Peterborough City Council v Enterprise Managed Services Ltd

[2014] EWHC 3193 (TCC)

Peterborough engaged EMS to design and install a 1.5 MW  solar energy plant. The Contract was made on the FIDIC General Conditions of Contract for EPC/Turnkey Projects (or Silver Book), and provided that if the plant did not generate 55 kW of power by 31 July 2011 then EMS would be liable to pay liquidated damages of £1.3m to the Council (“the Price Reduction’”).

Sub-clauses 20.2–20.7 set out the procedure for dispute resolution by a Dispute Adjudication Board (“DAB”) to be appointed on an ad hoc basis after any dispute had arisen. The Red and Pink Books require the parties to establish a dispute board from the outset of the project, known as a standing board. Sub-clause 20.8 provided that if at the time a dispute arose there was no DAB in place “… whether by reason of the expiry of the DAB’s appointment or otherwise” then either party could go to court.

Following completion Peterborough alleged that the plant had failed to achieve the required power output and claimed the Price Reduction. On 6 January 2014 Peterborough issued a letter of claim under the Pre-action Protocol. EMS responded that in accordance with the Contract terms the dispute ought to be referred to a DAB. During July 2014 EMS gave notice of its intention to refer the dispute to a DAB and since no DAB had by then been established, on 26 August 2014 EMS applied for the appointment of a DAB adjudicator. Peterborough issued court proceedings on 11 August 2014 and on 27 August 2014, EMS issued an application for an order to stay these proceedings.

Mr Justice Edwards-Stuart was therefore asked to consider whether or not the terms of the contract required a dispute to be referred  to adjudication by a DAB first as a pre-condition to any court proceedings. If that was correct, should the court exercise its discretion and order that the Council’s proceedings be stayed?

Peterborough argued that sub-clause 20.8 provided an opt-out from DAB adjudication but that if reference of a dispute to a DAB was mandatory, the court proceedings should be allowed to continue on the grounds that:

  1. what was a complex dispute was unsuitable for a “rough and ready” DAB adjudication procedure; and
  2. any DAB adjudication would be an expensive waste of time as it was inevitable that the losing party would go to court.

On the first issue the Judge decided that upon a proper interpretation of the Contract, sub-clause 20.8 would only apply to give Peterborough a unilateral right to opt out of DAB adjudication if the parties had agreed to appoint a standing DAB at the outset. Accordingly, given that sub-clause 20.2 provided for ad hoc DAB appointments, the Judge accepted EMS’s argument that the Contract required the determination of the dispute through DAB adjudication prior to any litigation. The right to refer a dispute to adjudication arises under sub-clause 20.4 as soon as a DAB has been appointed, whether under sub-clause 20.2 or 20.3.

The wording of sub-clause 20.8 did give rise to confusion, resolved by the Judge’s approach in distinguishing between contracts that provided for a permanent DAB to be established at the outset and contracts that, as in this case, allowed for ad hoc appointments. Given that on Peterborough’s submission, sub-clauses 20.2–20.7 would have been rendered meaningless, this was a rational and commercially sensible approach to adopt.

Peterborough submitted that any decision by the DAB would almost inevitably provoke a notice of dissatisfaction from one  or other party. Accordingly, to embark on the fairly lengthy (and therefore expensive) adjudication procedure under the contract would be a wholly or at least largely unproductive exercise. The dispute raised complex questions of construction and application of legislation, mandatory codes and standard industry practice and would require extensive disclosure. Therefore the “rough and ready” process of adjudication was entirely inapt to resolve this dispute.

However, the Judge noted that this was nothing new: the complexity of a potential dispute about when the required power output was achieved was foreseeable from the outset, yet nevertheless the parties chose to incorporate the adjudication machinery in the FIDIC form of contract. Both parties therefore agreed to the “rough and ready” adjudication procedure.

That said, in circumstances where the parties had not yet invested time or money in the DAB adjudication, the Judge was sympathetic to Peterborough’s case that the court proceedings should not be supplanted by adjudication.

However, the over-riding principle as illustrated by the legal authorities, for example DGT Steel & Cladding v Cubitt Building (see Issue 86), clearly showed a presumption in favour of leaving parties to resolve their disputes in the manner they had agreed to in their contract.

Accordingly, the Judge ordered that the court proceedings were to be stayed.