Pursuer: Howie, Q.C.; MacRoberts LLP

Defender: Reid, Q.C.; Richardson; Shepherd & Wedderburn LLP

18 August 2011

[1] This is the second of two actions between the pursuer ("Carillion") and the defender ("SP") arising out of contracts made under a framework agreement which the parties entered into in June 2003. Under those contracts Carillion carried out the excavation, backfilling and reinstatement of works and installed electricity and ancillary cables for SP.

[2] In my opinion of today's date in the other action (CA 1/11) I describe (a) the framework agreement and (b) the wider dispute between the parties in relation to Carillion's claim for payments for provision of lamping and guarding of cable excavations during periods when it was waiting for SP personnel to carry out and complete cable jointing operations. For the sake of brevity I refer to my findings in that opinion so far as relevant.

[3] The framework agreement and the contracts created by work orders made thereunder were construction contracts within the meaning of Part II of the Housing Grants, Construction and Regeneration Act 1996. Part I of the Scheme for Construction Contracts (Scotland) Regulations 1998 ("the 1998 Regulations") applies.

[4] Carillion referred the dispute to adjudication and Dr Robert Hunter was appointed Adjudicator on 20 October 2010. He issued a decision to the parties on 10 December 2010. He decided that Carillion was entitled to payment of £2,767,931.96 together with VAT thereon and that it was also entitled to interest on those sums from 10 September 2010 until payment. He also found SP liable in 60% of his fees and expenses. SP did not pay and Carillion, which was jointly and severally liable therefor, paid Dr Hunter.

[5] Carillion seeks in this action to enforce Dr Hunter's decision and to recoup the expenses due by SP which it has paid. SP challenges the legality of Dr Hunter's decision and thus the relevancy of the action. I heard the challenge in a debate which followed a debate in the principal action (CA1/11) in which Carillion pursues its claim under the contract.

SP's challenge

[6] SP asserts that Dr Hunter failed to comply with the rules of natural justice in the method which he adopted to quantify Carillion's claim. In short, he did not adopt the method of quantification which Carillion had put forward and which SP had criticised but used his own experience of what would constitute reasonable commercial rates for the additional equipment employed at the time the contract was formed. He made an assumption about the additional equipment which Carillion used for excavations which were greater than the sizes specified in the framework agreement and applied the rates which he selected to those excavations. He did not give the parties an opportunity to consider and comment on his proposed methodology and the material on which it was based. In so doing he acted in breach of natural justice in a material respect.

The parties' positions before the Adjudicator

[7] The parties accepted in their pleadings that the adjudicator accurately summarised their written submissions in his decision. The positions which they adopted may be stated as follows.

[8] Carillion in its referral notice sought payment of its claim of £4,829,718.10 "or such other sum as the adjudicator may decide" together with orders for the payment of interest and for costs. Its methodology for the calculation of its claim (which the adjudicator helpfully summarised in his decision) was as follows:

(i) it calculated the number of days of lamping and guarding required for each incident ("A");

(ii) it then calculated the perimeter of the excavation, compared it with the perimeter of a standard excavation in the contract and thereby obtained the appropriate multiplier ("B");

(iii) it identified the relevant Item 26 rate from the contract depending on when the lamping and guarding was supplied ("C"); and

(iv) it multiplied A x B x C.

[9] SP's primary position before the adjudicator, which was also its position in the principal action, was that, on a proper construction of the framework agreement, it was not due to pay Carillion any sums under the contract. It pointed out that Carillion's claim was based on over 35,000 work orders spanning four years which made the dispute unsuitable for a speedy determination by adjudication. SP asserted that Carillion had not substantiated its claim by producing a paper spreadsheet which SP, by a verification test, had shown to be materially overstated. The spreadsheet could not be relied upon. SP's fallback position was that (a) the use of a multiplier based on the perimeter of the joint bay was unjustified as Item 26 provided a flat rate per joint bay per day, (b) the multiplier artificially inflated the sum claimed as it included not only the equipment but also the attendance at site and labour costs which would not have increased as a result of the larger size of the excavation, (c) there was no contractual basis for applying Item 26 to excavations other than joint bays and thus to the lamping and guarding of the track (or trench) between joint bays . At most Carillion was entitled to a payment at the Item 26 rate per joint bay per day.

What the Adjudicator did

[10] In section 6.2.3 of his decision the adjudicator decided that the contract stated a standard excavation size and that additional resources were needed to lamp and guard an excavation which was bigger than the standard size of excavation. He recognised however that some resources were constant or warranted little increase. Thus he concluded:

"that additional payment is due but the adoption of a multiplier which is simply the application of a number derived by dividing the actual plan perimeter of the excavated area by the theoretical plan perimeter of the standard excavation as stated in the Contract is not appropriate.

I have decided therefore to evaluate the applicable charge for excavations that are larger than that specified in the Contract on the basis of my experience of what would constitute reasonable commercial rates for the additional equipment employed at the time the contract was formed i.e. June 2003."

He decided to take, as an average, two barriers and two cones as the additional equipment for larger excavations, whatever their size, and applied a rate of £1.48 per joint bay/day as adequate recompense for that extra equipment. He also allowed for inflationary increases in line with the increases of the Item 26 rate which the Extension Agreement allowed.

[11] Thus the adjudicator took the Item 26 rate and added his average rate for larger excavations as he demonstrated in table 5 of his decision:

Table 5. Inflationary revisions to the additional rate of £1.48 per joint bay/day

SP's submission

[11] Mr Reid QC for SP submitted, first, that an adjudicator would be in breach of the rules of natural justice and his decision would be unenforceable if he relied on material from whatever source, including his own knowledge and experience, without having given the parties a proper opportunity to comment on that material. Secondly and likewise, he would be in breach of the rules of natural justice if he adopted an approach or methodology which had not been canvassed before him without having given the parties an opportunity to comment on that approach or methodology.

[12] Dr Hunter had, without giving the parties an opportunity to comment, (a) made assumptions about the average numbers and sizes of barriers and (b) applied commercial rates from his own knowledge or an undisclosed source to arrive at the sum which he decided was payable. In so doing he decided the case on undisclosed factual material and on a basis which neither party had advanced.

[13] In support of his submissions Mr Reid referred to Balfour Beatty Construction Ltd v London Borough of Lambeth [2002] BLR 288 , RSL (South West) Ltd v Stansell Ltd [2003] EWHC 1390 (TCC), Costain Ltd v Strathclyde Builders Ltd 2004 SLT 102, Primus Build Ltd v Pompey Centre ltd and Others [2009] BLR 437 , and Paton, Petitioners [2010] CSOH 40 .

Carillion's response

[14] Mr Howie QC for Carillion submitted, first, that the adjudication procedure did not involve the final determination of anybody's rights and, secondly, that it required a serious breach of the rules of natural justice or actions in excess of jurisdiction before a court would refuse to enforce an adjudicator's decision. He stressed the tight timescale in which an adjudicator had to reach his decision and referred to the repeated statements by courts that they would rarely intervene with such decisions which were only interim solutions of a dispute.

[15] He referred to Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] BLR 93 , Carillion Construction Ltd v Devonport Dockyard Ltd [2006] BLR 15 , Balfour Beatty (above), Multiplex Constructions (UK) Ltd v West India Quay Development Company (Eastern) Ltd [2006] EWHC 1569 , Primus Build (above), Try Construction Ltd v Eton Town House Group Ltd [2003] BLR 286, Cantillion Ltd v Urvasco Ltd [2008] BLR 250 , Barr Ltd v Klin Investment UK Ltd [2009] CSOH 104 and Atholl Developments (Slackbuie) Ltd [2010] CSOH 94 .

Discussion

(i) What the rules of natural justice require

[16] The parties agreed that the rules of natural justice applied to an adjudication. There was little difference in their presentation of the relevant rules. Their differences lay in their characterisation of what Dr Hunter did and the application of those rules to his decision.

[17] The extensive case law which has developed in relation to adjudication has made clear certain propositions which provide the context in which the courts apply the rules of natural justice. First, the objective of the 1996 Act is to enable parties in a dispute to achieve a provisional or interim decision which the adjudicator, who often is not a legal expert, has to produce under strict time limits. As a result adjudication is necessarily crude in its resolution of disputes. See Balfour Beatty Ltd , Judge Lloyd QC at paragraph 27. Secondly, because an adjudicator's provisional decision can be superseded by a subsequent arbitration or court action, the courts are hostile to technical arguments which a losing party may mount to delay payment and to legal challenges which may lead to a substantial waste of time and expense. Thus in Carillion Construction Ltd Chadwick LJ at paragraphs 85-87 emphasised the Parliamentary intention behind the 1996 Act in support of the view that in the overwhelming majority of cases the proper course for the unsuccessful party was to pay the amount decided by the adjudicator and to use legal or arbitration proceedings to establish the true position.

[18] But, thirdly, it is recognised that in many cases parties treat the adjudicator's decision as the final determination of their dispute: Balfour Beatty Ltd at paragraph 29. Fourthly, the decision of the adjudicator is contractually binding and can be enforced, there is also the danger that the party in whose favour the decision is made and who receives payment may become insolvent, making an interim payment permanent.

[19] The rules of natural justice are designed to prevent the possibility of injustice. Counsel agreed that Lord Drummond Young's opinion in Costain Ltd v Strathclyde Builders Ltd contained an accurate statement of the law in relation to those rules. In paragraph [10] of his opinion he referred to the two principles which make up the rules namely, (i) no one appointed to determine a dispute should have any bias or personal interest in the outcome of the dispute and (ii) both sides should be given a fair opportunity to present their cases. He referred to the well-known case of Barrs v British Wool Marketing Board 1957 SC 72 for Lord President Clyde's dictum:

"The test is not 'has an unjust result been reached?' But 'Was there an opportunity afforded for injustice to be done?' If there was such an opportunity, the decision cannot stand."

It is therefore not necessary for the person challenging a decision to demonstrate actual injustice.

[20] In his application of the rules of natural justice to adjudication, Lord Drummond Young in paragraph [20] of his opinion set out nine principles. The one, which is most relevant to this case, is principle 6:

"6. An adjudicator is normally given power to use his own knowledge and experience in deciding the question in dispute... If the adjudicator merely applies his own knowledge in assessing the contentions, factual and legal, made by the parties, I do not think that there is any requirement to obtain further comment. If, however, the adjudicator uses his own knowledge and experience in such a way as to advance and apply propositions of law or fact which have not been canvassed by the parties, it will normally be appropriate to make those propositions known to the parties and call for their comments. ..."

I observe that Lord Drummond Young used the adverb "normally" and in so doing recognised that there may be cases where an adjudicator may apply propositions of law or fact which have not been canvassed without affording an opportunity for injustice to be done. As he stated in paragraph [20] before he set out his nine principles,

"The application of the relevant principles must depend on the circumstances of the individual case."

[21] The existence of that principle as a general rule is supported by the judgment of Judge Lloyd in Balfour Beatty Ltd at paragraph 28. He held that it depended on the circumstances whether the principle, that an adjudicator should inform parties of the information which he obtained from sources other than them and of the conclusions which he might reach from that information, was to be applied. It is not every breach of the rules of natural justice that undermines a decision. The breach must be substantial and relevant: Costain Ltd at paragraph [28]. Similarly, Judge Lloyd at paragraph 29 stated that the legal point or information must be either decisive or of considerable potential importance to the outcome and not peripheral or irrelevant.

[22] It seems to me that Judge Richard Seymour's statement in RSL (South West) Ltd at paragraph 32 needs to be read in its context if the principle is not to be elevated into an inflexible rule. He stated:

"It is absolutely essential, in my judgment, for an adjudicator, if he is to observe the rules of natural justice, to give the parties to the adjudication the chance to comment upon any material, from whatever source, including the knowledge and experience of the adjudicator himself, to which the adjudicator is minded to attribute significance in reaching his decision."

In that case the adjudicator had relied on an independent report from a surveyor with planning experience, whom he had instructed to assist him in relation to the programming of works in the construction contract, which was the subject of the dispute. He had shown the parties the surveyor's preliminary findings but not his final report, which must have differed from his preliminary findings, and which appeared to have influenced the adjudicator's decision. Stansell Ltd, which had not seen the surveyor's report, did not know what had informed the adjudicator's decision. An opportunity had been afforded for injustice to be done; and justice was not seen to be done.

[23] Paragraph 17 of Part I of the 1998 Regulations provides:

"The adjudicator shall consider any relevant information submitted to him by any of the parties to the dispute and shall make available to them any information to be taken into account in reaching his decision."

Judge Seymour referred to the English equivalent to this provision in support of his indisputable contention that the rules of natural justice require that a party should know what is the case against him and should have an opportunity to meet it. In my view paragraph 17 of the 1998 Regulations is not an absolute rule which would make a failure to disclose any information taken into account, however peripherally, a breach of natural justice. Rather the information would have to be material to the adjudicator's decision. Judge Seymour's reference to the adjudicator being minded to attribute significance to the information in reaching his decision is consistent with this view.

[24] Finally, Lord Bannatyne at paragraph [72] of his opinion in Paton, Petitioners summarised the principles which he derived from the case law. He held (i) that an adjudicator could use his own knowledge and experience in deciding disputed matters before him, (ii) that, if he used such knowledge to decide a contention placed before him by the parties, he did not require to obtain their further comments thereon and (iii) the mere fact that he arrived at an intermediate position for which neither party was contending did not mean that he had to refer his conclusion to the parties for their comments. He continued,

"Seventh, however, if he uses his own knowledge and experience to decide matters not advanced by parties then if these matters are of materiality in reaching his decision it would be his duty in order to comply with the rules of natural justice to revert to parties for their comments."

[25] Thus, while the courts have warned parties against raising technical arguments and searching for breaches of natural justice to challenge an adjudicator's decision, the judges in the cases, to which I have referred, have been consistent in their approach. They have required an adjudicator to disclose to the parties information, which he has obtained from his own experience or from sources other than the parties' submissions, if that information is material to the decision which he intended to make. Whether the information is of sufficient potential importance to the decision is a question of degree which must be assessed on the facts of the particular case.

[26] In the present case Dr Hunter did not go off on a frolic of his own, to use the expression of Akenhead J in Cantillon Ltd , in rejecting Carillion's multiplier approach as overstating its loss and in concluding that an average of two barriers and two cones was an appropriate measure of the extra equipment which it required. The parties were in dispute both about whether an Item 26 claim was available for lamping and guarding during what Carillion called "the repair period" and also, if it were, whether the framework agreement allowed the enhancement of the flat rates of Item 26 to take account of the assertion that the excavations, which Carillion lamped and guarded, were larger than the joint bays to which the contract referred. It was Carillion's submission that clause 33.4 of the framework agreement entitled it to an enhanced payment for the larger sized excavations on the basis of a reasonable price, having regard to other rates set out in the contract. See page 11 of Dr Hunter's decision. It appears that he accepted that submission and his decision to do so is not open to challenge in these proceedings. Dr Hunter's task was then to fix a reasonable price for the lamping and guarding of the larger excavations. He had before him Carillion's claim which he considered to be overstated but which disclosed the size of the excavations in respect of which it claimed payment. Having concluded that the perimeter multiplier overstated Carillion's claim, he was, in my view, entitled to look at the sizes for which Carillion claimed and form the view from that material that on average the equipment which was needed amounted to what he stated. In doing so, he applied his knowledge and experience to assess Carillion's claim.

[27] This exercise was, in my view, very different from the exercises which the adjudicator undertook in Balfour Beatty Ltd where he made up for a deficiency in the contractor's claim by creating his own as built programme and analysing a critical path in the context of a claim for an extension of time. It may be contrasted also with the circumstances in RSL (South West) Ltd. In that case the adjudicator failed to disclose an expert report on which he seemed to have relied. It was qualitatively different from Primus Build Ltd , in which the adjudicator rejected the referring party's claim for loss of profit based on a construction and management fee percentage stated in the contract and relied on material, which the parties had agreed should be ignored, to calculate a figure which represented its actual loss of profit. In the latter case Coulson J stated (at paragraph 40):

"... these things are always a matter of fact and degree. An adjudicator cannot, and is not required to, consult the parties on every element of his thinking leading up to a decision, even if some elements of his reasoning may be derived from, rather than expressly set out in, the parties' submissions. But where, as here, an adjudicator considers that the referring party's claims as made cannot be sustained, yet he himself identifies a possible alternative way in which a claim of some sort could be advanced, he will normally be obliged to raise that point with the parties in advance of his decision."

[29] The exercise which the adjudicator undertook in Primus Build Ltd was radically different from the way in which the referring party formulated its claim. In the present case Dr Hunter started with Carillion's claim and allowed for SP's point that the perimeter approach inflated the claim because attendance at site and labour costs would not increase with the size of excavation. Accepting SP's point, he therefore focused on the extra physical equipment which larger excavations required. It is a question of fact and degree, but I am persuaded that in so doing he derived his reasoning from the parties' submissions rather than adopting a wholly extraneous methodology. If that had been the only issue, I do not consider that he would have had to disclose his reasoning in advance of his decision because he departed from the perimeter multiplier approach. I consider that Mr Reid's submission that an adjudicator requires to consult the parties if he adopts a methodology which has not been canvassed before him is too broadly stated and that it would, if accepted, introduce unwelcome rigidity into the process of adjudication. Just as an adjudicator can, without consulting the parties, apply a percentage reduction to a claim because of concerns about its make up - Carillion Construction Ltd at paragraph 53 - so also can he extract one valid element of a broader claim in response to criticisms from the responding party.

[30] Dr Hunter's approach may be summarised as follows. He accepted the substance of Carillion's claim for payment (a) at the Item 26 rate during "the repair period" and (b) with a mark up for excavations which were larger than the joint bays specified in the contract. He also accepted the number of days for which Carillion claimed in its spreadsheets. Thus he accepted items A and C in Carillion's approach, which I summarised in paragraph [8] above. But, accepting SP's criticism, he considered the claim to be overstated by Carillion's use of the multiplier, B. Accordingly he scaled down its claim by replacing the multiplier B with his average addition of two barriers and two cones to which he applied the rates which he specified, which I will call "X". Thus, in lieu of Carillion's A x B x C, his calculation was A x (C+X). In so doing he significantly reduced Carillion's interim entitlement to a figure that was much closer to the Item 26 figure (A x C), which Mr Howie avers was £2,401,030.76.

[31] In my opinion there was evidence in the parties' submissions which entitled Dr Hunter to discount Carillion's claim by restricting the mark up for larger excavations to additional equipment. He had details of the size of excavations in a spreadsheet which accompanied Carillion's submission, from which he could readily reach at least a broad view on what additional equipment to allow on average. His decision to allow an average of two barriers and two cones was in the circumstances derived from the claim. In my view his adoption of that reasoning did not require him to give the parties an opportunity to comment before he issued his decision.

[32] Where, on the authorities cited above, I consider that he allowed an opportunity for injustice to occur was in applying the commercial rates which from his experience he saw as reasonable and about which there appears to have been no evidence. See paragraph [10] above. There is no doubt that the calculation of X was a material part of his decision. It cannot be regarded as being in any way peripheral. Nor was it insignificant. As it was an addition to a daily charge, a minor adjustment in the rate, say by 30%, would have altered the mark up which he allowed by over £100,000. The parties were entitled to know of this input into his reasoning and to have a chance to comment on it.

[33] I therefore conclude that in so acting, Dr Hunter breached the rules of natural justice in failing to give the parties notice of the commercial rate which he proposed and the way in which he proposed to apply it in reaching his conclusion.

Severability

(i) Parties' submissions

[34] Mr Howie submitted that, if the court were against him on the issue of a breach of the rules of natural justice, it should sever the offending part of the decision which related to the uplift over the Item 26 rates. In any event, the court should uphold the adjudicator's award of expenses, which was Carillion's third conclusion in its summons.

[35] In approaching severance he invited me to have regard to the statutory policy behind adjudication, which favoured swift if imperfect decisions, and referred to the comments of the Court of Appeal in Carillion Construction Ltd at paragraphs 85 to 87.

[36] He referred to the decision of Lord Macfadyen in Homer Burgess Ltd v Chirex (Annan) Ltd 2000 SLT 277, in which he held that partial reduction of an adjudicator's decision was competent. He invited me to follow that approach. There were examples of the court severing an adjudicator's decision in which he determined more than one dispute. See, for example, Ardmore Construction Ltd v Taylor Woodrow Construction Ltd [2006] CSOH 3 . He acknowledged that there were authorities which stated that severance was not possible where there was only one dispute and referred to Lord Menzies' decision in CSC Braehead Leisure Ltd v Laing O'Rourke Scotland Ltd [2006] CSOH 3 ; Cantillon Ltd (above); and Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin Joint Venture [2010] BLR 415 . He observed however that Coulson J in two recent decisions had expressed disquiet about the rule that that one could not sever an arbiter's decision in which he had determined only one dispute: Pilon Ltd v Breyer Group PLC [2010] BLR 452 (at paragraphs 39 and 40) and AMEC Group Ltd v Thames Water Utilities Ltd [2010] EWHC 419 (TCC) (at paragraphs 99 and 100).

[37] He observed that SP had not sought to reduce the adjudicator's decision and that an action of reduction, which would involve satellite litigation, would be needed to set aside the decision if the court were to hold there had been a breach of natural justice. Allowing severance would give effect to the statutory intention of a speedy provisional resolution of construction disputes.

[38] Mr Reid founded on CSC Braehead Leisure Ltd , Cleveland Bridge (UK) Ltd and RSL (South West) Ltd , at paragraphs 36-38, in support of his contention that the court could not rewrite an adjudicator's decision, for which the parties had contracted, where there was, as here, only one dispute.

(ii) Discussion

[39] It is clear that the fact that parties have contracted for a decision by an adjudicator does not prevent the court severing parts of his decision if he has determined separate disputes in the one decision. See Cantillon Ltd , Akenhead J at paragraph 65. At present, subject to Coulson J's doubts, the case law, to which counsel referred, has set its face against allowing the severance of parts of a decision in one dispute.

[40] I can see that the policy of encouraging the speedy provisional resolution of construction disputes might support pragmatic arguments in particular cases in favour of separating liability and quantum in an adjudicator's decision where he has fallen into error in relation to quantum alone. The same considerations may support the approach which Coulson J has advocated. But it is not necessary for me to decide on the competency of the severance of part of a single dispute in this case as I have formed the view that a partial enforcement of Dr Hunter's award would be likely to create complexities which are better avoided.

[41] In this case the decision which Dr Hunter reached on the merits may have influenced his decision on expenses. He held that SP were to pay 60% of his fees and expenses. It may be that, in so doing, he took account of the relative degrees of success of the parties' submissions. I cannot conclude that if he had decided that SP was wrong to say that nothing was due for lamping and guarding but that it was correct in its fall back position that, if the Item 26 rate applied, that rate exhausted the claim, he would necessarily have divided the liability in expenses in the same way. Thus I do not see how I can sever the decision on expenses from the decision on the merits or alter the decision on the merits while leaving the expenses decision in place.

[42] I note that in Homer Burgess Ltd Lord Macfadyen (at p.287) declined to pronounce a partial reduction of the adjudicator's decision because a reduction of the decision would allow the parties to obtain a fresh decision from the adjudicator. In this case SP has succeeded in challenging the validity of the decision without seeking its reduction. That course of action is competent, as Mr Reid submitted: Vaughan Engineering Ltd v Hinkins & Frewin Ltd 2003 SLT 428, Lord Clarke at paragraphs [33]-[35].

[43] Carillion, if it accepts my decision, can seek reduction of the unenforceable decision and thereby open the path to a new decision if it wishes a valid provisional decision from the adjudicator. If, in the light of the decision in Vaughan Engineering Ltd , it decides to proceed by application for judicial review under Rule of Court 53.8, such an application could be brought before me in view of its contingency upon the actions with which I am already dealing, as has been my colleagues' practice in other cases. Carillion can also press on with the principal action in which it has today received a ruling on the relevancy of its claim.

Conclusion

[44] I am satisfied that Carillion is not entitled to decree de plano because a decision reached in breach of the rules of natural justice does not have temporary binding effect under paragraph 23(2) of Part I of the 1998 Regulations. I will have the case put out by order to ascertain parties' views on how best to resolve this aspect of their dispute.