Recent Developments in Adjudication – Two Interesting New Cases
09 October 2013
Adjudication, the 28-day construction industry specific dispute resolution process, has been a fact of life under building contracts since the coming into force of the Construction Contracts (NI) Order in 1999. Last year, with the introduction of the Construction Contracts (Amendment) Act, the right to adjudicate was extended to include not just written contracts, but also oral and partly oral contracts. Now, two recent decisions of the English Technology and Construction Court, appear to have extended the ambit of adjudication even further.
The right to adjudicate applies (with certain limited exceptions) to all “construction contracts”, which are contracts for “the carrying out of construction operations”. Where the contract in question is a traditional building or engineering contract or sub-contract (be that under standard terms such as JCT or NEC or a more bespoke form), there is unlikely to be much debate but that the right to adjudicate will apply. However in the recent case of Parkwood Leisure Ltd –v- Laing O’Rouke Wales and West Ltd , the issue was whether adjudication was available in relation to a dispute that arose under the terms of a collateral warranty. The answer that the Court reached, which may come as a surprise to some, was that adjudication is available.
The case involved the construction of a swimming and leisure facility in Cardiff. Laing O’Rourke, as the Contractor, provided a collateral warranty in favour of a tenant of the development, Parkwood Leisure Ltd. The collateral warranty provided (amongst other things) that Laing O’Rourke “warrants, acknowledges and undertakes that it has carried out and shall carry out and complete the Works in accordance with the Contract; ... in the design of the Works … in so far as [Laing O’Rourke] is responsible for such design under the Contract, it has exercised and will continue to exercise all reasonable skill and care ...”. Many collateral warranties provided in construction projects contain words similar to those used here.
The Court was asked by Parkwood (who alleged defective design and/or workmanship on Laing O’Rourke’s part) for a declaration that the collateral warranty was a “construction contract” for the purposes of the GB equivalent of the Construction Contracts Order and that therefore adjudication would be available. In reaching its decision that the collateral warranty was a “construction contract”,the Court held that it was necessary to look at the words used in the collateral warranty to determine whether it was a contract “for the carrying out of construction operations”. The Court sought to draw a distinction between a warranty that was only given after works were complete and only warranted a past state of affairs and a warranty that (as in the present case) undertook to carry out future or on-going construction operations to a particular standard. The warranty in the current case, to “carry out and complete the Works” was consistent with a contract for the carrying out of construction operations and it was therefore a “construction contract” and adjudication would be available.
The decision in the Laing O’Rourke case does not mean that adjudication will be available under all collateral warranties. The wording of each warranty will need to be considered to see whether it actually provides “for the carrying out of construction operations”. However, given the common wording used in the collateral warranty in this case and the wide interpretation the Court gave, the likelihood is that many of the collateral warranties which Contractors and Sub-Contractors are required to provide, will be considered to be construction contracts and therefore subject to adjudication. As claims under collateral warranties are more likely to be made against Contractors and Sub-Contractors than by them, consideration should be given to both the number and extent of collateral warranties you are providing and as to how you would deal, in the very short time available, with a claim under one of those collateral warranties brought by adjudication.
The second recent case on adjudication relates to the ability of a party to an adjudication to recover its legal and other costs of contesting the adjudication. This issue arose in the case of The Board of Trustees of National Museums and Galleries on Merseyside v AEW Architects and Designers Ltd . Received wisdom prior to this case was that in the absence of an express contractual right (or a right set out in any applicable institutional adjudication rules), neither party in an adjudication could be ordered to pay the costs of the other party, regardless of the outcome of the adjudication. This is in contrast to the position in court or arbitration proceedings where costs usually follow the event, or in other words, the unsuccessful party is usually order to pay the successful party’s costs.
In the Merseyside case, an adjudication took place between the Board of Trustees and its Contractor, in which the Contractor was successful in obtaining a decision from the Adjudicator that the Contractor was not responsible for certain defective designs that had been carried out by AEW. The Board of Trustees subsequently brought court proceedings against AEW seeking to recover damages arising from the defective designs and also, significantly, seeking to recover its legal and expert costs incurred in defending the adjudication against the Contractor.
Rather than confirming what many would have thought was the position, namely that the costs of an adjudication are not recoverable, the Court held that AEW was liable to the Board of Trustees for its adjudication costs. The Court said that it was reasonably foreseeable that an adjudication would be brought by the Contractor in the light of AEW’s defective design and that there was a sufficient causative link between AEW’s breach of contract and the costs of the adjudication. That link would only have been broken had the Board of Trustees acted unreasonably in defending the adjudication or if the Board’s lawyers had advised them negligently as to their prospects of successfully defending the adjudication.
The Merseyside case therefore raises the possibility that a party who, acting reasonably, incurs costs in contesting an adjudication, may be able to recover those costs from a third party, if it can be demonstrated that the breaches of contract or other defaults by the third party made the adjudication (and therefore the costs of the adjudication) reasonably foreseeable. This may therefore make parties more prepared to incur the costs of an adjudication, if they expect to be able to recover them subsequently and may also result in an increase in litigation where claims are brought in the courts to try to recover such costs.