The following case raised several issues concerning adjudication and in particular what effect the incorporation of a dispute resolution provision giving parties a right to adjudicate in accordance with Part I of the Schedule for Construction Contracts (England and Wales) Regulations 1998 (Scheme) had on the question of set off. The court also had to consider whether an adjudicator’s consideration of without prejudice material amounted to a breach of natural justice.
RWE Npower Plc v Alstom Power Ltd  EWHC B40
The employer, who owned and operated the Aberthaw power station entered into the following three contracts with the contractor:
- a contract to repair and maintain the boilers at the power station (the Boiler Contract)
- a feed system contract (the Feed Contract); and
- a term maintenance contract (the Maintenance Contract).
The repair works under the Boiler Contract were to be spread over a three-year period between 2007 and 2009 because only one unit could be taken out of service at any one time. The repair works in 2007 overran and the contractor claimed the extra costs that it had incurred. With the prospect that the 2008 repair works might also overrun, the parties entered into a deed of variation to vary the Boiler Contract and the Feed Contract. The deed settled a number of financial and procedural matters relating to the works under both the Boiler Contract and the Feed Contract.
Clause 11 of the deed of variation provided:
“If at any time any dispute or difference shall arise under or in connection with the Contracts … then any party may refer such dispute or difference to adjudication in accordance with Part 1 of the Schedule to the Scheme for Construction Contracts (England and Wales) Regulations 1998.”
Matters did not progress smoothly and the parties embarked on three adjudications during 2008 and 2009. Correspondence and documents were exchanged, some of which was marked “without prejudice.” This dispute concerned the third adjudication.
The adjudicator’s decision was in favour of the contractor. In anticipation of enforcement proceedings by the contractor, the employer commenced proceedings questioning whether the adjudicator’s decision was enforceable and whether the employer was entitled to set off against the adjudicator’s decision liquidated damages due to it from the contractor.
For the purposes of the hearing it was assumed that neither the Boiler Contract nor the Feed Contract were construction contracts for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act).
Set off of liquidated damages
The employer wanted to set off from the adjudicator’s decision liquidated damages for delay in completing the 2008 works under the Boiler Contract. Under the deed of variation the works had to be complete by 9 July 2008 but were in fact delayed until 29 July 2008, entitling the employer to an amount of liquidated damages.
The employer argued that as the Boiler Contract was not a construction contract, the provisions of the Construction Act did not apply. As a result:
- The question of set-off was purely a matter of construction of the Boiler Contract as amended by the deed of variation.
- As a matter of construction, clear words would be needed to deprive the employer of the right to set off.
- Far from there being words of exclusion of set off, the Boiler Contract contained an express right to set off in clause 39 which provided:
“39 Without prejudice to any other remedy … [the employer] shall be entitled to deduct from any moneys due, or becoming due to [the contractor], all costs, damages or expenses for which under the contract [the contractor] is liable to [the employer]”
The contractual incorporation of the Scheme by clause 11 of the deed of variation was not, of itself, sufficient to displace the right of set-off. Clause 11 merely incorporated the Scheme without the Construction Act so that none of the policy considerations underpinning the Construction Act, including the “pay now, argue later” approach, could be imported into the Boiler Contract.
Conversely, the contractor argued that:
- Clause 11 of the deed of variation incorporated into the Boiler Contract not only the provisions of the Scheme - which imposed an obligation to comply with the adjudicator’s decision (paragraphs 21 and 23) - but also the “intent underpinning the legislation which gave rise to the Scheme”.
- As the objective of the legislation was to promote cash-flow and the Scheme was designed to ensure that an adjudicator’s decision was honoured, any deduction from the sums awarded by the adjudicator would not be in compliance with the adjudicator’s decision.
- The incorporation of the Scheme by clause 11 of the deed of variation imported wording which overrode the right to set off in clause 39 or any common law right of set off.
Set off: the court’s view
Having reviewed the authorities, the court concluded that:
- The Boiler Contract did preclude set off from being raised.
- The effect of clause 11 of the deed of variation was to incorporate the provisions of the Scheme.
- An informed bystander would conclude that by choosing to incorporate the provisions of the Scheme rather than its own bespoke provisions for adjudication, the parties intended to import into the Boiler Contract the parliamentary intention underlying the Scheme. That intention did not apply by virtue of an implied term but as a matter of construction.
- In a contractual application of the Scheme, the incorporated wording had to be given the same interpretation as it was given when the Scheme had statutory force, unless there were background matters concerning the incorporation of the Scheme, or there was wording elsewhere in the contract which compelled a different conclusion.
The court’s view was that there were no specific background matters to contradict this inference. It was clear to the judge that the parliamentary intention underlying the Scheme was widely known in the construction industry and understood by most surveyors and lawyers representing the parties to contracts for major works, whether in the power industry or other industries. It was therefore reasonable to conclude that by expressly choosing to incorporate the Scheme into the Boiler Contract and the Feed Contract, the parties appreciated that they were adopting a regime for interim dispute resolution which required adjudication decisions to be honoured without resort to set-off or cross-claims.
As a result it was not possible to interpret clause 39 as allowing a right of set-off against the amount awarded by the adjudicator without contradicting the purpose of the Scheme (which was to require prompt payment in full of decisions of adjudicators). Clear words would be required to alter the interpretation of the Scheme. The employer was not entitled to a set off against the adjudicator’s decision of sums due to it from the contractor.
Editors’ comments: set off
Employers should take note of this decision which suggests that in a contractual adjudication the express choice of the Scheme rather than any other set of adjudication provisions brings with it parliament’s intention underlying the legislation. As a result, if an employer in a contractual adjudication wishes to incorporate Scheme adjudication rules as a method of dispute resolution into a contract but retain a right to set-off, then the contract should include very clear and explicit words to this effect.
Suitable wording might include:
“Nothing in this [contract] whether expressly or by incorporation or by implication shall in any way restrict the employer’s equitable or common law rights of set off. Without prejudice to the generality of the foregoing, the employer shall have the right to set off against any sum due to the contractor …”
(Parsons Plastics (Research and Development) Ltd v Purac Ltd (2002 93 Con LR)
Enforceability of adjudication decision enforceable: breach of natural justice
The employer also sought to argue that the adjudicator’s decision was unenforceable because the adjudicator had proceeded with the reference after having reviewed correspondence which had been marked without prejudice; and that this was a breach of the rules of natural justice. This correspondence had been sent to enable the parties to explore the possibility of settlement. The employer maintained that only one letter was an open document: the contractor’s notice of claim of 25 October 2007. That letter and the exchanges between the parties which were protected by privilege meant that the contractor was unable to demonstrate that any dispute had crystallised.
The contractor argued that it was permissible for the adjudicator to have regard to without prejudice correspondence to establish whether there was a dispute. If that was incorrect, the contractor maintained that none of the communications were in fact privileged. The employer’s claim to privilege amounted to an “afterthought” and the “without prejudice” markings on the contractor’s letters was an obvious mistake, since none of the documentation enclosed with the letters was privileged, but provided the detail to back up the contractor’s claim.
The court’s approach to privilege
The court held that:
- There was “nothing privileged” about the correspondence prior to May 2008 as there was nothing to negotiate until the contractor had particularised its claim. There was nothing confidential about the expression on both sides of a willingness to compromise. The “without prejudice” marking suggested that the particulars of claim were an opening shot in negotiations, but they were also a response to the employer’s demands that details of the claim be given. In those circumstances the particulars were not privileged.
- The correspondence after May 2008 was only privileged insofar as it contained settlement negotiations. The privilege extended to the content of the exchanges rather than to the fact that those exchanges took place. The contractor was free to rely on the correspondence to show negotiations took place over the claim and to show that those negotiations did not result in any agreement.
- Adopting the broad approach to the definition of “dispute” in Amec Civil Engineering v Secretary of State for Transport  EWHC 2339 (TCC), this was sufficient to establish that there was a dispute between the parties when the contractor served its notice of adjudication.
The court went on to consider, had the claims before May 2008 been privileged at the date of the notice of adjudication, whether the adjudicator’s decision would have been unenforceable because of a breach of natural justice when the adjudicator reviewed that “without prejudice” material.
The appropriate test for an adjudicator to refrain from acting was if he considered that the knowledge acquired of the privileged communications disabled him from fairly continuing with the case, or a fair minded and informed observer would conclude that there was a real possibility that there would not be a fair hearing (Berg v IML London  1 WLR).
On the facts, the court considered that there was “no substance” to the argument that the rules of natural justice had been breached. The court did not consider that there was a real danger that the adjudication would be unfair.
The court did consider that it would have been a breach of natural justice for the adjudicator to have considered “without prejudice” material which one party had not had the opportunity of addressing, or if an adjudicator had taken into account privileged communications in which a party, which had not consented to any waiver of privilege, had said anything which was potentially disadvantageous to its pleaded case. Examples of this would be an offer to settle or a concession made for negotiating purposes.
Editors’ comments: Enforceability of adjudicator’s decision
This case is useful reminder that parties can only refer a crystallised dispute to adjudication and should consider carefully the need to refer “without prejudice” material to the adjudicator so as to avoid potential difficulties on enforcement.