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OUTER HOUSE, COURT OF SESSION
[2007] CSOH 21
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CA50/04
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OPINION OF LORD DRUMMOND
YOUNG
in the cause
CASTLE INNS (STIRLING)
LIMITED t/a CASTLE LEISURE GROUP
Pursuer;
against
CLARK CONTRACTS
LIMITED
Defender:
________________
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Pursuers: A Young; Dundas & Wilson, CS
Defenders: Howie, QC; MacRoberts
6 February 2007
[1] In May
2001 the parties entered into a contract for the construction of certain works
by the defender in licensed premises belonging to the pursuer. The circumstances of the contract are set out
at length in an earlier opinion in this action, dated 29 December 2005. The contractual form that was used was the Scottish
Building Contract, Contractor's Designed Portion, Without Quantities (January
2000 Revision), subject to certain amendments and modifications. Disputes arose between the parties, and two
referrals to adjudication were made by the defender. The second adjudication is material for
present purposes. The decision in that
adjudication was issued on 7 November 2003. Prior to the date, on 8 October 2003, the architect had issued the final certificate under
clause 38 of the conditions of contract.
[2] The
pursuer subsequently raised the present proceedings against the defender. The parts of the pursuer's claim that are
material for present purposes are as follows.
In their tenth conclusion the pursuers seek payment of the sum of
£72,680, with appropriate interest. That
sum is said to be due by way of damages for the defender's breach of
contract. It relates to delay occasioned
in the period following the date of practical completion. Under the contract the pursuer was entitled
to claim liquidate and ascertained damages for delay, but only in respect of
the period that ended with practical completion; consequently damages are
sought for delay that is said to have occurred thereafter. In relation to the damages claim, the pursuer
avers that the works carried out by the defender contained defects. The work of rectifying those defects, which
fell to the pursuer's shopfitting contractor,
Dimension Shopfitting Ltd, is said to have taken 28
days. It is then averred that as a
result of the defender's breach of contract the opening of the pursuer's
premises was delayed for a like period of 28 days. That 28 day delay in
opening the premises is said to have resulted in a loss of profits to the
pursuer amounting to £72,680; that is the sum sought as damages for breach of contract.
[3] The
action proceeded to debate, and thereafter the opinion dated 29 December 2005 was issued.
The consequence of that opinion was that certain parts of the claim were
held irrelevant; these did not include the damages claim in respect of delay
after practical completion. In addition,
it was held that the pursuer was barred from challenging the decisions of the
adjudicator in the second adjudication by legal proceedings or arbitration of
the sort contemplated by section 108(3) of the Housing Grants, Construction and
Regeneration Act 1996; this part of the opinion is important in relation to
subsequent procedure. Thereafter the
pursuer amended its pleadings to deal with certain matters arising out of the
opinion of 29 December 2005. Following the amendment procedure the
defender sought a further debate on the relevancy of the claim for damages in
respect of delay after practical completion.
This opinion relates to that debate.
Defender's
argument
[4] The
defender's argument is as follows. The
matters decided in the second adjudication cannot now be challenged by legal
proceedings of the sort contemplated by section 108(3) of the Housing Grants,
Construction and Regeneration Act 1996; that was part of the court's decision
following the first debate, in terms of the opinion of 29 December 2005. It followed
that any matter decided by the adjudicator in the second adjudication was now
binding on the parties, without the possibility of its being reopened in court
proceedings. One of the matters so
decided was the length of the delay that resulted from the defender's breach of
contract, and the consequential need to remedy defects. The adjudicator found that the pursuer's
claim in respect of the defects in the defender's work was greater by a considerable
amount than was justified by the true extent of the defects. More specifically, the adjudicator held that
only one week was required for Dimension Shopfitting
Ltd to make good the defects in the defender's work that resulted from the
defender's breach of contract. Dimension
had made a claim for additional loss and expense resulting from the delay
caused by the need to execute remedial works, and in the second adjudication
the pursuer had claimed that amount from the defender. The adjudicator awarded the pursuer an amount
corresponding to the additional loss and expense to which Dimension had
properly become entitled in consequence of the delay caused by the defender's
breach of contract. That amount was
calculated on the basis that one week's delay had been so caused. The pursuer had contended in the second
adjudication that a delay of four weeks had occurred to Dimension's completion
date as a result of the defender's breach of contract. That contention had been rejected, however,
and the sum awarded by the adjudicator in respect of the additional loss and
expense claim by Dimension had been limited accordingly.
[5] The
adjudicator's decision related to the pursuer's ability to recover from the
defender the sum that it was obliged to pay to Dimension in respect of the
latter company's loss and expense.
Counsel for the defender contended that in deciding that matter the
adjudicator had formed a conclusive opinion as to the length of the delay
caused by the defender's breach of contract; he had determined that delay at
one week, not the four weeks claimed by the pursuer. That opinion was conclusive not only in
relation to Dimension's loss and expense but in relation to any other issue
that was dependent on the length of the delay caused by the defender's breach
of contract. The loss of profit sustained by the pursuer in consequence of the
late opening of its premises was such an issue.
The pursuer was only entitled to recover from the defender for the period
of delay actually caused by the defender's breach of contract, and that had
been determined by the adjudicator at one week.
In the present proceedings, however, the pursuer claimed loss of profit
for a period of four weeks. Counsel
accepted that the pursuer's own loss of profit had not been remitted to the
adjudicator, and indeed had been expressly excluded from the remit. Nevertheless he contended that a critical
element in the loss of profit claim had been determined by the adjudicator, and
that determination was conclusively binding. It could not be reopened in the present
proceedings.
[6] Counsel
for the defender referred in some detail to the claim by the pursuer that had
been remitted to adjudication and the adjudicator's decision. I discuss these documents at paragraphs [10]-[11]
below; in summary, counsel sought to demonstrate that the length of the delay
caused by the defender's breach of contract was in issue; that delay was the
time that was necessary to repair the defects.
In this respect, the adjudicator's decision had effect as if it had
contained a declarator of the time required to repair
the defective work. Any petitory claim involves a declarator
of the pursuer's right as a necessary condition of the claim; in Union Electric Co Ltd v Holman & Co, 1913 SC 954, LP Dunedin
stated (at 957-958)
"In one sense there is
always a declarator subauditus in every decree that you ask.
Take, for instance, a mere action for payment founded upon a bill or a
bond. There must always be a finding
that the bill or the bond was good. It
would be a perfectly good answer to say that the bill was forged or that the
bill was obtained by false pretences, and yet the action could be nothing but a
petitory action.
Accordingly, it seems to me that the demand for a declarator
is a first stage of every action, whether declarator
is expressly concluded for or not".
Counsel submitted that that principle was applicable
to the second adjudication. In effect,
the adjudicator had made a declarator as to the
length of the delay; in awarding any sum of money a court, or adjudicator,
always makes an implied declarator. It was that declarator
that was binding in all subsequent proceedings, by virtue of the fact that the
adjudicator's decision could no longer be reopened under section 108(3).
[7] Counsel
further referred to the decision of Judge Humphrey Lloyd QC in Sindall Ltd v Solland, 2001, 80 Con LR 152. In that case a dispute had arisen about the
employer's right to determine the contractor's employment on account of its
failure to proceed regularly and diligently with the works. The contractor had claimed an extension of
time. The contract administrator had
nevertheless alleged default on the contractor's part as a result of failure to
proceed regularly and diligently, and the employer had thereafter terminated
the contract under the relevant provision of the contractual conditions. Thereafter the contractor began adjudication
proceedings to challenge the determination of the contract. The adjudicator decided that the contractor
was entitled to an extension of time and, in consequence of that decision,
decided that the determination was wrongful.
It was held that, in order to determine whether the contractor had
proceed regularly and diligently with the works, it was necessary to establish
the proper date for completion, and that in turn required consideration of the
contractor's entitlement to extensions of time.
Consequently the employer's right to determine the contract was linked
to the question of whether the contractor was entitled to an extension of time,
and the adjudicator required to deal with the latter
question to reach a decision on the former.
For that reason the adjudicator was acting within his jurisdiction in
considering the application for an extension of time: see paragraphs [19] and
[20]. Counsel for the defender submitted
that a similar principle applied in the present case; the adjudicator had
decided that the delay caused by the defender's breach of contract was limited
to one week; in so doing he had acted within his jurisdiction, and that part of
his decision was binding for all purposes.
Pursuer's
argument
[8] Counsel
for the pursuer opened his submissions by pointing out that the loss of profit
claim had been expressly excluded in the referral notice that gave rise to the
second adjudication. In these
circumstances, he submitted that the parties and the court were not bound by
the adjudicator's decision in so far as it related to the loss of profit
claim. The contractual time bar arose
from the provisions of clause 30.9.4 of the conditions of contract. That cause referred to a "dispute or
difference on which an adjudicator has given his decision". The pursuer's claim for loss of profit in
consequence of the late opening of the premises was of itself a "dispute or
difference"; but that dispute had not been referred to adjudication and
consequently there was no binding decision on it. The consequence was that the pursuer was
entitled to raise further court proceedings to have the loss of profit claim
determined. Close 30.9.4 only dealt with
disputes that had been referred to an adjudicator and determined by him. It did not prescribe that any effect should
be given to a previous adjudication decision in respect of issues that had not
been referred to and determined by the adjudicator.
[9] Counsel
emphasized that the court was only concerned with the competency of raising an
action. If clause 30.9.4 were to prevent
that, clear wording was needed, but that was absent. That was in accordance with clause 41A.8.1 of
the contractual conditions and section 108 of the Housing Grants, Construction
and Regeneration Act 1996; these provisions envisaged that the court could
reconsider matters decided by an adjudicator following completion of the
contract, and that jurisdiction could only be excluded by sufficiently clear
wording. In the present circumstances,
where the loss of profit claim had been expressly excluded, if the defender
were correct parties could not assume that the express exclusion of an issue
from adjudication would necessarily protect their position in future court
proceedings on that issue. That could
have serious consequences, especially if the significance of one part of an
adjudicator's decision was not fully appreciated and was accordingly not fully
argued. Finally, counsel pointed out
that the delay that was considered by the adjudicator was slightly different
from that involved in the loss of profit claim.
The adjudicator required to consider what was a reasonable period for the
defects in the defender's work to be made good; the loss of profit claim, by
contrast, required the court to determine what was the period
during which the pursuer was unable to trade because of the defender's breach
of contract. While these might be
closely related, they were not identical.
The second
adjudication
[10] The pursuer's claim was intimated to
the defender by a letter dated 19 August 2003; so far as material, this
was in the following terms:
"As a consequence of your
failure to carry out and complete the defects, which defects arose due to the
material and workmanship not in accordance with the contract, as detailed
(Schedule Part 1)..., we were required to employ Dimension Shopfitting
Ltd ('Dimension'), the phase II contractor, to make good the defects. We regard your failure to carry out and
complete rectification of the defects as a material breach of contract
entitling us to recover those costs incurred arising as a direct consequence of
your breach.
The total cost to make good
the said defects amounts to £129,287.09.
This includes the sum of £26,608.00 in respect of loss and expense
incurred by Dimension and paid by us to Dimension. The total costs we have incurred in making
good these defects are set out in the table below (Schedule Part 2).... This cost would not have been incurred had it
not been for your material breach of contract.
Accordingly, we require you to pay to us the sum of £129,287.09.
Dimension
were
unable to proceed regularly with the phase II works until the defects, in
particular rectification of the internal and external drainage defects, had
been completed.... The Contract Architect for the phase II works... assessed
that a 28 day period of delay was caused as a direct result of the instructions
given to Dimension to make good the defects".
The relevant dates were then summarized. The letter continued:
"As a further direct
consequence of your material breach of contract, the nightclub was unable to
commence trading for a period of 28 days from the planned trading commencement
date of 14 June 2002. As a result
of this we have incurred a loss of trading profit amounting to £72,680.00 for
the 28 [day] period of lost trade".
The letter ended by claiming the various sums referred
to.
[11] Thereafter
the defender referred certain matters to adjudication. The nature of the dispute that was so
referred was set out in the defender's notice of adjudication of 16 September 2003; the material terms of the notice are stated in
paragraph 5.00 of the adjudicator's decision and reasons, in which the defender
is referred to as "the Referring Party" and the pursuer is referred to as "the
Respondent":
"The Respondent maintains
that they are entitled to recover certain sums from the Referring Party. The Respondent has alleged that they are
entitled to recover the sum of £129,287.09 under the provisions of the contract
and/or by way of damages for breach of contract. This sum primarily relates to defects which
are alleged to exist in the works but also encompasses certain sums paid by way
of 'loss and expense' to Dimension Shopfitting
Limited by the Respondent. In this
regard, reference is made to the Schedule Parts 1 and 2 appended to the
Respondent's letter of 19 August 2003 addressed to the Referring
Party.... The Referring Party maintain
that the value of the Respondent's contractual entitlement and/or entitlement
to damages for breach of contract as aforesaid is £11,500 (which sum has
already been withheld...). Accordingly,
the Adjudicator will required to decide what monetary
value, if any, should be attributed to the items identified in the Schedule
Parts 1 and 2 referred to above. ...
For avoidance of doubt the
Referring Party has not referred to the adjudication the Respondent's purported
entitlement to recover the sum of £72,690 in respect of certain delay related
costs, all as more particularly described in the Respondent's letter of 19 August 2002...".
In his decision the adjudicator considered the
individual defects that had been alleged to exist by the pursuer. Certain of the heads of complaint were found
not to be defects. Finally, in relation
to what was described as Defect No 22, the adjudicator considered the question
of the extension of time of four weeks awarded to Dimension, and the resulting
claim for £26,608.00. He held that the
number of alleged defects that were properly substantiated was far less than
the number sought by the pursuer. For
that reason the adjudicator held that the four weeks claimed for Dimension's
time spent in rectifying defects required to be substantially reduced. He concluded that one week was a reasonable
estimate for the time required to rectify the defects or breaches that he had
found substantiated. An award was made
on that basis.
Discussion
[12] The
source of the contractual time bar is found in clause 30.9.4 of the conditions
of contract, as substituted by the Scottish Supplement. This is in the following terms:
"Where pursuant to Clause
41A.8.1 either Party wishes to have a dispute or difference on which an
Adjudicator has given his decision on a date which is after the date of issue
of the Final Certificate finally determined by arbitration or by court
proceedings either Party may commence arbitration or court proceedings within
28 days of the date on which the Adjudicator gave his decision".
That wording makes it clear that the time bar only
operates in respect of a "dispute or difference" on which the adjudicator has
given his decision. In relation to any
matter on which the adjudicator has not given a decision, the time bar has no
application, and court proceedings are competent, subject to the ordinary rules
of prescription. The critical question
in the present case is accordingly the identification of the "dispute or
difference" on which the adjudicator gave his decision in the course of the second
adjudication. The pursuer contends that, so far as material for present
purposes, that dispute or difference was confined to the computation of the sum
due by it to Dimension Shopfitting Ltd for
rectification of defective work carried out by the defender and certain amounts
due by way of loss and expense in consequence of that defective work; it did
not extend to a determination of the delay caused by that defective work that
was binding for all purposes, including the pursuer's claim for loss of profit. The defender, by contrast, contends that the
dispute or difference included a determination of the length of delay caused by
that defective work, and that that determination is binding for any material
purpose, including the calculation of the pursuer's loss of profit as a result
of the late opening of the premises.
[13] Although
it has its origin in the Housing Grants, Construction and Regeneration Act
1996, adjudication is conceptually contractual in nature; an adjudication
provision must be written into every construction contract, either expressly or
by statutory implication. Consequently,
in determining the "dispute or difference" on which an adjudicator has given a
decision, it is appropriate in my opinion to adopt the general approach of the
law of contract. This involves
construing the reference to adjudication objectively, according to the
standards of a reasonable man with a knowledge of the
construction industry. It must also be
borne in mind that adjudication is intended to be a relatively simple and
informal procedure; moreover, it is a procedure that is frequently started with
little or no legal advice, and such legal advice as is obtained is frequently
given in a hurry, without the opportunity for detailed consideration and
reflection. I am accordingly of opinion
that courts should avoid an over-elaborate or
over-analytical construction of references to adjudication. Instead, the critical question will normally
be what a reasonable man with knowledge of the construction industry would take
the reference to cover.
[14] On that
basis, I am of opinion that a "dispute or difference" within the meaning of
clause 30.9.4 should normally be identified by reference to a claim made by one
party and rejected by the other.
Typically such a claim will relate to the payment or deduction of a sum
of money or to the right of the contractor to an extension of time, but other
forms are possible. Nevertheless, the
critical point is in my opinion that one party makes a claim and the other
rejects it. Thus it is the totality of the claim that is referred to
adjudication, and it is the totality of the claim that constitutes the "dispute
or difference" that is so referred. This
can be seen using the example of a financial claim. With such a claim three elements will
normally be involved: first, an event giving rise to a right to payment or a
breach of contract; secondly, a sum due for payment or a loss
sounding in damages, and thirdly a causal connection between the event
or breach and the sum due or the loss.
All of those elements must be established to make out the claim. In my opinion it is artificial to consider
each such element in isolation as a "dispute or difference". The dispute between the parties rather
relates to the totality of the elements, with a final financial result; unless
all are established there are no financial consequences. Parties would not normally embark on
adjudication or court proceedings in relation to one such element in isolation,
unless the other elements were agreed and the only live issue between the
parties related, for example, to whether a breach of contract had
occurred. I am accordingly of opinion
that a "dispute or difference" should be identified by reference to the
totality of the claim, and not by reference to any single element within the
claim.
[15] When
the foregoing approach is applied to the present reference, I am of opinion
that the "dispute or difference" that was referred to adjudication was the
pursuer's claim for damages for breach of contract in respect of the
rectification of defective work and payments by way of loss and expense to
Dimension Shopfitting Ltd. That dispute or difference did not extend to
the determination of the pursuer's claim for loss of profit in consequence of
the late opening of their premises. Nor
did the dispute or difference extend to a determination of the delay caused by
the need to rectify defective work that was binding for all purposes. I reach this conclusion on the basis of the
terms of the defender's notice of adjudication of 16
September 2003, as set out in paragraph [11] above. Two features of that notice are in my opinion
important. In the first place, the
notice refers to the pursuer's claim to recover £129,287.09 under the
provisions of the contract or by way of damages for breach of contract. It is then explained that "This sum primarily
relates to defects which are alleged to exist in the works but also encompasses
certain sums paid by way of 'loss and expense' to Dimension Shopfitting
Limited by [the pursuer]". Reference is
then made to the schedule appended to the pursuer's claim letter of 19 August 2003. When that
schedule is considered, it is clear that it relates to sums allegedly due to
Dimension by the pursuer. That
formulation of the matter referred to adjudication makes it clear in my opinion
that it was the liability to Dimension that was in issue, and not other
possible claims. In the second place,
the reference to adjudication goes on to state that, for the avoidance of
doubt, the defender had not referred to the adjudication "the Respondent''s [the pursuer's] purported entitlement to
recover the sum of £72,690 in respect of certain delay related costs, all as
more particularly described in the Respondent's letter of 19 August 2002". That letter contains a claim for £72,680 in
respect of a delay of 28 days in the start of trading from the premises. It is accordingly clear that the intention in
the notice of adjudication was to exclude that claim from the reference to
adjudication. On that basis, I am of
opinion that the pursuer's claim for damages for loss of trade consequential
upon the delay in opening the premises was not part of the dispute or
difference remitted to the adjudicator; on the contrary, consideration of that
claim was expressly excluded by the reference.
[16] The
defender contends that the question of the delay caused by the defender's
defective work is relevant to both of the foregoing claims, and that a decision
on this question in respect of one of the claims is binding in respect of the
other. In my opinion that contention
involves isolating one element in the pursuer's claim for damages in respect of
sums payable to Dimension and elevating that into a distinct "dispute or
difference". For the reasons discussed
previously, I consider that that is not the correct approach; on the standard
of a reasonable man with knowledge of the construction industry, a "dispute or
difference" should normally be determined by reference to a single financial
claim. Moreover, nothing in clause 30.9.4
indicates that any element in an adjudicator's decision must be given effect in
relation to a dispute that has not been referred to and determined by the
adjudicator. The effect of that clause
is that the adjudicator's decision on a dispute or difference is rendered final
and binding if court proceedings or arbitration are not started within the
specified time limit; the clause does not, however, give any greater force to
the adjudicator's decision. Consequently
the adjudicator's decision on any element of a claim is not rendered binding in
relation to another claim that has not been the subject of adjudication. It follows that the
adjudicator's decision that the delay caused by the defective work was limited
to one week, not the four weeks claimed by the pursuer, is not binding in
relation to the pursuer's claim for loss of profit as a result of the late
opening of their premises.
[17] In
any event, as counsel for the pursuer pointed out, the question of delay
considered by the adjudicator is not precisely the same as the question of
delay that is relevant to the pursuer's claim for loss of profit. The relevant part of the submission to the
adjudicator (item 22) is for the determination of a reasonable period to make
good the defects in the defender's work.
The issue in the loss of profits claim, however, relates to the period
during which the pursuer was unable to trade because of the defender's breach
of contract. Those two periods are
clearly related, and might be the same; nevertheless, conceptually they are not
identical. In some circumstances they
might be different. If, for example, the
contractor's programme had a degree of slack towards the end the delay in
opening the premises might be less than the time taken to make good
defects. Alternatively, the intervention
of public holidays could have the result that the delay in opening was longer
than the time taken to make good the defects.
Regardless of the practicalities, however, the issue before the
adjudicator and the issue before the court are distinct, and my opinion the
court could not be bound by the adjudicator's decision. Certainly nothing in clause 30.9.4 would have
that result.
[18] In
his submissions counsel for the defender placed considerable reliance on the
principle that a decree for payment or damages invariably involved an implied declarator; he contended that in the present case the
adjudicator's award involved a declarator of the
length of the delay that had occurred.
The answer to that argument is in my view that put forward above, in
particular in paragraph [16]; an adjudicator's decision resolves a "dispute or
difference", and its binding effect for the purposes of clause 30.9.4 is
confined to the resolution of that dispute or difference. The critical question is accordingly the
identification of the dispute or difference that has been remitted to the
adjudicator; that question should be determined on the basis of the totality of
the claim rather than its constituent parts.
It may be possible to analyze the adjudicator's reasoning into one or
more implied declarators; nevertheless, those declarators, taken by themselves, are not made binding on
the court by virtue of clause 30.9.4 of the contract conditions. The
wording of that clause is not in my opinion sufficient to render such
individual implied declarators binding in subsequent
court proceedings. In arriving at this
result, I have taken into account the consideration that the general scheme of
the adjudication provisions of the 1996 Act and the standard forms of contract
is that any dispute between the parties can be considered in court proceedings
at the conclusion of the contract; consequently, if that result is to be
excluded I am of opinion that clear contractual wording is required. The wording of clause 30.9.4 is in my opinion
insufficient to achieve that result. In
any event, as explained the last paragraph, the declarator
that is implicit in the adjudicator's decision on item 22 of the reference is
not precisely the same as the issue that arises in the present
proceedings. That is a further reason
for holding that the implied declarator is not
binding on the court.
[19] Reliance
was also placed on the decision in Sindall Ltd v Solland, supra. That case emphasizes the fact that various
individual aspects of parties' disputes may be closely interconnected, and that
a reference to an adjudicator of one dispute can involve him in considering
another matter. Nevertheless, the court
in that case was not concerned with the extent to which the adjudicator's decision
in such a case was rendered conclusive by clause 30.9.4. Nor was it necessary for the court to
consider in detail what was a "dispute or difference" for the purposes of that
clause. Consequently I do not consider
that decision to be relevant to the present case.
[20] For
the foregoing reasons I will hold that the pursuer's claim for damages in
respect of the late opening of the premises is relevant. The action will accordingly proceed to proof
before answer on that basis.
