The Court of Appeal has ruled in Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc (2013) that an adjudication under the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the "Scheme") started a fresh cause of action for the losing party to appeal in the courts the payment it made, with the limitation period running from the date of payment, rather than the date of the underlying breach.
Background and facts
The Housing Grants, Construction and Regeneration Act 1996 (the "Construction Act") was introduced to improve cash flow for the construction supply chain by requiring UK construction contracts to contain provisions giving greater certainty as to payment and granting the parties a right to adjudicate at any time. Adjudication delivers decisions more quickly, pending full examination in arbitration, legal proceedings or later agreement between the parties.
In 2004, Aspect conducted an asbestos survey for Higgins. Higgins alleged that the survey underestimated the contamination and, in 2009, referred the claim to an adjudicator who ordered Aspect to pay Higgins £658,017 (about £200,000 less than was being claimed) in light of delays and additional decontamination expenses incurred. In 2012, Aspect issued a claim to recover this sum with Higgins counterclaiming the higher original sum they sought from the adjudicator.
The issues examined on appeal were:
Was it an implied term of the parties' contract that the losing party to an adjudication could seek a final determination by litigation, and, if successful, recover the difference between the payment ordered by the adjudicator and any lesser sum subsequently ordered (the "overpayment")?
If so, did the applicable limitation period run from the alleged original breach of contract or the date of payment of the amount originally ordered by the adjudicator?
What was the applicable limitation period for the counterclaim brought by Higgins?
On the first issue, the Technology and Construction Court judge held that there was no such implied term, following the authority set out byAttorney General of Belize v Belize Telecom (2009) and BP Refinery v Shire of Hastings (1977). There was nothing to suggest that it had been Parliament's intention to incorporate such a term and no overriding policy reasons existed for such an implication.
On appeal, Longmore LJ disagreed and ruled that, provided the appeal was successful, the overpayment should be recoverable. Such a term was implied into the contract by virtue of paragraph 23(2) of 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 … or by agreement."
Longmore LJ cited Lord Hoffman's observations about implying terms inAttorney General of Belize. It is "the meaning which the instrument would convey to a reasonable person" in possession of all the background knowledge "which would reasonably be available to the audience to whom the instrument is addressed" which creates the objective meaning and whether a term should be implied to give it that meaning. The Court held that although paragraph 23(2) "does not say in actual words that any overpayment is recoverable, that seems to be the true intent of the provision and is inherent in the words used."
On the second issue, Longmore LJ held that the limitation period for such an action to be brought ran from the date when the award made in the original adjudication was paid, not the date of the original, alleged breach of contract. The implied term created a distinct cause of action, separate from the original cause of action for alleged breach of contract. The Court's reasoning did not engage with the limitation authorities cited by counsel for Higgins, but centred instead on the risk that a "wily claimant" would commence an adjudication just before the initial six-year window closes and that a "perhaps less wily" defendant would not realise it should issue precautionary proceedings. This reasoning fails to recognise that a referring party cannot commence an adjudication without a dispute existing and that, for a dispute to exist, the other party must be at least aware of it.
On the final issue, the limitation period for Higgins's counterclaim was held to run from the original breach of contract and had therefore elapsed. As Higgins was the party receiving the benefit of the adjudication award, it was aware that it could make a claim from the date of the original breach, and its cause of action should therefore accrue from that point.
At first glance, it would be tempting to see this decision as just one of many handed down each year in relation to adjudications. However, Aspect did not argue that the term should be implied due to any facts specific to this case. The term will therefore be implied into every construction contract which provides for adjudication governed by the Scheme – which is what most construction contracts do.
Theoretically, this means that a claim could be brought by an unsuccessful party more than 6 or 12 years after the original cause of action arose. Presumably though, the burden of proof would still be on the party who referred the original dispute to adjudication, although the Court did not elaborate on this point. It is odd that the adjudication process could now potentially have the effect of postponing the final determination of a dispute, contrary to the intent and policy of the Construction Act.
Given the wide use of the Scheme, it remains to be seen whether there will be an appetite amongst parties to construction contracts for including provisions on how adjudication awards can be appealed and limitation periods for making such appeals. In light of the Court's reasoning, the issues in this case may well need to be revisited and clarified in future cases or by the Supreme Court (to whom leave to appeal has been applied for in this case).
In the meantime, if a successful party to an adjudication anticipates a challenge under the implied term and fears being prevented from bringing a counterclaim in light of the approaching expiry of the limitation period applying to the original claim, then it may wish to seek a declaration of non-liability from an adjudicator.