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Adjudicator's award given more clout

LAW

The relationship between an adjudicator's decision and other clauses in the contract has now been clarified - and obligation to pay the sum awarded has precedence, writes Daniel Atkinson

WHENEVER an alternative form of dispute resolution is considered by the court, it is necessary to decide the legal status of the procedure. This is now taking place in relation to mediation, which has achieved higher prominence because of the recent court reforms. The most recent case is Cable & Wireless v IBM (2002).

The status of an adjudicator's decision under the Construction Act 1996 has proved more difficult.

The status of the decision in relation to the court itself and to arbitration was quickly established.

It is now recognised that the adjudicator's decision is provisional and binding until determination by the courts or, if the contract requires it, arbitration.

The Court of Appeal confirmed, in the case of Bouygues v Dahl-Jensen (2000), that adjudication was intended to enable a quick interim, but enforceable, award to be made in advance of what was likely to be a complex and expensive dispute.

The adjudicator's award could, therefore, give rise to an immediate payment obligation, which could be enforced by the court.

The problem that has now arisen is the exact status of the adjudicator's decision in relation to other provisions of the contract on which the decision was made. There have been a number of conflicting decisions on this issue but the question was resolved last month by the Court of Appeal in the case of Ferson Contractors v Levolux.

The contract in this case was a subcontract under the GC/Works form. Levolux commenced adjudication for Ferson's failure to pay in full. Ferson's defence relied on its having issued a notice of withholding payment, as required by the Act.

The adjudicator identified that the referred dispute was about whether or not the withholding notice complied with the requirements of Section 111 of the Construction Act. He concluded that it did not and ordered payment. Levolux applied for summary judgment for the amount of the award.

Ferson submitted that summary judgment should not be given. Its primary case was that, prior to the adjudication, it had terminated the subcontract between parties, in accordance with Clause 29 of the subcontract. Levolux had suspended work on the subcontract and Ferson had subsequently sent a letter to Levolux giving notice that it was required to recommence work. A couple of weeks later, Ferson sent another letter pointing out that Levolux was continuing to suspend its work on the subcontract and warning that it was going to terminate Levolux's contract.

In court, Ferson argued that Clauses 29.9 and 29.10 of the contract provided that it was not bound to make any further payment to Levolux until after the works were completed, making good the defects that had taken place, and the payment application procedure referred to at 29.10 had been complied with. Ferson said these provisions provided a complete code for the rights and liabilities of the parties on termination of the subcontract.

Giving judgement, Judge Wilcox observed that the dispute referred to adjudication did not expressly include issues relating to Ferson's purported determination of the contract. Crucially, he held that it was a necessary implication of the adjudicator's decision that Levolux was entitled to suspend the works and that the purported determination based on wrongful suspension had no contractual effect.

Ferson appealed to the Court of Appeal against Judge Wilcox's order to enforce the adjudicator's decision. Ferson argued that it did not necessarily follow that the adjudicator's decision should be accorded supremacy over clear provisions contained elsewhere in the contract. It argued that, where the terms of the contract override the apparent obligation to pay on the adjudicator's decision or where the decision is overridden by another applicable adjudication, then the adjudicator's order of payment is not binding and enforceable.

Ferson relied on the statement of Judge Humphrey Lloyd QC in KNS Industrial Services v Sindall (2000). Judge Lloyd said that if, by the time an adjudicator makes a decision requiring payment by a party, the contract has been lawfully terminated by that party or some other event has occurred that entitles the party not to pay, then the sum awarded by the adjudicator does not have to be paid.

Ferson also relied on the decision of Judge Thornton in Bovis Lend Lease v Triangle Developments, which extended the principle of the KNS case, that where other contractual terms clearly supersede, or provide for an entitlement to avoid or deduct from, a payment ordered by an adjudicator, then those terms prevail.

The Court of Appeal firmly closed the door on any expansion of the principle in the KNS case. It held that if Ferson and Judge Thornton were right, then the intended purpose of adjudication under the Construction Act would be defeated. The contract must be interpreted to achieve that purpose.

If not, the offending clause must be struck down.

In this case, Clauses 29.8 and 29.9 had to be read as not applying to monies due by reason of an adjudicator's decision. The obligation to pay the amount stated in the adjudicator's decision had to take precedence over these clauses in the contract.

The situation is now clear, if not entirely satisfactory. The result of the judgment will increase the number of counter-adjudications, already a regular feature of this form of dispute resolution.

This and other articles written by Daniel Atkinson for Construction News can be found at www. atkinson-law. com

Key points

The status of an adjudicator's decision in relation to other provisions of the contract on which he made his decision has been clarified in the case of Ferson Contractors v Levolux.

Challenging an adjudicator's decision in the Court of Appeal, Ferson cited comments by Judge Humphrey Lloyd in another recent case, where he held that, when other contractual terms have the effect of superseding a payment ordered by an adjudicator, then those terms prevail.

The Court of Appeal decided this argument runs counter to the intended purpose of the Construction Act and that the obligation to pay a sum awarded by an adjudicator takes precedence over other clauses in the contract.