SW GLOBAL RESOURCING LTD V MORRIS & SPOTTISWOOD LTD
Scotland, Outer House, Court of Session
Lord Hodge
28th December 2012
THE FULL TEXT OF THE OPINION OF LORD HODG
[1] Morris & Spottiswood Ltd ("M&S") was the main contractor in a contract with Historic Scotland to carry out building works at StirlingCastle. SW Global Resourcing Ltd ("SW") was a sub-contractor. The sub-contract was formed by correspondence and a purchase order. The parties agreed that it was a construction contract within the meaning of Part II of the Housing Grants, Construction and Regeneration Act 1996.
[2] On 21 November 2011 SW referred to adjudication a dispute about its claim for disruption costs and loss and expense incurred in the proper execution of the works. In its notice of referral SW sought an order that M&S pay it £272,677.77. On 23 November 2011 Mr John N. Bell was appointed as the adjudicator.
[3] M&S challenged Mr Bell's jurisdiction on the ground that the issue which had been referred to him had already been decided by Ms Janey Milligan in an earlier adjudication. Mr Bell rejected that challenge in a decision dated 2 December 2011 in which he held that the dispute which Mrs Milligan determined related to an interim application in respect of loss and expense.
[4] In a decision dated 10 January 2012 Mr Bell awarded SW £73,303.16 in relation to its claim for loss and expense together with interest on that sum from 18 July 2011 at 2% above the Bank of England base rate until payment.
[5] In this action SW seeks payment of the sums which Mr Bell found due. M&S in its defences seeks to have Mr Bell's decision reduced by way of exception and alleges that the decision was a nullity based on five inter-related grounds of challenge. In a debate Mr Howie QC for M&S sought a decree setting aside Mr Bell's decision and Mr Walker for SW sought decree de plano.
M&S's grounds of challenge
[6] Mr Howie advanced several grounds of challenge which overlapped. He addressed me on passages in Mr Bell's decision and mounted his inter-related challenges on each passage. That was helpful in presenting the relevant documents to me. But in what follows I try to separate out the strands of his argument so that I can state my reasons on each ground in an orderly manner.
(i) Breach of natural justice and apparent bias
[7] SW and M&S were not in agreement on whether they had incorporated the terms and conditions of the main contract (GC/Works/1) into the sub-contract and made submissions on that issue. SW contended that the main contract terms were not incorporated while M&S contended that they were. This dispute focused on a provision in the sub-contract order (para 4) which stated that "so far as applicable to the sub-contract works" SW would comply with the provisions of the main contract as though they had been incorporated into the sub-contract.
[8] Mr Bell referred to this dispute in section 7 of his decision and held that clauses 46.1 and 46.2 of the main contract, which gave a contractual right to claim prolongation and disruption costs, were available to SW in the sub-contract as the legal basis of its claim for loss and expense. He held however (in para 7.8) that clause 46.3 of the main contract, which obliged the contractor to give immediate notice of circumstances that were likely to disrupt the regular progress of the works, was not incorporated into the sub-contract "because there is no benchmark (contract period) to measure against and serve notice."
[9] Mr Howie submitted that this amounted to a breach of natural justice as neither party had advanced a proposition of the partial incorporation of clause 46. SW's position had been that the provision did not apply while M&S had submitted that clause 46 applied and that SW had not given the notices which clause 46.3 stipulated as a pre-condition of the claim for prolongation costs. There was no basis for the suggestion that Mr Bell was dealing with a case of partial incorporation.
[10] Mr Howie also attacked as a breach of natural justice and an instance of apparent bias Mr Bell's statement in para 8.3 of his decision:
"I consider that the Referring Party has entitlement to costs which arise out of their claim of loss and expense and irrespective of the extent (or otherwise) of the records provided in this adjudication. I cannot find the value to be nil and must use my knowledge and experience as a Quantity Surveyor (41 years) to evaluate the loss and expense claim on a fair and reasonable basis using the records provided."
This, Mr Howie submitted, amounted to an admission by Mr Bell that even if SW had not produced sufficient documentary evidence to discharge the burden on it to establish its claim for loss and expense, he was determined to find in its favour. That amounted to apparent bias. If the passage was not so construed, it involved the adjudicator using his own knowledge and experience to fill in the holes in SW's case without first giving M&S an opportunity to comment.
[11] In my view Mr Bell did not breach natural justice in deciding that clauses 46.1 and 46.2 of the main contract were incorporated into the sub-contract but that clause 46.3 was not. As Lord Hamilton stated in Babcock Rosyth Defence Ltd v Grootcon (UK) Ltd 1998 SLT 1143 at 1149C,
"When parties make reference to a set of conditions designed primarily for use in another contract but do not expressly adapt those conditions to meet the circumstances of their own relationship, it is often difficult to determine with confidence the contractual effect."
In this case, Mr Bell was faced with M&S's assertion that the main contract conditions applied and SW's argument that they did not. The circumstances are very different from those which arose in Strathclyde Regional Council v City of Glasgow District Council 1992 SLT 51 in which the judge was criticised for deciding the case on a basis that the parties had not placed before him: judex non reddit plus quam quod petens ipse requirit". Rather in this case Mr Bell used his own knowledge and experience in assessing the parties' contentions and reached a conclusion some way between their respective positions. I agree with Mr Walker's submission that his so doing without inviting further comments from the parties is not obviously unfair: see Costain Ltd v Strathclyde Regional Council 2004 SLT 102, Lord Drummond Young's sixth proposition in para 20 of his opinion, Paton, Petitioners [2011] CSOH 40, Lord Bannatyne's fifth proposition in para 72, and Carillion Construction Ltd v Devonport Royal Dockyard [2006] BLR 15 (CA), Chadwick LJ at para 85.
[12] Further, SW's answers to M&S's response to the notice of referral (pro 6/39) while asserting that there had been no incorporation of the main contract terms, referred to case law on the partial incorporation of contractual terms. M&S's further submissions (Pro 6/40) referred to that case law and the email from SW's solicitors to Mr Bell (6/42) addressed specifically the incorporation of clause 46. In my view Mr Bell was entitled to deal with the issue of the partial incorporation of clause 46 of the main contract without inviting further comment.
[13] I do not infer any unfairness or apparent bias from what Mr Bell stated in para 8.3 of his decision. It is important to observe that SW had sought a sum substantially larger than that which he awarded and that he excluded several claims, including a claim for disruption, on the basis of a lack of adequate records. I agree with Mr Walker that in para 8.3 Mr Bell was stating that he was prepared to use the records which SW provided in assessing its claim, notwithstanding his concerns about the quality of some of the documents, and that he would bring to bear his knowledge and experience in making that assessment. In RGB Ltd v SGL Carbon Fibres Ltd [2010] BLR 631 Lord Menzies at para 28 and in Atholl Developments (Slackbuie) Ltd, Petrs [2010] CSOH 94 Lord Glennie at para 17 referred to the presumption of regularity or of propriety which an adjudicator enjoys. It is presumed that he has looked at the relevant documents and given them appropriate consideration within the tight time constraints under which he works. In the face of that presumption I do not infer any irregularity from this statement.
(ii) Failure to exhaust remit
[14] Mr Howie submitted that Mr Bell had failed to exhaust his remit in two respects. First, he had not addressed M&S's argument that SW had failed to comply with the terms of clause 46.3 of the main contract by giving the required notices. As I have interpreted Mr Bell's decision as determining that that clause did not form part of the sub-contract, that submission fails.
[15] The other ground needs more explanation. In sections 8 and 9 of his decision Mr Barr considered SW's claim for loss and expense. He held that SW was entitled to pursue the claim either in implement of the sub-contract, which I interpret as being a reference to the incorporated clauses 46.1 and 46.2 of the main contract, or as damages for breach of contract. He determined that the initial period of the sub-contract was 34 weeks and that 80 weeks was a reasonable period for SW to have completed the contract in the light of the events which had occurred. The difference between the two periods was 46 weeks and he held that to be the period of prolongation for which SW could claim additional preliminaries (para 9.4.3).
[16] Mr Howie contended that in so deciding Mr Bell had failed to consider M&S's submission that SW had been culpable in delaying the sub-contract by 26.14 weeks by its failure to provide the contractually specified stone paving materials to the site.
[17] Mr Bell had before him M&S's contentions on that matter in its reply to referral notice and also SW's riposte in its answers to the response. M&S's assertion of culpable delay was, as Mr Walker submitted, a rather skeletal submission with very limited documentary evidence in support (Appendices K and L to the reply to the referral notice). Mr Bell did not uphold the submissions of either M&S or SW about the initial contract period but held it to be 34 weeks. He accepted SW's contention that a reasonable period for the completion of the contract was 80 weeks. In my view it is implicit in that acceptance that he did not accept that SW had culpably delayed the completion of the sub-contract. While it may be that SW delayed in the provision of the correct stone paving, it is not clear that any such delay was part of the critical path in the context of delay events that SW attributed to M&S. The period of delay that M&S asserted fell within the longer period of delay that SW claimed had been caused by M&S (see Pro 6/36 App 9 and 6/35 App L). Mr Bell suggested that M&S had offered "no apparent challenge to the 80 week period". I interpret that as a rejection of M&S's claim and do not accept that Mr Bell failed to address the culpable delay contention that M&S advanced. In any event, the presumption of regularity, to which I have referred, causes me to reject this ground of challenge.
(iii) Ultra vires
[18] M&S in its note of argument submitted that Mr Bell acted ultra vires either because he treated himself as bound by Mrs Milligan's decision that a reasonable time for the sub-contract works was 80 weeks or used that decision to alter the onus of proof.
[19] I do not interpret what Mr Bell stated in para 8.1(b) of his decision is consistent with either of those submissions. In his discussion he referred to the previous adjudicator having "noted" a reasonable period to complete the works was 80 weeks. He did not profess to be bound by Mrs Milligan's decision. It is true that SW argued that Mrs Milligan had decided the point and that her view was binding. But Mr Bell did not accept that submission. In my view, reading para 8.1(b) as a whole, what Mr Bell said was that SW had asserted an 80 week period, that Mrs Milligan had been satisfied that that was supported by the information presented, and, crucially, in the current adjudication M&S had offered no apparent challenge to SW's assertion.
[20] Mr Howie also submitted that, if that interpretation were correct, Mr Bell had breached the rules of natural justice in deciding that 80 weeks was a reasonable period to carry out the works because he ignored M&S's submission to the contrary. Mr Bell stated in the final sub-paragraph of para 8.1(b) of his decision:
"I also note that although [M&S] states that Mrs Milligan's decisions did not decide that 80 weeks was a reasonable period to carry out the works they offer no apparent challenge to the 80 week period being wrong".
Mr Howie submitted that in so deciding Mr Bell overlooked M&S's challenge that 26.14 weeks delay were the fault of SW and that oversight vitiated his decision.
[21] I am not persuaded by this submission. Mr Bell had before him the material which SW had presented to Mrs Milligan and which it provided to him. That material was its claim for extension of time dated 30 March 2011 and supplementary appendices sent by letter dated 15 April 2011 which supported SW's assertion in its referral notice of a reasonable period of 80 weeks. In that claim SW asserted 8 events that disrupted and prolonged the contract works and presented a bar chart (appendix 9 Part iii)) summarising the delaying effect of the events.
[22] M&S's refutation of SW's claim was confined to two appendices (Appendices K and L) of its reply to the referral notice. It is clear that Mr Bell considered appendix K. That appendix was concerned principally with the submission that SW had a fixed contract period of 47.86 weeks but also sought to assert the proposition that SW had caused a delay of 26.14 weeks. The only other material relating to delay by SW was appendix L, which as Mr Walker observed, was supported by only two emails which were said to vouch the start and end points of the 26.14 week period. I do not construe Mr Bell's statement that there was "no apparent challenge" as vouching that he had overlooked the assertion of the 26.14 week delay and so failed to exhaust his jurisdiction. I construe it as a rejection of the insubstantial material by which M&S advanced its assertion of culpable delay by SW. He could no doubt have stated his reasons more fully. But in my view he has done enough to indicate his rejection of the assertion of SW's culpable delay of 26.14 weeks.
[23] I observe for completeness that M&S's submission in appendix L that Mrs Milligan had found SW responsible for delay of that extent is not supported by her decision. See paras 9.18 to 9.23 of her decision in which she discusses M&S's withholding notice. While it is correct, as Mr Howie asserted, that Mrs Milligan did not state that there was no delay attributable to SW, she rejected the only period that M&S had asserted before her. M&S repeated that assertion in its submissions before Mr Bell but gave him no evidential basis on which to find a shorter period than 26.14 weeks. This is part of the context in which Mr Bell concluded that there was no apparent challenge.
[24] At the continued hearing on this application I was furnished with an affidavit by Alastair Kettles and a report by Ms Jennifer Willis on the expression "reasonable period to carry out the works." Although it is not central to my determination as I have construed Mr Bell's decision as a rejection of M&S's insubstantial challenge, I am satisfied, as Ms Willis suggested, that the expression refers to the period that the sub-contractor took to complete the works less any period of delay to the critical path that that sub-contractor caused. I am not persuaded by Mr Kettles' suggestion that the expression meant the result of adding the delays caused by persons other than the sub-contractor to the original contractual period but before deducting any delays attributable to the culpability of the sub-contractor. That would remove any content from the qualification "reasonable".
(iv) Wednesbury unreasonableness and internal contradictions
[25] Mr Howie accepted that it was unusual to challenge the decision of an adjudicator on the ground of unreasonableness as the process of adjudication leads only to an interim resolution of disputes and the adjudicator may make glaringly obvious errors of law and fact within his jurisdiction. He submitted that an exception arose where an adjudicator reached a decision which involved internal contradictions in his reasoning. Logical inconsistencies in an adjudicator's decision provided a ground for review. While the presumption of regularity and propriety prevented most Wednesbury challenges, such a presumption had to give way to demonstrable irrationality.
[26] In support of his contention he referred to Lord Reed's opinion in Ballast plc v The Burrell Company (Construction Management) Ltd 2002 SLT 1039, at paras 34-39 in which he suggested that an adjudicator's decision might be open to judicial review on Wednesbury grounds. In his summary in para 39 Lord Reed stated:
"I have come to the conclusion that the scheme should be interpreted as requiring the parties to comply with an adjudicator's decision, notwithstanding his failure to comply with express or implied requirements of the scheme, unless the decision is a nullity; and it will be a nullity if the adjudicator has acted ultra vires (using the expression in a broad sense to cover the various types of error and impropriety which can vitiate a decision), for example because he had no jurisdiction to determine the dispute referred to him, or because he acted unfairly in the procedure which he followed, or because he erred in law in a manner which resulted in his failing to exercise his jurisdiction or acted beyond his jurisdiction."
[27] M&S alleged that in several matters Mr Bell had acted irrationally. It characterised his acceptance of SW's assertion of a the 80 week period, which I have discussed in paragraphs [15] - [17] and [20] - [24] above, as irrational. It submitted that he had acted irrationally and inconsistently (a) in holding that clause 46.3 of the main contract had not been incorporated into the sub-contract because there was no contract period as a benchmark against which to measure prolongation (para 7.8 of his decision) to allow notices to be served and (b) in his subsequent finding by analysing M&S's programme that the maximum duration of the works was 34 weeks (para 8.1(b)). .
[28] Mr Howie also submitted that there was a clear contradiction in Mr Bell's treatment of SW's claim for head office overheads and that amounted to irrationality. In para 9.6 of his decision Mr Bell stated
"Overheads are usually calculated as a function of turnover ie an amount (percentage) to be added to the net cost of work (eg labour, material and plant) to ensure return of the cost of overheads.