Monday 10 October 2011

Adjudication: Who Pays? read the small print ….

Introduction

In accordance with section 108 of the Housing Grants, Construction and Regeneration Act 1996 (the Act) a construction contract shall enable a party to refer a dispute to adjudication.
However, many contracts, in an attempt to discourage the referring party from using it, contain a provision requiring the referring party to meet not only the adjudicator’s fees and expenses in their entirety but also both parties’ legal expenses. This issue arose in the case Profile Projects Limited v Elmwood (Glasgow) Limited.

Background

The parties entered into a contract whereby Profile was engaged as sub-contractors to Elmwood for carrying out the design and installation of partitions and other works for NHS Lothian. A dispute arose concerning Profile’s entitlement to payment in terms of its interim application 3, which Profile referred to adjudication. The adjudicator found that payment was due to Profile and also found Elmwood liable in the costs of his fees. Elmwood refused to make payment.

Court case

One of the issues that had to be determined was whether the adjudication provisions in the contract were incompatible with section 108 of the Act because of clause 27(ii) which stated:
“…the referring party shall bear the whole costs of the adjudication including, but not limited to the Adjudicators fees and costs in their entirety and both parties’ legal expenses (on a solicitor and client basis and upon the sale of charges applicable to Court of Session business…”
Profile argued that section 108 of the Act requires that there is no restriction on the scope of disputes which may be referred to adjudication; and that a provision which places an obstacle in the way of a party referring a dispute to adjudication will not comply with section 108(2)(a) of the Act which states:
“…The contract shall…enable a party to give notice at any time of his intention to refer a dispute to adjudication…”
Therefore, clause 27(ii) allocating all costs of the adjudication to the referring party, independently of the outcome of the adjudication process, was such a provision.
Elmwood disagreed and argued that clause 27(ii) did not have the effect of preventing either party from referring disputes to adjudication. The most that can be said of this clause is that it may discourage a party from exercising that right.
The judge agreed with Elmwood. He said that it would have been open to parliament to make it a requirement that if a contract makes allocation of the costs of adjudication, such allocation must meet certain conditions. Such a requirement does not exist in the Act, and in the circumstances he concurred with HHJ Mackie in Bridgewater Construction Limited v Tolent Construction Limited that there should be no interference with the contract.
One important point to note in the Profile case concerned the effect of the wording of clause 27(ii). It simply refers to ’...the referring party …’ whereas, for example, in another case concerning the same issue Yuanda (UK) Limited v W W Gear Construction Limited there was a similar clause which stated that if Yuanda referred a dispute to adjudication it was required to pay the costs of the adjudication. The subtle difference between the provision in Yuanda and the provision in Profile is that in the former there was no corresponding obligation on Gear.
This lack of reciprocity was considered relevant in Yuanda. In Profile there was reciprocity; the adjudication provision applied to both parties to the sub-contract, and was agreed when no one knew to whose benefit it might operate. Furthermore, the provision in Yuanda placed no limit on the amount of the costs of the adjudication i.e. there was no provision for reasonableness. By contrast, in Profile there was an entitlement to refer the account of the costs to taxation by the Court of Session scale, so there was provision for reasonableness.

Comment

The significance of this case, and others like it, is that the underlying purpose of a provision making the referring party bear all the costs of the adjudication is to deter the referring party from taking disputes to adjudication. It would only be worth the referring party adjudicating if it felt that its recovery would exceed its opponent’s costs. Estimating such costs could be extremely difficult, particularly as there is no reason for the responding party to restrain its expenditure given that it will not be paying the bill.
The strong message to contractors’ is to ensure that they review very carefully their contract and seek to remove such clauses.