building caused by the defenders' faulty design. The defenders would have proceeded without the piling as they in fact did." (paragraph 17).

So far as it goes, no doubt this is true. However it misses the main point raised by the defenders.

[34] The adjudicator dealt with an argument concerning the terms of the lease not being within reasonable contemplation, including a submission based upon Hadley v Baxendale, and with a contention that the costs of the omitted piling should be deducted from any award. His decision on the latter point is unsatisfactory, but probably just falls within the scope of an intra vires error of law as discussed in Diamond.

[35] In short, there is a very significant omission in the adjudicator's decision and reasoning. Having regard to the guidance in Diamond, in my view it is sufficient to justify reduction of his award. The adjudicator did not deal with an important matter which had been remitted to him. Potentially it was a complete answer to the claim. This amounts to a breach of natural justice. It can also be noted that the adjudicator did not address the submission based upon the Ogden Tables. If a fresh award is to be made, I would expect the adjudicator to reach a decision on that matter.

[36] I would not wish to appear to be overly critical of the adjudicator. He was faced with a more or less impossible task. I fail to see how he could have hoped to resolve it within the time available, and without an inquiry into the full circumstances of the project. Evidence would be required from the key witnesses so that the probabilities could be explored, and appropriate submissions on the evidence and the law made to him.

Article 1 of the first protocol

[37] I now turn to Mr Wolffe's A1P1 submission. He made it plain that this argument would have been presented even if the adjudicator's decision and reasoning was beyond criticism. The court is being asked to enforce a decision which will require the defenders to make payment of almost £3 million to the pursuers. Prima facie the exercise of the court's power engages A1P1: see Wilson v First County Trust Ltd (No.2) [2004] 1 AC 816, Lord Nicholls of Birkenhead at paragraph 42. When the court is ordering someone to pay money to another, usually it will have identified the parties' true legal rights and obligations, all by way of a procedure which is fully compliant with the Convention. I agree with Mr Wolffe's submission that it is very different when the court is being asked to enforce an adjudicator's award. The decision of an adjudicator does not purport to reflect the parties' true legal rights and obligations. It is well recognised that adjudication is a "rough and ready" process designed to provide a speedy and relatively cheap provisional award pending a final determination by litigation, arbitration or agreement.

[38] The "rough and ready" aspect is particularly true in respect of a large and relatively complex dispute such as the present. No matter the number and nature of the issues before him, an adjudicator labours under very tight timescales. Often, as here, the adjudicator will have no legal qualification, though, again as here, no doubt he will possess a skill in another professional discipline. Nonetheless, as Lord Reed recognised in Ballast plc v Burrell Co (Construction Management) Limited 2002 SLT 1039 at 1048L, an adjudicator's decision can be as important to the parties as a decision of the court. Its enforcement can put one party into liquidation, or save the other from the same fate.

[39] The court's power to refuse enforcement is an important part of the overall scheme, though obviously one to be used sparingly, so as not to undermine the intended benefits of compulsory adjudications in construction contracts. In particular it can provide a long stop safeguard if and when Convention rights are violated. In Carillion Construction Ltd v Devonport Royal Dockyard Limited [2005] EWCA Civ 1358, Lord Justice Chadwick, when delivering the judgment of the court, observed that the statutory scheme for adjudications

"provides a means of meeting the legitimate cash-flow requirements of contractors and their sub-contractors. The need to have the 'right' answer has been subordinated to the need to have an answer quickly" (paragraph 86).

His Lordship observed that it is open to doubt whether Parliament contemplated that disputes involving difficult questions of law would be referred to adjudication. He expressed concern as to whether such disputes are suitable for adjudication. In Integrated Building Services Engineering Consultants Limited v Pihl UK Limited Lord Hodge said (at paragraph 15) that the purpose of the adjudication scheme in the 1996 Act was to encourage co-operation between the parties to a construction contract, to preserve the cashflow of contractors and sub-contractors during the contract, and to improve the efficiency of the construction industry" (emphasis added). He referred to a decision of Judge Richard Seymour QC (Rainford House Limited v Cadogan Limited [2001] BLR 416) in which it was explained that adjudication is aimed at deciding "who has to pay what to whom while the construction work to which the contract relates is in progress...." (pages 421/2). In Diamond, Lord Gill observed:

"In dealing with the problems that it was designed to solve, the legislation has created a new set of problems. For example, where the adjudicator erroneously rejects a party's well-founded claim or defence....the subsequent vindication of the party's position may be rendered futile by an intervening bankruptcy....". (paragraph 43)

[40] As is clear from the jurisprudence on the subject, when the court is asked to enforce an adjudicator's award, in most cases it will do so; and this notwithstanding the disadvantages inherent in adjudications and the risk of injustice. If faced with a Convention challenge, the court will usually be able to justify enforcement of an award by reference to the well understood countervailing general interest benefits arising from an adjudication. But what is the correct position when a large sum is awarded based on a finding of professional negligence, and those benefits are largely, if not entirely, absent? In my opinion, no general or public interest was served by the pursuers taking this dispute to adjudication - not least since it will be many years until the cost savings gained by the absence of piling will be outweighed by the projected losses. The bulk of the claimed losses will not occur until 2035/6. In short, there was no need to have a quick answer to this dispute, at least not in the sense discussed by Lord Justice Chadwick in Carillion. Perhaps the pursuers saw a potential advantage for them in referring the issue to an adjudication, as opposed to some other form of dispute resolution more likely to provide the correct outcome. However, the private interests of one party cannot justify an interference in the defenders' A1P1 rights.

[41] It is true that Parliament did not limit compulsory adjudications to disputes arising during the works involved in construction contracts. Does this mean that, many years after completion of the works, and when problems arise, adjudication will always be available and enforced by the court? Mr Reid suggested that, if it were otherwise, this would undermine the whole statutory scheme. This was consistent with Mr Reid's overall approach, namely to emphasise the advantages of adjudications in general, as opposed to this adjudication in particular. He submitted that any interference with the defenders' possessions would not meet the tests discussed in Lord Reed's opinion in AXA. Thus enforcement would not be a breach of the court's obligations under section 6 of the Human Rights Act. In short, it is a justified interference.

[42] Mr Wolffe relied upon what is sometimes called the first rule in A1P1, namely the defenders' entitlement to the peaceful enjoyment of their possessions. (For present purposes, I shall proceed on the basis that enforcement of the award would constitute an interference with that entitlement.) In AXA Lord Reed explained that the second and third rules are simply instances of the general principle enunciated in the first rule. The test is the same whatever the classification of the interference. It will amount to a violation unless it "complies with the principle of lawfulness and pursues a legitimate aim by means that are reasonably proportionate to the aims sought to be achieved" (paragraph 108). The final part of that test depends on "whether a fair balance has been struck between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights" (Sporrong v Lönnroth (1983) 5 EHRR 35).

[43] It is important to appreciate that the defenders are not challenging the legislative scheme itself on A1P1 grounds, not least because of the ability of the court to refuse enforcement if, in a particular case, to do otherwise would involve a violation of a party's Convention rights. It follows that Mr Reid's reliance upon the margin of appreciation given to national authorities when framing social and economic policy, here as expressed in the 1996 Act, carries less weight than will often be the case.

[44] The question before me is - would enforcement of this award involve a violation of A1P1? As indicated earlier, at present I am assuming that, notwithstanding the insurance considerations, enforcement would amount to an interference with the defenders' entitlement to peaceful enjoyment of their possessions. Is such justified? Would there be a fair or an unfair balance between the competing interests? Would enforcement require the defenders to bear an individual and excessive burden, keeping in mind that there has been no identification of the parties' true rights and obligations?

[45] In my opinion, the issue can be approached as follows. There was no pressing need for a speedy provisional decision in respect of the pursuers' large claim based upon the alleged professional negligence of the defenders. The dispute arose long after completion of the contract. By then the premises were leased by the pursuers from a third party. The settlement problem does not and will not prevent the use of the premises for their intended purpose. While relatively modest sums may require to be expended over the next few years by way of inspection and remedial works, no major losses will be incurred for many years to come. In the meantime, the pursuers are considerably in pocket, in the sense that they did not incur the extra costs involved in the piling works. If ultimately the defenders are successful, there is no guarantee that the defenders will recoup any monies paid to the pursuers, and there is no provision for state compensation for any such loss. Furthermore, none of the public interest justifications which underpin the compulsory statutory scheme set out in the 1996 Act apply in the present case, unless they are given the most extended definition.

[46] Mr Reid submitted that a decision not to enforce this award on A1P1 grounds would undermine the whole adjudication scheme, which, in general, has worked well. I find this approach to be exaggerated and unconvincing. There may be analogies with the way in which our law has sought to reconcile diligence on the dependence with Convention rights - see Karl Construction Limited v Pallisade Properties Plc 2002 SC 270. In any event, the current enforcement stage of the statutory adjudication procedure is an important safeguard, and in my view, it is appropriate that, in the whole circumstances, the safeguard should be operated. Though ex facie competent, to proceed to adjudication in this case was unnecessary and inappropriate. To enforce the award would result in an unfair and excessive burden being placed upon the defenders. The interference would not be justified by any process which could, or even purported to identify the parties' true legal rights and obligations.

[47] As discussed earlier, the adjudicator was presented with a next to impossible task. Even a judge would struggle to identify a procedure which would allow the complex issues of fact and law arising between the parties to be determined in any semi-satisfactory manner within six weeks. In the circumstances of the present case, the well known problems, disadvantages and potential injustices of an adjudication are not counter-balanced, let alone outweighed, by any of the aims and purposes lying behind the 1996 Act. It is those public interest benefits which justify enforcement of an adjudicator's award, even a sub-standard and obviously wrong award (as in Diamond), but they are more or less wholly absent in the present case. It follows that it would be disproportionate and wrong to enforce the award, especially in the absence of any security for repayment in the event that the defenders are ultimately successful when the true merits of the claim come to be decided. The Strasbourg case law indicates that the absence of compensation for losses caused by an interference in property rights will be an important factor to be weighed in the overall balance. Given the very particular circumstances of this case, to enforce this award would not be justifiable as a proportionate measure in pursuit of a legitimate aim. It would not strike a fair balance between protection of the defenders' fundamental rights and the protection of any public interest reasons for the interference.

[48] I do not consider that this will upset the proper working of the now well-established statutory scheme of compulsory adjudications in construction contracts. The court should be careful not to undermine the undoubted benefits of many, if not most adjudications, by an over-willingness to uphold objections to enforcement. However, when serious issues under ECHR are raised, careful scrutiny is required. [49] For completeness I should indicate that I was not persuaded that the defenders had waived any right to rely on A1P1 in the proceedings before the adjudicator. In my view it would be a counsel of perfection to expect the defenders to reserve their position on that issue at that stage. Reference can be made to the similar approach taken in Hamilton v Ferguson Transport (Spean Bridge) Ltd in the opinion of Lord President Hamilton at paragraph 67. In any event, the question now is whether the court should or should not enforce the award. The court has an independent obligation to comply with the Convention.

[50] There remains the question as to whether enforcement of the award would amount to an interference with the defenders' possessions in terms of A1P1. Mr Reid relied upon the admitted fact that the defenders enjoy the benefit of professional indemnity insurance in respect of the current claim. Thus, it is said, no possessions of the defender are involved. In AXA there was a discrete fund which would be affected retrospectively by the legislation. Mr Reid observed that we know little if anything as to the defenders' financial situation. Do they have a bank account? If so, is it in overdraft? The Memorandum of Appointment required the defenders to take out sufficient professional indemnity insurance to cover a claim of up to £10 million.

[51] In response Mr Wolffe observed that a decree of the court would be a warrant for diligence, allowing the pursuers to attach the possessions of the defenders. Such is, in itself, an interference with the defenders' possessions. While he acknowledged that the defenders are insured in respect of the claim, that is an irrelevant circumstance. In any event the policy is subject to an excess payable by the defenders. The court cannot assume that, because of insurance, the warrant will not be enforced. The normal approach is to leave insurance arrangements wholly out of account.

[52] Neither counsel addressed me on this subject at any length. I was not referred to any case law, nor to any textbook or academic discussion as to whether something which would otherwise amount to a violation of A1P1, can be elided by insurance arrangements. There is a superficial attraction in the proposition that if the defenders are insured against the claim, enforcement of the award does not involve any interference in their possessions. However, traditionally the law is blind to such arrangements. It would be unsafe to assume that the enforcement of this award is a matter of indifference to the defenders themselves, as opposed to their insurers. Most companies would be anxious to avoid a court order to pay such a large sum, whether insured or otherwise.

[53] In any event there can be no guarantee that the defenders' assets will remain wholly unaffected. The court order would be directed at the defenders, not their insurers. For aught yet known, problems may emerge as to the validity of the cover, or as to the insurers themselves. For good reason, the law normally treats insurance as a collateral matter between the insured and the insurers. Mr Reid did not challenge the proposition that the defenders' possessions could be attached in enforcement of the award, and Mr Wolffe made reference to an excess provision in the policy. Presumably there may also be some impact upon future insurance arrangements.

[54] In short, I am not persuaded by the submissions presented by Mr Reid, nor by the rather sketchy information before me as to the full facts, that I should hold that the prima facie unjustified interference in terms of A1P1 is superseded in the particular circumstances of this case. If it is thought that the insurance issue is a critical one, then I would be prepared to consider any application Mr Reid may wish to make for leave to present additional submissions upon this topic, perhaps buttressed by further information from the defenders on the detail of their insurance arrangements. Below I indicate that I will be putting the case out by order for a discussion on future procedure.

Decision on article 6

[55] Mr Wolffe also relied on a submission that enforcement of the award would be in breach of article 6(1). Ultimately the dispute between the parties will be resolved by extra judicial settlement, agreement to proceed to arbitration, or litigation in court. Thus, when the whole process is considered, there is no article 6 concern. Article 6(1) applies in respect of the "determination" of civil rights and obligations (and of a criminal charge). Thus, on the face of it, no issue under article 6 can arise in respect of an interim measure or order. However Mr Wolffe submitted that, in the light of the decision of the Grand Chamber in Micaleff v Malta, the view should now be taken that the provisional stage of adjudication and enforcement of an adjudicator's award is itself a process which engages article 6. Given that the procedure before an adjudicator is not compliant with all the article 6 protections, by simply enforcing the award without any investigation of the merits of the claim, the court would be acting incompatibly with article 6, and therefore contrary to its obligations under section 6 of the Human Rights Act. Mr Wolffe submitted that this would be true even though the court was enforcing the award on a provisional basis.

[56] In my view it is clear that if and when civil rights and obligations are being finally determined, a procedure of the nature of arbitration, or adjudication, will not be sufficient to comply with article 6. However, if the parties concerned freely consent to such a procedure, as commonly occurs, then the protections afforded by article 6 have been waived. In the present case, although both parties entered into a contract which contains provisions for adjudication, this was against the background that, in the absence of such clauses, an adjudication regime under the 1996 Act would be implied and enforceable by either party. It follows that there is no question of waiver of article 6 in the present case. Reference can be made to the discussion at paragraph 30 of the Commission's report in Bramelid and Malstrom v Sweden. In Stretford v Football Association Ltd, when delivering the judgment of the court, the then Master of the Rolls said that the general principle is that "an arbitration agreement operates as a waiver of at least some of the requirements of article 6" (paragraph 48). However he made it clear that the agreement must be voluntary, not "required by law".

[57] Arbitration and adjudication are non-compliant with article 6 because it guarantees access to a court or tribunal established by law. An arbitrator or an adjudicator appointed on a one off basis by nomination of the parties, or by some third party, is not a court or tribunal in the sense intended by article 6, nor in terms of UK constitutional law. Under our system, justice is administered by the prescribed exercise of the judicial power of the state: Coppard v Customs and Excise Commissioners [2003] QB 1428 at paragraph 34. No doubt arbitrators and adjudicators will be independent of the parties and the executive, and will be impartial, but that is not sufficient. Furthermore, at least so far as adjudication is concerned, it does not purport to identify and resolve the parties' civil rights and obligations. Many of the normal safeguards are sacrificed for the sake of a speedy provisional decision.

[58] In Elanay Contracts Ltd v The Vestry, the court considered whether an adjudication was subject to article 6 of the Convention. It was held that, since the adjudicator did not finally determine the parties' rights and obligations, article 6 had no application. Mr Wolffe's submission is that, as a result of the decision of the majority of the Grand Chamber in Micaleff v Malta, a different view should now be taken.

[59] The case had a long and complicated history. It concerned a dispute between two neighbours as to whether one of them was entitled to hang her washing over the other's courtyard. At the outset, and in the absence of the respondent, a Maltese judge granted an interim injunction. It is unnecessary to rehearse the full detail of the lengthy procedure which ensued. When the matter eventually came before the Grand Chamber, it had to consider, amongst other things, a complaint that when the case was before the Maltese Court of Appeal, the court was chaired by the Chief Justice, who was the uncle of the lawyer representing the claimant, and the brother of the lawyer who had represented the claimant at first instance. Relying upon article 6, the applicant to the European Court of Human Rights submitted that, in breach of his sister's right to a fair hearing, the Court of Appeal had lacked impartiality. (In the meantime the respondent had died, and the case was now being pursued by her brother). A majority of the Grand Chamber upheld the claim of a violation of article 6(1) in respect of the impartiality requirement (11 votes to 6). (Amongst other things, the dissenting judges expressed the view that the subject matter of the original dispute was so trivial, and the subsequent over-use of the courts such "an affront to good sense", that the application should have been dismissed at the outset as an abuse of the right of application.)

[60] In the course of their judgment, the majority of the court considered whether there was a need for development of the case law concerning the applicability of article 6(1) in respect of interim proceedings - see paragraphs 74-89. It was noted that there must be a dispute over a "civil right" and "the result of the proceedings must be directly decisive for the right in question" ... Preliminary proceedings, like those concerned with the grant of an interim measure such as an injunction, were not normally considered as determinative of such rights and obligations, and therefore did not fall within the protection of article 6.

"Nevertheless, in certain cases, the court has applied article 6 to interim proceedings, notably by reason of their being decisive for the civil rights of the applicant" (paragraph 75).

Reference was made to exceptional cases where the interim measure "disposed of the main action to a considerable degree". The court noted that in many contracting states:

"a judge's decision on an injunction will often be tantamount to a decision on the merits of the claim for a substantial period of time, even permanently in exceptional cases. It follows that, frequently, interim and main proceedings decide the same 'civil rights or obligations' and have the same resulting long-lasting or permanent effects.

Against this background the court no longer finds it justified to automatically characterise injunction proceedings as not determinative of civil rights or obligations. Nor is it convinced that a defect in such proceedings would necessarily be remedied at a later stage, namely, in proceedings on the merits governed by article 6, since any prejudice suffered in the meantime may by then have become irreversible and with little realistic opportunity to redress the damage caused, except perhaps for the possibility of pecuniary compensation" (paragraphs 79/80).

Thus the court considered that a new approach was required. In particular:

"Whenever an interim measure can be considered effectively to determine the civil right or obligation at stake, notwithstanding the length of time it is in force, article 6 will be applicable" (paragraph 85).

The majority of the Grand Chamber continued:

"However, the court accepts that in exceptional cases - where, for example, the effectiveness of the measure sought depends upon a rapid decision-making process - it may not be possible immediately to comply with all of the requirements of article 6. Thus, in such specific cases, while the independence and impartiality of the tribunal or the judge concerned is an indispensable and inalienable safeguard in such proceedings, other procedural safeguards may apply only to the extent compatible with the nature and purpose of the interim proceedings at issue. In any subsequent proceedings before the court, it will fall to the Government to establish that, in view of the purpose of the proceedings at issue in a given case, one or more specific procedural safeguards could not be applied without unduly prejudicing the attainment of the objectives sought by the interim measure in question" (paragraph 86).

[61] The court noted that the substance of the right at stake in the main proceedings concerned the use by neighbours of property rights in accordance with Maltese law, and therefore was a right of a civil character. Furthermore, the purpose of the injunction was to determine, albeit for a limited period, the same right as the one being contested in the main proceedings, and which was immediately enforceable.

"It follows that the injunction proceedings in the present case fulfil the criteria for article 6 to be applicable and no reasons have been established by the Government to limit the scope of its application in any respect" (paragraph 87).

The court concluded that article 6 was applicable to the proceedings complained of, and that the Government's preliminary objection must be dismissed.

[62] The majority of the Grand Chamber was heavily influenced by the consideration that, at least in some cases, the grant or refusal of an interim interdict (or injunction) is determinative of the whole matter. It is true that an immediate decision on an interim interdict, one way or the other, will often mean that one party has won and the other has lost. The realities of the situation may well militate against a more leisurely approach. All of this is borne out by experience in the courts in Scotland. If interdict is the only or main object of an action, it is rare for the proceedings to continue beyond the grant or refusal of interim interdict.

[63] Similarly, no doubt it is true that an adjudication award in respect of a construction contract will often be treated by both parties as, in effect, resolving the dispute - but that is because they choose to so agree - not because the interim decision has, in reality, determined the issue in dispute for all practical purposes. In Micaleff, the majority view was that it would be unrealistic not to regard the interim injunction decisions of the Maltese courts, of themselves, as decisive of the rights and obligations at stake in the action. I find it difficult to take the same view in respect of the present case, or indeed of adjudication awards in general. It is of the essence that an adjudicator's decision, unless the parties agree otherwise, has no final effect. It is expressly provisional pending a final resolution, which, if necessary, will involve a traditional court procedure. The defenders are actively pursuing a counterclaim which is designed to demonstrate that the adjudicator's award is wrong. I am unable to conclude that this adjudicator's award, allied to any enforcement by the court, can be considered as finally deciding the civil right or obligation at stake. Article 6 is only engaged when a civil right or obligation is being determined. It follows that article 6 is not applicable.

[64] My decision on article 6 is in line with the decision in Elanay Contracts Ltd, where it was held that article 6 did not apply to proceedings before an adjudicator "because, although they are the decision or determination of civil rights, they are not in any sense a final determination." To use the language of paragraph 74 in Micaleff, enforcement of an adjudicator's award is not "directly decisive for the right in question".

[65] It is my impression that the fundamental complaints which underpin the defenders' article 6 case are not materially different from those supporting the A1P1 submission. In the context of article 6, they are used to suggest that the enforcement of the adjudicator's award should be treated as the equivalent of a decisive determination of the parties' civil rights and obligations. However, in my view, the violation of Convention rights has occurred in the context of A1P1, not article 6. Mr Wolffe relied heavily on the potential for irreversible prejudice if the pursuers are subsequently unable to repay the £3 million. That is a factor which I weighed in the balance in the discussion concerning A1P1. It does not persuade me that enforcement of the adjudicator's award would be directly decisive of the right in question in the sense which influenced the Grand Chamber in Micaleff. For the purposes of A1P1, it is sufficient if there is an unjustified interference in the peaceful enjoyment of possessions. I reject Mr Wolffe's submission based on article 6.

Severability

[66] For completeness I should discuss a discrete issue which was debated before me. The adjudicator made a finding that the remedial cost of reinstatement of the main production area floor slab would be £1,885,227, which is more than the sum claimed in this respect by the pursuers, namely £1,816,860.10. Mr Wolffe observed that clearly it is not a case of a transposition of figures, and there is no basis for identifying the decision as a clerical error. The adjudicator gives no explanation for the difference. According to Mr Wolffe the court cannot assume that the adjudicator's intention was to award the lower sum as per the pursuers' claim. He submitted that this problem vitiates the whole award.

[67] In response Mr Reid suggested that, in all likelihood, there was an arithmetical error in the adjudicator's calculations - or he reached the conclusion that the sum sought was unduly modest, but omitted to reduce the assessment to the claimed amount. The difference is small in percentage terms. The parties did not incorporate the "slip" rule (rule 32), thus they took the risk of such a mistake. According to Mr Reid, even if the "slip" had added an extra £10 million, the award as pronounced would remain enforceable. That said, Mr Reid would "not mind" if the court simply reduced the award by the relevant balance. Alternatively he could undertake that the pursuers would not enforce the extra amount. Mr Reid also submitted that, if there was a breach of natural justice, the offending part of the calculation could be severed, and the rest of the award enforced.

[68] In response Mr Wolffe relied upon the decision in Pilon Ltd v Breyer Group Plc [2010] QBD (TCC) 452 as support for the proposition that in a single claim for a single loss, it is inappropriate to sever any offending element. This is partly because it would prevent a fresh adjudication which could resolve the issue and produce a satisfactory award, which would then be enforceable by the court. Only the adjudicator can correct what is accepted by Mr Reid as a clear mistake. Only the adjudicator knows what happened, and how it falls to be rectified. In the meantime the whole award is tainted.

[69] In Pilon Ltd, Coulson J considered a similar issue (see paragraphs 39/42). A specialist refurbishment contractor carried out work on a construction project. An application was made for an interim payment of just over £337,000 in respect of part of the contract works. A dispute on this was referred to adjudication, the basis of the claim being that the employer had not served any withholding notices. The defence was in two parts. Firstly, there was no obligation to serve such notices, and, secondly, an overpayment of £147,774 on the first part of the works should be set off against the current claim. The adjudicator decided that he had no jurisdiction to consider the overpayment defence. He issued an award in the sum of £207,617.74 plus VAT.

[70] In resisting enforcement, the respondents argued that the adjudicator's failure to consider the overpayment defence was a breach of natural justice, and thus the decision was not binding. It was held that the adjudicator's failure to consider the defence was a breach of natural justice. The question then arose as to whether the claimants were entitled to summary judgment on the balance of approximately £60,000, this sum being unaffected by the error. The answer given was no, on the basis that the decision addressed only one dispute or difference, namely, what sum is due by way of an interim payment for the specified work? This could be contrasted with a case where an adjudicator was asked to determine two wholly separate disputes, when there could be scope for severing a tainted decision from an untainted decision.

[71] In the present case there was only one dispute or difference before the adjudicator, namely what damages, if any, are due in respect of loss or damage sustained by the pursuers as a result of any negligence on the part of the defenders? While the adjudicator's single award was made up of separate constituent elements, it remained one award. In agreement with the approach of the learned judge in Pilon, I see no way to sever the offending part of the award from the rest.

[72] However, the matter does not end there. Mr Reid submitted that the adjudicator was entitled to make this kind of mistake, even if it extended to an error of some £10 million. On such an extreme hypothesis, I consider that the court would be bound to intervene if an adjudicator's error had an impact of that magnitude. But does it follow that an adjudicator's award for £3 million or thereby must be held as non-binding because of an error concerning a sum of around £70,000? In Pilon the bulk of the award was tainted by the error. While no doubt the boundaries may be difficult to define, it is at least arguable that it would be contrary to the purpose and intention of the adjudication legislation and regulations if an award could be reduced because of a relatively small or non-material mistake. That would encourage every disappointed party to trawl through every adjudication decision for errors, however minor.

[73] Mr Wolffe argued that the court simply does not know what has happened here, therefore it cannot be assumed that the impact of the mistake (if that is what it was) is limited to the difference between the two amounts. Mr Reid suggested that there was either an arithmetical error or an omission to reduce the calculated sum to the claimed amount. There may be some other explanation. If it could be safely assumed that the issue concerns, at most, some £70,000 out of the total award, then this may well fall into the category of a non-material error of the kind discussed at paragraph 19 of the judgment in Pilon. However, in my view it would not be safe to make that assumption. Given that the award is being reduced for other reasons, suffice to say that, if and when the matter returns to the adjudicator (and it may not, given the Convention violation), he should address and deal with this issue.

[74] Both counsel suggested that the next step should be to fix a by order hearing for submissions on the appropriate form of order and on further procedure in the case. That is what I shall do.

Appendix

The procedure before the adjudicator
The adjudicator received the notice of referral and accompanying documentation on 2 March 2012, and the defenders' response documents on 15 March. The response included a submission that, since no dispute had crystallised, he had no jurisdiction. The adjudicator requested an extension of fourteen days to allow him to consider the jurisdictional challenge. The pursuers agreed, meaning that the revised final date for a decision was 12 April. The adjudicator came to the view that a dispute had crystallised and that he should proceed with the adjudication. By way of an email of 19 March he issued a revised timetable for the replies to be made by each party and potential dates for the hearing. He received the pursuers' reply on 21 March and the responses thereto on 27 March. A hearing took place on 30 March at the bottling plant in Grangemouth. An agenda for the hearing included a tour of the premises, to enable the adjudicator to view the areas of settlement and cracking. He was accompanied by members of both parties, with one member from each nominated to address him on relevant matters. After the site inspection, the hearing commenced, at which both parties were given the opportunity to address the adjudicator on matters in dispute.

The pursuers' claim
The pursuers contend that the defenders failed to exercise reasonable skill, care and diligence, and in particular in relation to the failure to include piling in the design of the bottling plant and associated offices. As a consequence, the premises are affected by settlement outwith expected tolerances. The pursuers want to carry out remedial works comprising interim works, annual and biannual inspections, maintenance work at five yearly intervals, and also reinstatement of the defective floor slab prior to the end of their lease of the premises. The redress sought was as follows:

(a) £574,000 in respect of the interim remedial works.

(b) £37,500 in respect of annual inspections by a structural engineer.

(c) £37,500 in respect of annual inspections by a mechanical engineer.

(d) £37,500 in respect of annual inspections by an electrical engineer.

(e) £20,000 in respect of biannual level checks.

(f) £71,500 in respect of ongoing periodic remedial work.

(g) £1,816,860 in respect of the reinstatement of the main production area floor slab.

(h) £1,012, 512 in respect of loss of use and enjoyment of the premises for one year (during such reinstatement).

The adjudicator was asked to provide reasons for his decision. The defenders invited the adjudicator to determine that the referring party had failed to establish any breach of contract, and that he should make no award for payment.

The issues between the parties, and the submissions made to the adjudicator

In the referral notice it is stated that in or about June 2009 the referring party was advised that cracking in the walls and floors of the bottling hall, despatch area and office area was caused by a lack of adequate piling, all resulting from defective design. The cracking was attributed to a lack of support for the foundation slab which, because of the nature of the soil, caused excessive settlement. The pursuers accept that, as part of a "value engineering exercise", they instructed the removal of piles from the design for some areas, however, not from the bottling hall and office area. No piles had ever been specified for those areas.

It is said that the remedial works, along with consequential losses, would run to tens of millions of pounds; accordingly the pursuers intend to carry out interim remedial works, and then, when they require to return the building to the landlord in a satisfactory condition at the end of the lease, the floor of the main production area will require to be reinstated at a cost of almost £1.817 million. In addition, to avoid business interruption, the premises will be vacated one year early, causing wasted rental payments of over £1 million.

In their responses the defenders refer to the value engineering exercise carried out in 2004. Various cost savings were proposed, including the removal of piling across various parts of the development. The likelihood of differential settlement was highlighted, but the pursuers accepted that risk and agreed to proceed with the removal of piles, thus achieving substantial cost savings. The defenders complied with any duties incumbent upon them by advising that, should piling be removed from the design, differential settlement between piled and non-piled structures was likely. In any event, there is no basis upon which the adjudicator can be satisfied that settlement will continue. Such survey results as there are indicate that a general state of equilibrium has either been reached or is being approached.

The defenders contend that to establish an entitlement to damages, it must be demonstrated that, had they specified piling in the bottling hall and associated areas, such piling would have been incorporated in the final design, and would have been constructed. This is not suggested in the referral notice. In all the circumstances, the adjudicator would be entitled to infer that, even if the piling had been specified, it would not have been constructed. There would have been considerable cost implications for the pursuers, easily exceeding £924,000. In addition the slab design and construction costs would have increased. The total difference is accordingly over £1.4 million. The works would have taken longer to complete. Considerable costs would have been incurred as a result of the delay. The pursuers have failed to demonstrate a causative link between any breach of contract and any losses sustained by it.

In any event, the pursuers will only suffer loss as a result of any breach of contract, if the additional costs which are now reasonably to be incurred are greater than the sums which were saved as a result of the piling being omitted from the design. As it is, any costs incurred, or to be incurred in consequence of the settlement, are less than the costs of implementing the piling works. Accordingly the pursuers have failed to demonstrate that they have incurred any loss as a result of any breach of contract on the part of the defenders.

The defenders observe that, to date, minimal remedial works have been conducted. The premises have remained open. The claim that significant costs will be incurred in the future is speculative. Many of the sums sought relate to works which are to be conducted many years in the future. Even if the pursuers establish that these sums are recoverable, it would be appropriate to apply a discount factor in accordance with table 27 of the Ogden Tables, to reflect the fact that any sum will be paid immediately, but not expended for many years. In any event, no proper engineering justification has been set out for the sums sought. Except for the cost of emergency ceiling repairs, none of the works have been conducted to date, despite their supposed urgency.

There were a number of detailed arguments on behalf of the defenders concerning alleged excesses in the sums sought. A reasonable total estimate for remedial works would be just over £200,000. Furthermore, at the time of the contract between the parties, it was not within reasonable contemplation that the pursuers would enter into a lease of the premises and thereby bind themselves to reinstate the slab at the end of the lease. The sum sought is too remote and not recoverable. In any event there had been no demonstration that there is any likelihood that these works will be carried out. The lease will come to an end after 30 years, which, according to the referral notice, is "the useful life of the building". It is inconceivable that another company in the same group as the referring party will oblige it to conduct major works of this nature when the building has come to the end of its useful life. In any event these would be extraordinary repairs, and thus the responsibility of the landlord.

In their reply to the contentions as to the value engineering exercise, the pursuers said:

"At no time was the removal of the piles from the bottling hall discussed or suggested. No piles were every specified in the bottling hall" (para 4.3).

The defenders simply failed to specify piling under the slab in the bottling hall. Had the defenders specified piling under the slab, those specifications would have formed part of the design in tender drawings; the tender drawings and specification would have gone to tender, and the works as designed and specified would have been constructed. The adjudicator is not entitled to infer that the piling would not have been constructed. The present cost of implementing the additional piling which should have been specified and installed is £552,349. The piling contract was let to Stent, at a cost of £723,000.

A ground lease and lease back is a common method of funding, and would have been in the reasonable contemplation of the parties. Had the additional piles been built, the pursuers would have added the cost to the price under the ground lease, and would have recovered it from the purchaser, their landlord. It makes no difference whether the costs have been incurred or not. The loss is the damage to the building, and the need to carry out the repairs. The estimates are reasonable assessments of the loss. Certain works will be carried out in the future, however the Ogden Tables are for use in cases of personal injury and death. They have no application. It is appropriate to make an award of the cost of repair at present day prices. The actual cost of repair in the future will be affected by inflation. The reinstatement of the slab is required because of the lack of piling, not because of the lease. While the pursuers are subject to the full repairing and insuring obligations of a normal commercial lease, had they retained ownership of the building, they would still have needed to replace the slab. They propose to defer carrying out the works so as to avoid the impact of an immediate shutdown of the facility, which would cause loss of profit, loss of market position, and other associated costs in excess of £10 million. Deferment of the replacement works is accordingly prudent mitigation of loss. It makes no difference whether the pursuers are a tenant or an owner. The slab requires to be replaced because it is defective as a result of the poor design. The landlord is not in the same group of companies as the referring party. The terms of the lease (clause 3.4.1) prevent the pursuers from arguing that the repairs are "extraordinary repairs".

In a further response the defenders stated that the pursuers rely upon an assertion that the piling would have been constructed had it been specified, however this does not follow. No evidence to support this has been provided. The person in charge of the project was anxious to reduce construction costs. He instructed that piling be removed from the ancillary building, a decision taken notwithstanding advice given by the responding party regarding the risk of differential settlement. The person in charge was willing to take that risk in order to save on the capital cost of the project.

"The potential saving should piling be omitted from the bottling hall was far greater than the potential saving should piling be omitted from the ancillary building. It is therefore reasonable to infer that, had Mr Imerman been advised regarding the risks of not including piling to the bottling hall, he would have instructed that the piling be removed in order to save on capital costs" (para 8.2).

Furthermore, it was claimed that the pursuers have suffered no loss. The costs they would have incurred had the piling been specified and constructed are greater than the reasonable rectification costs which they will incur. Had additional piles been constructed, the cost would not have been recovered from the landlord. Had the transaction been at arm's length, the price paid by the landlord would have been linked to the market rental that could be achieved from the building. Any additional costs incurred in carrying out piling works would be unlikely to affect the market rent. The sum paid by the landlord would not have increased had the slab to the bottling hall been piled. Even if it had, it is likely that this cost would have been offset by the landlord increasing the rent. The referring party is accordingly in a significantly better financial position as a result of piling being omitted. The funding arrangement was not within the reasonable contemplation of the defenders. In any event the question is whether the cost of the pursuers being required by the landlord to reinstate the slab at the end of the lease would have been in the reasonable contemplation of the parties at the time of the contract. This would require the assumption that the pursuers would (a) enter into a lease and (b) would assume responsibility for extraordinary repairs encompassing the reinstatement of the slab at the end of the lease, and that the landlord would insist on the slab being reinstated, notwithstanding that the building would be at the end of its intended lifespan. The defenders cannot be said to have assumed responsibility for a loss of this type.

The adjudicator's decision and reasoning

The adjudicator ruled that a dispute had crystallised and therefore he had jurisdiction. He upheld the allegation of a failure to exercise reasonable skill and care on the part of the defenders. He noted that there was no evidence that piling had ever been specified for the bottling hall and office areas, either before or after the value engineering review in October 2004. In respect of the removal of piling from the ancillary building and tank farm, this is clearly recorded as part of the review, with specific guidance on the effect of the change on both building elements and process. There is no record of a similar exercise having been undertaken or even suggested for the bottling hall and office areas. The adjudicator did not see any link between this exercise and the lack of piling to the bottling hall and office areas, as no piling had been specified in those areas prior to the value engineering exercise being carried out.

The adjudicator noted that a geotechnical ground investigation report covering the whole site was carried out prior to any detailed design being developed. A quick assessment was made of the suitability of the ground bearing floor slabs. It was noted that the predicted level of settlement was unlikely to be acceptable and, as such, the ground floor slabs may have to be structurally designed. With regard to a minute of a meeting dated 22 March 2004, the adjudicator was of the view that the defenders had followed a course in their design which never changed, even after the correct geotechnical information was made available. Mr Dewar, a chartered engineer, gave his professional opinion as to the causes of the settlement, and the ongoing implications for future settlement rates. The adjudicator found his evidence to be credible and logical. He preferred the evidence that the settlement caused by the lack of piling to the slab areas was likely to continue at a similar rate to that since completion. The adjudicator rejected the contention that equilibrium had been reached, or was about to be reached. Mr Dewar stated that, for these particular premises, the foundation design departed from the customary techniques to control or manage excessive settlement. The design solutions used for the foundations of the building were not consistent with an experienced engineer exercising all reasonable skill and care. The defenders had not given any reason why the adjudicator should reject Mr Dewar's opinion. They were in breach of contract in respect of the lack of specification of the piling to the concrete slab in the bottling hall, despatch area and offices.

Turning to the issue of causation, the adjudicator considered that, on the balance of probability, it was within the reasonable contemplation of the parties that the referring party might enter into a sale and lease back arrangement. Full repairing commercial leases are not unusual, and thus could be within the reasonable contemplation of the parties. He addressed the submission that at the end of the lease period it is highly unlikely that the landlord will require any reinstatement work, since the building will be at the end of its useful life. The view was that, as the landlord is not connected to the referring party, it would be in his contemplation to lease out the premises for a further period to some other commercial user. It is therefore highly likely that the landlord will enforce the conditions of the lease and require the floor slab to be reinstated with a properly piled substructure.

The adjudicator then addressed the submission that, if piling to the slab had been specified throughout the bottling plant and offices, the additional cost of such works should be deducted from any award. The pursuers had asked that the cost of piling be disregarded as being unavoidably incidental to the claim of damages, and any award should instead be based on a "cost of cure" approach. The adjudicator accepted that the object of damages is to place the claimants in the same position as they would have been in had there been no breach of contract. He continued:

"The cost of the piling to be deducted can only be taken for the areas where the slab can be feasibly reinstated, that is the bottling hall building excluding the office areas. I accept the referring party's explanation that the office area is two storey and no retrospective piling can be carried out in these areas. The office loadings are light enough to allow any settlement to be adjusted with a screed and this is covered on the interim repair."

The adjudicator then considered the submission that the onerous provisions of the lease would not have been in the contemplation of the parties and as such are too remote to found any valid claim. The pursuers had submitted that the loss arose as soon as the building was complete. In this regard reference was made to the case of McLaren Murdoch & Hamilton Ltd v The Abercrombie Motor Group Ltd 2003 SCLR 323. He found the reasoning of Lord Drummond Young helpful, and in particular his observations at paragraphs 42 and 43:

"If a breach of contract occurs, causing loss that can be measured in financial terms, the party who is not in breach may recover loss sustained by another person, if a loss has been sustained by a person other than the contracting party, however the contracting party must sue on behalf of that other, and must accordingly account to that other for the damages recovered.

...

I am of opinion that the defenders would be entitled to raise proceedings against the pursuers for substantial damages even in respect of a loss that had been suffered by another company."

Having quoted this passage the adjudicator stated "I did not therefore accept the defenders' arguments on the remoteness of the breach."

The adjudicator then turned to the cost of remedial work. He considered that the most recent level survey demonstrated that settlement is continuing and will continue in the future. Some of the costs reflected in the Elmwood tender appeared to be excessive. He specified those costs which he considered to be too high. He concluded this part of the reasoning as follows:

"The referring and responding parties have arrived at quite significant different figures for the carrying out of the necessary works, and in particular the piling work. I considered the documents and arrived at costs which I consider reflect the justified points raised by the responding party in their submissions. I have noted below my summary of the calculation for the cost of the work that will be required.

A. Interim remedial work - £451,225.

B. Reports and inspections by structural, electrical and mechanical engineers and level surveys - £133,000.

C. Periodic remedial work - £400,000.

D. Reinstatement to the main production area floor slab including piling - £1,885,227.

Subtotal £2,869,452

Less cost of new piling work and extra cost between ground bearing slab and structural slab £894,674.

£1,974,778".

The adjudicator added £1,012,512 in respect of loss of use of the premises for the final year of the lease, making a total sum payable of £2,987,290, with interest at 6% above the base rate of the Bank of England from the date of the award until payment.