The meaning of “cause of action” under the Limitation Act 1980 and its effect on adjudication decisions and court proceedings
The court in the following case had to consider the date of accrual of a cause of action in proceedings brought by the losing party to challenge the adjudicator’s decision. This was of particular importance because the adjudicator’s decision was delivered close to the expiry of the limitation period.
Section 5 of the Limitation Act 1980 states that the time limit for actions based on simple contract (as opposed to a contract executed as a deed) is 6 years from the date on which the cause of action accrued.
The central issue was whether the commencement of court proceedings by a losing party in an adjudication under the Scheme of Construction Contracts (Scheme) challenging the matters decided by the adjudicator (with a view to recovering the monies paid by it to the winning party in compliance with the adjudicator’s decision) gave rise to an independent cause of action separate and distinct from the cause of action in respect of the underlying dispute which had been referred to adjudication.
If the answer to this question was yes, then the claim in this case was not statute-barred by Section 5 of the Limitation Act; if no, then the claim was statute-barred.
Jim Ennis Construction Ltd v Premier Asphalt Ltd  EWHC 1906 (TCC)
The claimant sub-contractor was employed by the contractor to construct the road works to the main entrance of a Tesco supermarket in Lancashire. The sub-contractor in April 2002 sub-contracted the supply, laying and rolling of the macadam surfacing to Premier Asphalt Ltd(Premier). In the absence of any express adjudication provisions in the contract, the adjudication provisions of Part 1 of the Scheme for Construction Contracts (Scheme) applied to the contract between the sub-contractor and Premier.
On 29 May 2002, the employer’s engineer complained about the base course laid by Premier. The sub-contractor removed the base course which Premier subsequently replaced in June 2002. The parties did not agree who should bear the costs associated with replacing the defective work.
Some months later, in December 2002, Premier included the cost of the replacement works in its final application for payment. The sub-contractor refused to pay that part of the application (due to the defective work) and claimed it was entitled to deduct its cross-claims for loss and damage caused by the laying of the defective base course. A deduction was made from the final account.
Premier challenged this deduction almost 6 years later, on 15 September 2008, when it referred the dispute to adjudication. The claim was at this time within the applicable 6 year limitation period for a claim in contract founded on the non-payment of its final application for payment, but outside the 6 year period for the sub-contractor to claim for damages for breach of contract in relation to the defects in Premier’s works.
The adjudicator upheld Premier’s claim and required the sub-contractor to pay back the principal sum which it had deducted. The sub-contractor did not accept the decision but nevertheless made the required payment recognising that by virtue of paragraph 23 (2) of the Scheme the adjudicator’s decision was binding on it unless and until the dispute was finally determined by legal proceedings.
The sub-contractor subsequently issued court proceedings seeking a final determination of the dispute.
The limitation argument
Premier applied to strike out the sub-contractor’s claim on the basis that it was outside the limitation period for a claim based on simple contract under the Limitation Act (6 years from the date on which the cause of action accrued). Premier argued that the cause of action for the breach of contract complained of by the sub-contractor occurred before 29 May 2002 (i.e. the time when the employer’s engineer complained to the contractor about the laying of the original base course), and that by virtue of Section 5 of the Limitation Act the sub-contractor’s claim was statute barred.
The sub-contractor’s arguments
The sub-contractor argued that:
- the adjudicator’s decision gave rise to an independent cause of action, separate and distinct from the underlying cause of action in respect of the dispute submitted to adjudication (Issue 1); and
- it was an implied term of the contract that the “losing party” in an adjudication who paid sums to the “winning party” was entitled to re-argue the dispute in subsequent legal proceedings and if successful recover all sums which had been paid pursuant to the adjudicator’s decision (Issue 2).
Issue 1: did the adjudicator’s decision give rise to an independent cause of action?
The starting point for the court was section 108 (3) of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) and paragraph 23 (2) of the Scheme which together set out a specific contractual obligation to comply with the decision of the adjudicator.
Section 108 (3) of the Construction Act provides that:
“The contract shall provide that the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration …or by agreement.”
Paragraph 23 (2) of the Scheme 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 … or by agreement between the parties.”
The court was referred by the sub-contractor to a number of authorities and academic texts which supported the contention that compliance with an adjudicator’s decision did give rise to an independent cause of action, namely:
- Judge Hicks in VHE Construction v RBSTB Trust Co ((2000) 70 Con LR 51) who reasoned that the true nature of enforcement proceedings was that they were proceedings to enforce the contractual obligation to comply with the adjudicator’s decision;
- Judge Thornton in Bovis Lend Lease v Triangle Development (2002) EWHC 3123 (TCC) who held that the adjudicator’s decision gave rise to a separate contractual obligation to comply with the decision; and
- Judge Akenhead in Ringway Infrastructure Services v Vauxhall Motors (No 2) (2007) EWHC 2507 (TCC) who held that as the nature of enforcement of adjudicator’s decisions was contractual, the date when the cause of action arose was the date when the losing party failed to pay the winning party in accordance with the adjudicator’s decision.
The judge considered the analysis given by Judges Hicks, Thornton and Akenhead in the authorities above to be correct and held that the obligation to comply with the adjudicator’s decision did give rise to a new cause of action in favour of the winning party to compel the losing party to comply with that decision.
It should be noted that this conclusion was not in itself sufficient for the sub-contractor because the sub-contractor was seeking to have the court finally determine the dispute decided by the adjudicator, as opposed to seeking to enforce the adjudicator’s decision. However, the court’s conclusion on Issue 1 did provide the platform for determination of Issue 2.
Issue 2: The implied term
It was clear from section 108 (3) of the Construction Act and paragraph 23 (2) of the Scheme that the adjudicator’s decision was binding on the parties until the dispute was finally determined by legal proceedings. However, neither the Construction Act nor the Scheme conferred an express right on a losing party to adjudication to bring legal proceedings finally to determine the dispute referred to adjudication and, if successful, recover sums paid to the winning party in compliance with the decision.
The question was whether such a term was to be implied?
The sub-contractor submitted that such a term satisfied all of the 5 conditions for the implication of a term stated by the Privy Council in BP Refinery v Shire of Hastings (1978) ALJR 20, namely that:
- It must be reasonable and equitable.
- It must be necessary to give business efficacy to the contract so that no term would be implied if the contract was effective without it.
- It must be so obvious that it went without saying.
- It must be capable of clear expression.
- It must not contradict any express term of the contract.
The court agreed that the implication of such a term did satisfy the 5 requirements identified in the BP Refinery case and held that:
- There was an implied a term that where one party has paid monies to the other party in compliance with the decision of an adjudicator then that party was entitled to have that dispute finally determined by legal proceedings and, to the extent that the dispute was finally determined in his favour, to have those monies repaid to him.
- The implied term was necessary to make fully workable the concept of the temporary finality of the adjudicator’s decision which lay at the heart of the policy behind the adjudication provisions of the Construction Act.
The sub-contractor was not statute-barred from seeking a final determination of the adjudicator’s decision by court proceedings because it had successfully argued that compliance with an adjudicator’s decision gave rise to a cause of action which was separate and distinct from the underlying dispute referred to adjudication and that it was an implied term that a losing party was entitled to a final determination by the court of the adjudicator’s decision and payment back (if successful) of the monies which it had paid in compliance with the adjudicator’s decision.
The decision seems to be a sensible one as, on the facts of this case, there was nothing that the sub-contractor could have done to protect itself from the limitation defence contended by Premier. To have found for Premier would have had the effect of encouraging parties to wait until just before the expiry of the time limit before referring disputes to adjudication. The risk of this happening would leave parties in a position similar to the sub-contractor with no option but to issue defensive proceedings for declaratory relief from the courts out of an abundance of caution.
A decision in favour of Premier would also have been inconsistent with the approach taken by the courts in robustly enforcing the decisions of adjudicators on the grounds that however rough and ready the process and however wrong the decision there is no injustice because the losing party can always challenge the decision (and hence recover money) by subsequent legal proceedings.