Scottish Sheriff Court Decisions

CA296/09

JUDGMENT

OF

SHERIFF PRINCIPAL

JAMES A TAYLOR

in the cause

Bell Building Projects Ltd

PURSUERS/RESPONDENTS

against

Carfin Developments Ltd

DEFENDERS/APPELLANTS

                                                                       

GLASGOW, 24 September 2010.

The Sheriff Principal, having resumed consideration of the cause, Refuses the appeal; Adheres to the interlocutor of 8 April 2010; Finds the appellants and defenders liable to the pursuers and respondents in the expenses occasioned by the appeal as taxed; Allows an account thereof to be given in and remits same, when lodged, to the auditor of court to tax and to report.

NOTE:-

[1] The defenders and appellants (hereinafter "the defenders") are the employers in a building contract. The pursuers and respondents (hereinafter "the pursuers") are their sub-contractors. The defenders were represented by Mr Thomson, Advocate, and the pursuers by Mr Borland, Advocate. I am indebted to both counsel for their thoughtful submissions. In the event I preferred the submissions of the pursuers, as had the learned sheriff, and accordingly I have refused the appeal.

[2] The parties entered into a contract in which the pursuers were employed to design and construct commercial and/or retail units and other ancillary works in Motherwell. The contract is a construction contract as defined by Part II of the Housing Grants, Construction & Regeneration Act 1996 (hereinafter "the Act"). In about July 2009 the pursuers submitted to the defenders a claim for payment based upon valuation No 11, the total amount claimed being £63,048 excluding VAT. The defenders resisted payment and issued a Notice of Withholding in respect of six items with a total value of £83,000. The pursuers referred the dispute to adjudication as they were entitled to do in terms of Section 108(1) of the Act. The adjudicator appointed was Alan Stewart. He came to the view that the defenders were entitled to withhold payment in respect of two of the six items with a total value of £23,000 excluding VAT but that quoad ultra the pursuers were entitled to the balance. The Notice of Adjudication (6/7 of process) identifies at paragraph 3.2 the issue referred for a decision. It is in the following terms:-

"By email dated 11 May 2008 the respondent issued a purported Withholding Notice in the sum of £83,000. The respondent has sought to withhold on six grounds however, it is the Referring Party's contention that the grounds for Withholding are unfounded in fact and, as such, the purported Withholding Notice is invalid."

The total sum in respect of which it was said by the adjudicator that the defenders were entitled to withhold payment was £26,000. This related to alleged ponding in the footpaths and the use of red whin chips. The date upon which the Notice of Adjudication was given was 1 July 2008. The adjudicator's decision is dated 31 July 2008.

[3] A Certificate of Practical Completion was issued on 28 November 2007 certifying the date of practical completion as 23 November 2007 and the expiry of the defects liability period as 23 November 2008.

[4] By notice dated 21 July 2009 the pursuers again gave intimation to the defenders that they wished to refer a further dispute to adjudication. The nature of the dispute referred to adjudication on this occasion is stated in the following terms:-

"4.1 The Employer took possession of the entire site on 23 November 2007, or such other date as the Adjudicator shall so decide;

4.2 Practical Completion of the works was achieved on 23 November 2007 as certified by the Employer's Agent, or such other date as the Adjudicator shall so decide;

4.3 In the alternative, Partial Possession occurred on 23 November 2007, or such other date as the Adjudicator shall so decide;

4.4 The Defect Liability Period in terms of the contract has expired;

4.5 The Respondent has failed to properly administer the contract by appointing a new Employer's Agent;

4.6 A Notice of Completion of Making Good Defects should have been issued in accordance with clause 16.4 of the contract;

4.7 The Respondent has failed to properly administer the contract and in doing so is benefiting from its own breach;

4.8 The Respondent has failed to issue a valid withholding notice following receipt of the Referring Party's invoice dated 29 January 2009;

4.9 The Referring Party is due to be paid the gross amount of £20,185.18, excluding VAT, or such other sum as the Adjudicator may so decide in respect of retention monies;

4.10 The Referring Party is due to be paid the total sum of £26,000.00 excluding VAT, or such other sum as the Adjudicator may so decide, in respect of monies due for the alleged ponding in the footpaths and for the red whin chips;".

In this notice they specified that they were seeking payment of the £26,000 relating to the two items of work in respect of which the Notice of Withholding had been held by the first adjudicator, Mr Stewart, to be legitimate and also the sum of £20,185.18 being the final moiety of retention. Mr Jack McKinney was appointed adjudicator. He issued his decision on 1 September 2009. He found the pursuers to be entitled to both sums plus VAT. Said sums are the sums sued for.

[5] The sheriff granted summary decree in favour of the pursuers. In so doing he rejected the defenders' submission that the second adjudicator ought to have resigned because the dispute which he was being asked to determine was the same or substantially the same as that which had been determined by Mr Stewart by virtue of his decision dated 31 July 2008. The defenders appealed.

[6] It was not in dispute before me that decisions of adjudicators are binding and must be complied with until the dispute is finally resolved. Mr Thomson accepted the underlying purpose of the Act was to "pay now and litigate later". Under reference to Carillion Construction v Devonport Royal Dockyard 2006 BLR 15 he submitted that an exception to the general rule was that where an adjudicator had acted in excess of his jurisdiction the court would not enforce the adjudicator's decision. Under reference to Diamond v PJW Enterprises Ltd 2004 SC 430 he also accepted that an adjudicator's award created a liability which was immediately enforceable. He drew my attention to the opinion of Lord Justice-Clerk Gill at paragraph 25 where his Lordship expressed the view that a court has jurisdiction to review a decision of an adjudicator which proceeds on an erroneous exercise of jurisdiction. Mr Thomson submitted that there had been an incomplete analysis by Mr McKinney in that when addressing the issue of jurisdiction he ought to have asked himself whether he had jurisdiction given that there had already been an adjudication of the same or substantially the same issue as Mr McKinney was being asked to decide. He submitted that the Withholding Notice served by the defenders and which had been considered by the first adjudicator remained binding until the works which were subject to withholding had been remedied. He submitted that the passage of time was irrelevant. That position was strengthened when the justification for serving the Withholding Notice had been supported by the first adjudicator. He examined the Certificate of Practical Completion and drew my attention to the narrative on the face of the Certificate to the effect that "practical completion has been issued on the basis of the attached agreement dated 28 November 2007." The said agreement is to be found at 6/5/Tab/13/2. It bears to be an agreement between the parties and CRGP Ltd, the employers' agent, in terms of which it is said that "It is hereby agreed that practical completion will be issued on the basis of the following conditions being satisfied by Thursday, 31 January 2008." There then follows a list of items which, it is said, (1) have either been agreed were omitted from the contract or (2) had still to be completed under the contract or (3) that outstanding information had to be issued under the contract. Included in that list were the two issues in respect of which the first adjudicator held the Notice of Withholding to be valid. It was submitted that the document, properly understood, was not a Certificate of Practical Completion. He submitted that it was the product of a separate agreement. He pointed out that the issue had been addressed by the second adjudicator who, at page 10 of his decision, was correct to comment that the contract between the parties did not provide for issuing a Certificate of Practical Completion in such circumstances. When it was put to Mr Thomson that ex facie the document it was valid and binding and that no attempt had been made to reduce it, he submitted that it would be open to the defenders to introduce averments and the appropriate plea-in-law in the present action in order to seek reduction ope exceptionis. Mr Thomson accepted that in terms of Condition 16 of the Standard Form of Building Contract with Contractors Design 1998 Edition, the conditions which applied to the present contract, an employer ought to issue a Schedule of Defects not later than 14 days after the expiry of the Defects Liability Period. He accepted that in normal circumstances if no Schedule of Defects was issued by the employer, the employer was taken to be satisfied that the works were defect free. However, he submitted that in the context of there having been an earlier adjudication in which defects were found to exist, the normal conclusion could not be reached. He also accepted that in certain circumstances the passage of time and a change in circumstances could allow the same issue to be referred to adjudication for a second time. It was a question of degree in every case. He submitted that the second adjudicator ought not to have effectively put aside the decision of the first adjudicator and decided that the pursuers were entitled to payment in respect of the works which the first adjudicator had decided they were not entitled to payment. He submitted that the purpose of Condition 16(2) and the issuing of a Schedule of Defects was to draw to the contractor's attention that defects existed which required to be attended to. In this particular case the contractor was well aware of the defects as they had been pointed out by the first adjudicator.

[7] Mr Thomson then addressed the authorities relating to when it might be said that the dispute in one adjudication was the same or substantially the same as one which has previously been referred to adjudication. If it can be so said the adjudicator must resign. He first drew my attention to the case of Skanska Construction Ltd v ERDC Group Ltd 2003 SCLR 296. In this case the pursuers sought to interdict an adjudicator from continuing with a second adjudication on the basis that what the second adjudicator was being asked to do was the same or substantially the same as that which a previous adjudicator had decided. Lady Paton refused the conclusion for interdict on the basis that a different stage in the contract had been reached, different contractual provisions were applicable, more information had become available and thus different considerations and perspectives applied. However, he submitted that it would not have been sufficient had the only consideration been that a different stage of the contract had been reached and that different conditions applied unless there was some other reason to say that the dispute was different. One would require there to be different factual circumstances. One must look to see if the underlying issue was the same in both cases. In this case the issue was whether defects continued to exist. He also drew my attention to the decision of Lord Glennie in Barr Ltd v Klin Investment UK Ltd 2010 SCLR 33 where again the defenders in that case argued that the dispute which had been referred to adjudication was substantially the same as that which had been referred to and decided in adjudication at an earlier stage. Lord Glennie was of the opinion, which he expressed at paragraph 34, that an extended meaning should not be given to the expression "substantially the same" as it appears in the conditions of contract. His Lordship pointed out that it was not uncommon for there to be a number of references to adjudication and that a party was not required to submit, in one reference, all the disputes or differences which existed at that time. A party could seek to recover payment of that which he considered to be due by more than one means. He could refer one aspect to adjudication which if unsuccessful would leave it open to the same party to seek payment, if necessary, by adjudication of the same sum at a later date. Mr Thomson distinguished Barr from the present case on the basis that in Barr the first adjudication only resolved whether the Withholding Notice had been timeous. The second adjudication considered whether there was substance in the Withholding Notice.

[8] I was also referred to the case of Reinwood Ltd v L Brown & Sons Ltd 2008 1 WLR 696 which was said to be authority for the general proposition that save for special circumstances a Withholding Notice which was validly issued continued to be valid notwithstanding subsequent events unless the subsequent events involved carrying out further work. He therefore submitted that Condition 16 could not operate to strip the Withholding Notice, which had been supported by the first adjudicator, of its binding character.

[9] Mr Thomson submitted that the agreement referred to in the Certification of Practical Completion being a Compromise Agreement, the remedy for the pursuers was to sue upon it. I was referred to the case of Quality Street Properties (Trading) Ltd v Elmwood (Glasgow) Ltd, unreported, Glasgow Sheriff Court, 8 February 2002, which was the decision of Sheriff Principal Bowen QC. Finally I was referred to the case of Minster Trust Ld v Traps Tractors Ld 1954 1 WLR 963. In that case the court held that documents were not certificates in form and therefore did not have the force which would otherwise have been accorded to them. The substance and intent of the parties as disclosed by the Certificate of Practical Completion was that they had departed from the contract by entering into the Compromise Agreement and that accordingly the remedy of adjudication was not available to them. Thus the adjudicator did not have the necessary jurisdiction to determine the case.

[10] In reply, Mr Borland submitted that one could distill the defenders' submissions down to three distinct arguments. Firstly, the sheriff held that the two adjudications concerned disputes which were not the same or substantially the same and was said by the defenders to have erred in so doing. Secondly, the sheriff had erred in failing to find that the decision of the second adjudicator was based on a compromise. Thirdly, the sheriff had erred in characterising any errors in the second adjudicator's decision as intra vires errors of law.

[11] Turning to the applicable law, Mr Borland drew my attention to the fact that the sheriff had before him Lord Glennie's decision in Barr and he commended to me the approach adopted by the learned sheriff which he said was wholly supported by Lord Glennie's opinion. The provision requiring the adjudicator to resign if the dispute was the same or substantially the same was not designed to cover a second reference to an adjudicator if that second reference was a separate and distinct way of recovering the sum which had been sought in the first adjudication. He submitted that there was no warrant to limit the application of what was said by Lady Paton in Skanska at paragraph 28 of her opinion as had been submitted by Mr Thomson. He urged me to adopt the approach of Lady Paton and hold that the second adjudicator had jurisdiction when the two adjudications concerned different stages of the contract with different contractual provisions applying and thus different considerations and perspectives being relevant in both. He urged me to look carefully at any jurisdictional challenge to see if what was being said was in fact a substantive challenge dressed up as jurisdictional. In this particular case he submitted that the first adjudication had as its basis the pursuers' claim based upon valuation 11. At the time when the first adjudicator was coming to his decision the Defects Liability Period had not expired. Thus the first adjudicator did not and could not have regard for the terms of Condition 16. By the time of the second reference to adjudication the Defects Liability Period had expired. One was therefore now dealing with a different stage of the contract and with different contractual provisions. The context had also changed in that the employer failed to do certain things which in terms of Condition 16 it was obliged to do. The second adjudication was a separate and distinct dispute. That was so even although part of the sum claimed in the second adjudication had been sought in the first adjudication. As was seen in Barr that was not in itself a basis for holding that the second adjudication was the same or substantially the same as the first. My attention was drawn to the mandatory terms of Condition 16 where it was said that the employer "shall" deliver to the contractor the Schedule of Defects which would form an instruction. There was thus, said Mr Borland, no tenable argument that there was no need for an employer to issue a Schedule of Defects on the basis that such defects had been covered by the first adjudication.

[12] In any event, submitted Mr Borland, Mr McKinney had asked himself the correct question. Even if the answer he came to was wrong, and Mr Borland did not accept that to be so, his decision was still intra vires and as such was not open to challenge.

[13] Mr Borland submitted that the Certificate of Practical Completion had not in any respect contaminated Mr McKinney's decision. The pursuers had referred the second dispute to adjudication as a dispute under the contract. It was not a dispute under the Certificate of Practical Completion or any Compromise Agreement. The Certificate had been issued under the contract. He accepted that the mere use of the word "Certificate" was not decisive. But he submitted that in form and substance the Certificate was what it bore to be. He sought to distinguish what was said in Reinwood Ltd on the basis that entirely different contractual provisions applied.

[14] In my opinion the sheriff was entitled to hold that the two references to adjudication were altogether different. As was pointed out in Skanska and Barr a sum of money can be recovered in a subsequent adjudication even although an attempt to recover the same sum failed in an earlier adjudication. In this case the pursuers first sought to recover sums claimed to be due to them after the Certificate of Practical Completion had been issued but before the expiry of the Defects Liability Period specified in that Certificate. In the first adjudication they relied upon valuation No 11 to support their claim. The defenders relied upon Notices of Withholding which they had served on the pursuers specifying six specific grounds of withholding. The first adjudicator found the defenders entitled to withhold on two of the grounds. By the time of the second reference to adjudication the Defects Liability Period had expired without the employer having issued a Schedule of Defects. Thus the pursuers' claim for payment in the adjudication was for release of the monies withheld by the defenders on the basis that, absent a Schedule of Defects having been issued by the defenders in terms of Condition 16, the pursuers were entitled to a Notice of Completion of Making Good Defects, payment of the sums withheld and also to payment of the retention monies. I can see no justification for doing as Mr Thomson urged and limiting the application of Lady Paton's dicta in Skanska. As in Skanska a different stage in the contract had been reached with different contractual provisions applying. The dispute may have involved the same sums of money but the basis upon which the pursuers claimed payment was entirely different. As Lord Glennie said in Barr at paragraph 32:-

"He (the contractor) may, for example, refer to adjudication a discrete issue affecting a claim for an extension of time, in the hope that, if he is successful on that discrete issue that success will enable him to claim payment of part or all of what he alleges to be due to him. If he is unsuccessful, his chosen route to unlocking that payment will have failed; but that does not prevent him referring to a second adjudication another discrete issue, possibly affecting the same claim, with a similar hope that success on that issue will unlock the payment of some or all of the sums which he claims to be due. It is important to have this in mind when seeking to identify the dispute or difference which the referring party has submitted to adjudication on any particular occasion. The dispute or difference referred is simply that which the referring party chooses to refer, no more and no less. That is quite different from serial adjudication."

Counsel for the defenders accepted, as he had to, that the passage of time and a change in circumstances could result in the same issue being referred to adjudication for a second time. In my opinion we are not even dealing with the same issue. The dispute in the first adjudication was whether effect should be given to the Notice of Withholding served by the defenders. In the second adjudication the issue was whether the pursuers were entitled to a Notice of Completion of Making Good Defects absent a Schedule of Defects having been served. The fact that the same sums are involved is irrelevant. Thus I consider the sheriff to have been correct in holding that the second adjudicator did not require to resign on the basis that the dispute he was being asked to adjudicate was the same or substantially the same as one which had previously been referred to adjudication.

[15] Conditions 16.2 and 16.4 of the contract conditions are in the following terms:-

"16.2 Any defects, shrinkages or other faults which shall appear within the Defects Liability Period and which are due to failure of the Contractor to comply with his obligations under this Contract or to frost occurring before Practical Completion of the Works, shall be specified by the Employer in a Schedule of Defects which he shall deliver to the Contractor as an instruction of the Employer not later than 14 days after the expiration of the said Defects Liability Period, and within a reasonable time after receipt of such Schedule the defects, shrinkages and other faults therein specified shall be made good by the Contractor at no cost to the Employer unless the Employer shall otherwise instruct; and if the Employer does so otherwise instruct then an appropriate deduction in respect of any such defects, shrinkages or other faults not made good shall be made from the Contract Sum.

16.4 When any defects, shrinkages or other faults which the Employer may have required to be made good under clauses 16.2 and 16.3 shall have been made good he shall issue a notice to that effect, which notice shall not be unreasonably delayed or withheld, and completion of making good defects shall be deemed for all the purposes of this Contract to have taken place on the day named in such notice (the "Notice of Completion of Making Good Defects")."

[16] It must be accepted that the Certificate of Practical Completion was issued in an irregular manner in that it relied upon a back or collateral agreement between the parties. The contract into which the parties entered at the outset of their relationship makes no provision for practical completion being conditional. But that is what the parties would appear to have done. There is a back agreement. In my opinion that does not affect or impact upon the validity of the Certificate of Practical Completion. It may give rise to a problem for the parties, in particular the defenders, should the terms of the back agreement not be implemented. The existence of a collateral agreement does not signify that the parties have varied or departed from their original contractual rights and duties. The contract provisions remain in place. I disagree with the submission made on behalf of the defenders, as did the sheriff, that the Certificate of Practical Completion is a product of a separate agreement. It has been issued in terms of the parties' original contract. It follows in my opinion that the contractual arrangements regarding defects remain in place. The Defects Liability Period as provided for in the Certificate of Practical Completion, remained. If the defenders failed to follow the contract provisions certain consequences flow. Counsel for the defenders submitted that the pursuers were well aware of the defects and had been made so by the Notice of Withholding and the terms of the decision of the first adjudication. In my opinion it is not enough to say that the contractor was well aware of the existence of defects and therefore there was no need to serve a Schedule of Defects. The whole purpose of Condition 16 is to provide parties with certainty; certainty as to what defects the employer considers exist. It is nothing to the point that the contractor may not have done some of the work since the first adjudication. Had they done some work but in a perfunctory and unsatisfactory manner the defenders would have required to issue a Schedule of Defects in terms of Condition 16. The fact that they have done no work, as would appear to be admitted, does not entitle the defenders to ignore the contractual provisions. As I understood Mr Thomson's submission, he accepted that had the contractors made some attempt to attend to the works which the first adjudicator held to be subject to a valid Notice of Withholding, but that attempt did not make good the works to the satisfaction of the employer, the employer would have required to deliver to the contractor a Schedule of Defects in terms of Condition 16.2. One can anticipate a situation, albeit perhaps extreme, where the contractor says that he has attended to the works subject to a Notice of Withholding and the employer maintains that no attempt has been made to remedy the deficiency. In such a situation, and on Mr Thomson's analysis of the contract, it is not clear if the employer would require to resort to a Schedule of Defects in terms of Condition 16 in order to justify not paying the contractor for the work or whether the Notice of Withholding would provide the justification. The answer would depend on whether it could be established that the contractor had made some attempt to address whatever had given rise to the Notice of Withholding. Such confusion and uncertainty is avoided if one adopts Mr Borland's interpretation of the contract. Thus I am not prepared to hold that there was no obligation upon the defenders to issue a Schedule of Defects unless further works were carried out by the contractor. If such was the contractual position one would expect to see it reflected in Condition 16. It is not there. There was no authority advanced for this proposition. Mr Thomson accepted that the contract would normally operate in such a way that if no Schedule of Defects was delivered to the contractor by the employer within 14 days of the Defects Liability Period expiring, the contractor would be entitled to assume that the works were free of defects and that he was contractually entitled to payment therefor.

[17] I do not consider that the case of Minster Trust Ltd v Traps Tractors Ltd rescues the defenders although I accept that the use of the word "Certificate" would not necessarily give to a document a character which it would not otherwise attain. However, in this case the Certificate of Practical Completion looks like such a Certificate, has all the usual hallmarks of such a Certificate and bears to be such a Certificate issued in terms of the contract. Furthermore, it is signed by CRGP Ltd who, lest it not be forgotten, are the defenders', the employers', agents. Thus I do not consider that we are in the same territory as was the case in Minster Trust. The case of Reinwood Ltd is also of limited value in that the court was there dealing with entirely different contractual provisions. The decision rested upon an interpretation of Clause 24 of the JCT Standard Form of Building Contract, Private with Quantities, 1998 Edition and in particular the relationship between Clause 24.1 and Clause 24.2.3. This was a case in which the employer served notice that it was intending to deduct liquidate and ascertained damages (LADs) from monies which it was due to pay the contractor. This followed receipt by the employer of a certificate of non-completion issued by the architect under Clause 24.1. Some six days later the architect granted an extension of time to the contractor. This had the effect of reducing the LADs to which the employer was entitled. The issue which arose was whether the employer was entitled to continue to retain the full amount of LADs or whether credit had to be given to the contractor for the difference between the original LADs and the reduced amount payable as LADs following the extension of time. Clause 24.2.3 made specific provision for a similar but not identical situation. It is in the following terms:-

"24.2.3 Notwithstanding the issue of any further certificate of the architect under Clause 24.1 any requirement of the employer which has previously been stated in writing in accordance with Clause 24.2.1 shall remain effective unless withdrawn by the employer."

The difficulty which arose and which difficulty the court had to address was the fact that the clause is silent as to what should happen if the further Certificate was issued before the requirement was acted upon. However, the words "shall remain effective" were decisive in the thinking of the House of Lords. Their Lordships gave the phrase "shall remain effective" its ordinary meaning. Accordingly, it was held that the employer was contractually entitled to retain the amount of LADs as they had been calculated before the contractor received the certificate from the architect granting an extension of time. Thus one can see that the court was dealing there with an entirely different contractual situation from the present. The decision in Reinwood turned on the specific wording of Clause 24.2.3. The case is not authority for the general proposition that a validly issued Withholding Notice entitles the employer to continue to withhold sums from the contractor notwithstanding the contractor deciding not to issue a Schedule of Defects within the Defects Liability Period. In the present case I was not referred to any contractual provision to the effect that a Notice of Withholding continued to have effect notwithstanding the expiry of the Defects Liability Period without a Schedule of Defects having been issued by the employer. In my opinion the defenders remained contractually obliged to serve a Schedule of Defects before the conclusion of the Defects Liability Period if they wished to continue to be entitled to withhold payment from the pursuers. It is their failure to follow the contractual provisions which has resulted in this somewhat anomalous situation arising.

[18] I have therefore come to the view that the sheriff's decision should not be disturbed. It was agreed that expenses should follow success. The cause has already been certified as suitable for the employment of junior counsel.