You are dissatisfied with an adjudicator's decision, but pay the successful party. However, you can litigate or arbitrate the dispute (as provided for in the contract) afresh, hopefully with a different outcome. How long do you have to start those proceedings - does the original limitation period apply, or does it start again once you have paid out?

This thorny issue was dealt with in Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2013] EWHC 1322 (TCC). Here, the Technology and Construction Court decided there is no new cause of action once payment is made. The decision raises an interesting and important issue as to when a party, which is dissatisfied with the substance of an adjudicator's decision, needs to issue its proceedings or raise any counterclaim in those proceedings to challenge and seek to overturn that decision.

Background

Aspect specialised in the provision of asbestos management services including asbestos surveys. Higgins specialised in the construction and refurbishment of community housing, education and healthcare products. In 2004, Higgins approached Aspect to carry out an asbestos survey in relation to the demolition and redevelopment of the Ivybridge Estate, Hounslow, London. It was subsequently necessary for additional asbestos to be removed and Higgins alleged that 17 weeks of delay to the project was attributable to discovery of additional asbestos.

In 2009, Higgins commenced adjudication proceedings. The adjudicator found that Aspect was in breach of contract for failing to conduct a proper and appropriate survey and failing to identify the presence of asbestos containing material. A decision was issued in favour of Higgins, pursuant to which Aspect paid Higgins £658,017 (about £200,000 less than was being claimed) on 6 August 2009.

The issue

The problem here was that Higgins had obtained an adjudication decision four to five years after the adjudicated cause or causes of action (in contract or tort) had accrued. Aspect had paid the monies to Higgins within a few weeks of the decision.

When did Aspect's cause of action against Higgins, to recover the monies it had to pay out on the temporarily binding decision, accrue?

  • when it paid the monies, or
  • back to the time when it was (or was not) in breach of its contractual duties, or when damage arose which was caused by any breach of duty of care (2004 or 2005)?

This problem does not usually arise, since most adjudications will be commenced during, or shortly after, the construction project ends and any challenge will be pursued shortly after that. However, in this case there had been delays. Higgins had not adjudicated until 2009 and Aspect had not commenced legal proceedings until some two and a half years after the adjudication. The problem for Aspect was that if its cause of action arose in 2004 or 2005, its claim would be statute barred (it having only six years to bring the claim).

Subsequent legal proceedings

On 3 February 2012, Aspect commenced legal proceedings and alleged an implied term that the unsuccessful party in an adjudication is entitled to have the dispute determined by litigation and to repayment if successful. It was the implied term argument which gave rise to a preliminary issue that was required to be determined by the court. Aspect argued the survey had been carried out with reasonable care.

Aspect's claim

  • Among other things, Aspect sought "a final and binding resolution of a dispute which was referred to adjudication" and a declaration that it was not liable to pay damages and/or interest to Higgins in the amount decided by the adjudicator, or at all. Aspect argued it should be reimbursed the monies it had paid out.
  • Aspect relied on an implied term that a paying party pursuant to an adjudication under the Scheme for Construction Contracts (the Scheme) was entitled to have the dispute finally determined by legal proceedings; and to repayment of the monies it had paid out in the event that the legal proceedings were decided in its favour.

Higgins' defence and counterclaim

  • Higgins denied the implied term - there was no necessity or room for it.
  • Higgins argued a limitation defence. The Housing Grants, Construction and Regeneration Act and the Scheme did not alter or extend limitation periods for bringing a dispute before the court.
  • Higgins argued in its counterclaim that it was entitled to the full amount of its claim and it sought the balance of £150,776.98, exclusive of interest. Aspect's reply was that the counterclaim was statute barred.

The arguments

The contract incorporated the Scheme. However, the problem as highlighted by the judge was that "It is abundantly clear that Parliament and the drafters of the Scheme did not actually apply their minds to whether or not a new cause of action arose for either party following the honouring or observance of a valid adjudicator's decision in relation to the recovery in any later proceedings of a Court or arbitrator which was to be the tribunal charged with the final resolution of disputes between the parties".

The judge clarified that what could be stated with confidence was the following:

  • "The decisions of adjudicators can be enforced by the Courts, essentially on the basis that there is a contractual undertaking in effect that the parties shall treat the decision as binding, albeit for the time being."
  • "Those decisions are to be enforced by the Courts even if the adjudicators have answered the questions or disputes referred to them incorrectly as a matter of fact or of law."
  • "Those decisions are to bind the parties to the construction contract until and unless the parties agree otherwise or the tribunal of final resolution (be it arbitration or a Court) decides otherwise."

Jim Ennis Construction Ltd v Premier Asphalt Ltd (2009)

It was necessary to review the decision in Jim Ennis because this was the only adjudication case where the issue had been directly considered. It decided that "the obligation to comply with the adjudicator's decision does indeed give rise to a new cause of action in favour of the successful party to compel the losing party to comply with that decision." Akenhead J agreed with this view.

However, the judge in Jim Ennis then went on to say that the obligation to comply and it giving rise to a new cause of action did "provide the platform for the Claimant's second submission that there is additionally an implied term that an unsuccessful party is entitled to bring court proceedings to have the dispute referred to the adjudicator finally determined and, if successful in persuading the court to reach a conclusion different to that reached by the adjudicator, to be repaid all sums paid by him in compliance with the decision."

Delay justifiable

Interestingly the judge in Jim Ennis justified delay which would be caused by the implication of such a term. So, for example the court could be adjudicating on a 12-year-old claim, where the referring party had waited almost six years to commence adjudication proceedings, followed by a further (almost) six-year period for the claim for repayment to be commenced. The judge's answer to this was that (1) the initial delay was not the fault of the losing party and (2) that it seemed the fairer result.

Was there an implied term?

The first point made by Akenhead J was that adjudication was legally and procedurally very different from a court judgment or arbitrator's award. Judgments and awards are final and binding, subject to any appeal, whereas an adjudication decision is temporarily binding pending any final resolution and there is no appeal from an adjudication decision. He also said that the use of negative declarations could be valuable and constructive and that this course was open to Aspect.

Akenhead J considered paragraph 23(2) of the Schedule to the Scheme which provides that:  

"The decision of the adjudicator shall be binding on the parties, and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement between the parties."

However, Akenhead J disagreed with the view expressed by the judge in Jim Ennis "that paragraph 23(2) in some way provides a 'platform' for the implication of a term, if by that expression he meant this opens the way to the implication".

The judge highlighted that Higgins' adjudicated cause of action for contractual negligence "did not and does not disappear by reason of the adjudication process or decision; it existed and is as good before as it is after the decision".

Akenhead J went on to consider the arguments for and against implication of the term. According to the test for implication (BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977)), the term should among other things be reasonable, necessary to give business efficacy, must be so obvious it goes without saying, capable of clear expression and not contradict any express term of the contract.

Was delay justifiable?

One factor considered by Akenhead J (as had been considered in Jim Ennis) was that implication would create a new cause of action as from the date of payment ordered by the adjudicator's decision. This would have the effect of "extending the period in which the underlying dispute can be litigated or arbitrated (but only by the party required to pay) for an additional six years from the date of payment, without the risk of a limitation defence being raised".

Anomalous consequences - set-off and counterclaims

According to the judge, there was no gap in what the parties through the Scheme must have been taken to have agreed. Either party was free to seek a positive or negative declaration from the court (as the final resolution tribunal) at any time (at least after performance) that it or the other party was or was not in breach of contract.

But also there would be anomalous circumstances created as to how the proposed term would deal with set-off and counterclaim where a referring party did not recover all of its claim. For example: a sub-contractor claims on an invoice for £50,000; the main contractor raises a cross-claim for defects or delays for £60,000. In scenario 1, the adjudicator decides that the set-off is proved to the value of £30,000 and awards the balance of £20,000 to the sub-contractor. In scenario 2, the adjudicator decides that the set-off is proved to the value of £60,000 and awards the balance of £10,000 to the main contractor.

Scenario 1 - the main contractor could pursue its counterclaim (and set-off) within six years (without fear of the limitation defence) from the time when it paid £20,000 to the sub-contractor, although any claim for a positive declaration that the sub-contractor had been in breach would run (limitation-wise) from the date of the original breach. For the sub-contractor, any claim for the balance of its account would run from the date when the money was originally due.

Scenario 2 - the main contractor has no new cause of action because it has not paid any money. It is restricted to a cause of action for a positive declaration that it was entitled to the damages which (limitation-wise) relate back to the date of the breach. The sub-contractor has two causes of action: (1) a claim on the invoice which dates back to when the money originally fell due and (2) for the recovery of the £60,000 paid pursuant to the adjudication decision.

The judge questioned "whether the parties must be taken to have agreed that this relatively common permutation is to produce these consequences, which could be said to be anomalous".

Conclusion

The judge found against Aspect. As with any losing party, Aspect could have made a claim for a negative declaration at any time - it did not have to wait for an adjudication decision and the dispute had not changed. It had two and a half years before the limitation period expired to go to court to have the dispute finally resolved without fear of any limitation defence being raised.

Implication of the implied term was not reasonable, equitable or necessary to make the contract work. The only risk that theoretically existed was that if just before the expiry of a limitation period, a party like Aspect waits to see what the result of an adjudication claim against it would be, its later claim for a negative declaration might fail if the limitation defence was deployed. However, the risk was very small because adjudications were often commenced close to the beginning of the limitation period.

There could be no implied term as argued by Aspect. Further, the "essential claimed cause of action relied upon by Aspect involving a negative declaration that it was not in breach of contract or duty and that Higgins did not incur the loss eventually found by the adjudicator to be due is barred by limitation". Consequently, Higgins' counterclaim was also barred by limitation. Both claim and counterclaim were dismissed.

Commentary

It is clear that a dissatisfied losing party must act quickly in challenging an adjudication decision by commencing litigation or arbitration (as provided by the contract) so that any subsequent claim is not time-barred. Akenhead J also highlighted that parties should consider carefully (both legally and commercially) the use of negative declarations in establishing any potential liability and in particular the fact that such a declaration can be sought at any time after an alleged breach of contract or tortious duty. There is every reason for a dissatisfied party to examine its options at an early stage and, needless to say, within the appropriate original limitation period.