Neutral Citation Number: [2011] EWHC 1810 (TCC)

Case No: HT-11-180

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

TECHNOLOGY AND CONSTRUCTION COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 13/07/2011

Before:

MR JUSTICE EDWARDS-STUART

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Between:

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Mr David Streatfeild-James QC (instructed by Wragge & Co LLP) for the Claimant

Ms Fionnuala McCredie (instructed by Reynolds Porter Chamberlain) for the Defendant

Hearing date: 23^rd June 2011

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Judgment

Mr Justice Edwards-Stuart:

Introduction

1. This is an application for summary judgment by the claimant, Hyder Consulting (UK) Ltd ("Hyder") to enforce an adjudicator's decision dated 2 May 2011 by which the adjudicator, Mr Alan Turner, ordered the defendant, Carillion Construction Ltd ("Carillion"), to pay Hyder £3,104,399.74, together with interest and 50% of the adjudicator's fees, in respect of Hyder's claim for the balance of fees due under an agreement made between Hyder and Carillion. The Claim Form was issued on 16 May 2011 and I heard the argument on 23 June 2011.

2. Carillion resists the application on the ground that the adjudicator acted in breach of the rules of natural justice by failing to notify the parties, and Carillion in particular, of the methodology that he proposed to use when calculating a value for the Target Cost under the agreement and the figures that he proposed to use for the purpose of making that calculation.

3. Hyder is a Civil Engineering consultant and Carillion is a Civil Engineering contractor. Carillion appointed Hyder to undertake design works for a project known as the Network Rail East London Line, which is part of the improvement of the London transport system for the 2012 Olympic Games. The dispute referred to the adjudicator concerned the amount of fees, if any, to which Hyder was entitled.

4. The agreement between Hyder and Carillion provided for Hyder to be paid for the substantial proportion of its services on the basis of actual cost according to a schedule of rates agreed between the parties. However, Hyder's claimed costs were subject to a deduction for Disallowed Costs as defined in the agreement. The principal area of dispute before the adjudicator was as to the proper amount for Disallowed Costs - the parties were about £4 million apart. In addition, the agreement contained a pain/gain share provision by which Hyder was either entitled to 50% of the amount by which its actual cost fell below the agreed Target Cost or, alternatively, obliged to pay 50% of any excess.

5. Whilst the agreement specified the Target Cost for the original scope of work, the parties failed to agree appropriate revisions to the Target Cost to reflect all the variations and additions to the work. There was no dispute that there had been significant additions and variations to the original scope of Hyder's work. There was thus a further dispute about whether the concept of Target Cost remained applicable at all or, if it did, what the final value of the Target Cost should be.

The background

6. The agreement between the parties was made on 25 August 2009. Hyder's fee was made up of three distinct parts:

7. 1. 1. 1. 1. a fixed lump sum fee for certain items of detailed design;

            2. a fixed price lump sum fee for all disbursements; and

            3. time charges at fixed rates detailed in a schedule to the agreement for work not covered by the fixed price lump sum fee.

8. The fee excluded Disallowed Costs, which were defined as certain costs disallowed under the Main Contract between Carillion and Network Rail, namely: costs arising from uneconomic and inefficient working; costs arising from re-design caused by the fault of Hyder; and any failure by Hyder to comply with the timescales of the Main Contract Change Procedure.

9. The net fee was then subject to adjustment under the pain/gain machinery that I have already described. For this purpose there had to be an initial Target Cost specified in the agreement. This was £4,367,327 - from now on in this judgment I shall usually give figures rounded down to the nearest pound. It was of course essential to the operation of this machinery that if the original scope of work was added to or varied there would be an appropriate adjustment to the Target Cost.

10. To this end the agreement provided that where Hyder was required to carry out re-design or additional design which was not due to any reason within the control of Hyder, Hyder was to follow the Change Procedures set out in the Main Contract. In particular, the agreement provided that Hyder was, within 7 days of receiving an appropriate instruction, to prepare a detailed Target Cost and programme for the additional design, and at the same time to advise of any impact that such additional design might have on the design programme.

11. Any work carried out by way of variation or addition was to be reimbursed on the time charges at the agreed rates, subject to adjustment under the pain/gain machinery.

12. Although the Main Contract made provision for the assessment by the Engineer of any revisions to the Target Cost consequent upon a variation of or addition to the original work in the absence of agreement between the parties, no similar provision was incorporated into the agreement between Hyder and Carillion.

13. Clause 9.5 of the agreement between Hyder and Carillion provided that if Carillion required services in addition or variation to those identified in the agreement, they were to be provided at a fee agreed between the parties or, in default of such agreement, at the agreed time related charges. However, as I read it, this did not relieve Hyder of the requirement to provide a Target Cost in relation to any variation or addition to the work if its value could not be agreed. Accordingly, the agreement provided that if the value of the varied or additional work was not agreed, Hyder would carry it out and charge for the time spent at the agreed rates (subject to any Disallowed Costs). If this cost exceeded or fell below the agreed Target Cost for that varied or additional work, the pain/gain machinery would be operated accordingly.

14. By the time Hyder had issued its Referral Notice on 23 February 2011 it had claimed fees amounting to £16,747,201 in its Application No 21a. At a meeting on 31 January 2011 Carillion notified Hyder of its assessment of Disallowed Costs. This was in the sum of £4,950,553. By this time Hyder had been paid £12 million on account, and so the effect of Carillion's assessment of Disallowed Costs was that Hyder had, according to Carillion, been overpaid. There was no dispute about the amount of Hyder's claimed fees, only as to the amount of the Disallowed Costs. Hyder submitted originally that the correct total of the Disallowed Costs was £888,054. Each party revised its assessment of Disallowed Costs very slightly in the other's favour during the course of the adjudication.

15. On 4 April 2011 the adjudicator held a meeting between the parties. Each party was given an opportunity to present an outline of its case and was then questioned by the adjudicator. At the conclusion of the meeting the adjudicator asked the parties to provide him with some consolidated numerical data relating to resource costs.

16. Following that meeting the adjudicator set out his request, together with the information identified in a previous request that he had made on 24 March 2011, in an e-mail dated 6 April 2011. This was in direct response to an e-mail from Carillion's solicitors, Reynolds Porter Chamberlain, asking the adjudicator to confirm his directions regarding the additional information that he required, and noting that Carillion's understanding was that the adjudicator required “details of the target cost updates that have been agreed to date . . . and what has been expended against these variations". The adjudicator's e-mail in reply was in the following terms:

“please find attached a schedule of information required.

I have combined both what I asked for on Monday and also a simplified version of what I asked for with my spreadsheets.

I have attempted to set out the information I require so that what ever I decide I will have the information to calculate the correct sum. I assume that you would want me to concentrate on the question of liability rather than the arithmetic.

As the Parties are agreed on the amount of resource that was employed then the allocation of that resource should equally be agreed. If it is not both Parties need to give me their version of what ever is not agreed.

I have the information relating to the disallowed costs and likewise the disbursements.”

16. The schedule of information attached to the e-mail requested the following:

• Total cost of resource provided by Hyder but not including disbursements.

• Cost of resources (separately identifying Engineering Design and Management) for ...

• Value of agreed "Target Cost" uplifts

• Value of resources recorded against the agreed "Target Cost" uplifts separated into ...

• Corus total fee (including the 5% Hyder management fee) separated as ..."

17. On 8 April 2011 Hyder served a short pleading entitled "Reply to Rejoinder". In addition it served:

18. 1. 1. 1. 1. A one page spreadsheet entitled "Information Requested by Mr Turner at meeting on 4^th and 6^th April 2011". This stated that the value of agreed "Target Cost" uplifts was £2,385,647, and that the value of resources recorded against those agreed "Target Cost" uplifts was £2,339,477.

             2. Behind this were a further 19 spreadsheets, the first of which was entitled "Analysis of Target Cost vs Actual Costs". In this spreadsheet the actual cost as at the date of Application 21a was divided into three columns headed “Contract”, “Agreed Vos” and “Other Variations”. Under the heading "Agreed Vos" the total shown was £2,339,477, the same figure as shown on the covering spreadsheet. Under the heading "Contract" the total shown was £2,947,174.

             3. A further set of spreadsheets giving the details of time and overtime (by management and others) which the adjudicator had requested.

             4. A 6 page document entitled "Information requested by Adjudicator at the meeting on 4^th April 2011 and further clarified in his e-mail of 6 April 2011".

19. At this stage the adjudicator's decision was due on 15 April 2011. Carillion immediately asked for a further 14 days in which to consider and respond to this deluge of information from Hyder. Carillion's request was granted and it was given until 21 April to serve its material in response. The date for delivery of the adjudicator's decision was put back to 2 May 2011.

20. On 21 April 2011 Carillion submitted its responses to the questions set out in the adjudicator's e-mail of 6 April 2011. Carillion complained that this was the first time that it had been provided with any sort of breakdown of Hyder's alternative Target Cost of £15,069,799, but asserted that in any event the breakdown was inadequate and contained a number of errors. It stated also that there was a difference between Hyder and Carillion as to the value of the agreed Target Cost uplifts. Carillion submitted also that Hyder had not given a proper answer to the adjudicator's question about the value of resources recorded against the agreed Target Cost uplifts by reference to each variation, as it should have done, but had instead carried out what was called an Earned Value Analysis.

21. Against this background the adjudicator issued his decision on 2 May 2011. After a fairly detailed introduction and discussion of the contract terms, he dealt in the next 20 pages with the Disallowed Costs. His assessment of the Disallowed Costs was in the sum of £1,527,457 - a figure very much closer to Hyder's figure of just under £1 million than Carillion's figure of about £5 million.

22. The adjudicator then went on to consider the Target Cost, which he did over the next 7 pages of his decision. He concluded that the revised Target Cost was £17,082,944, about £2 million higher than the figure for which Hyder had contended and much higher than Carillion’s figures of £6,595,112 or £8,874,217.

23. Basing himself on his understanding of clause 9.5 of the agreement between Hyder and Carillion, the adjudicator concluded that, where the Target Cost for any variation had not been agreed, the revised Target Cost was to be the time related charges using the contract rates for the varied work in question. In other words, since the Target Cost for the varied work was to be the same as the actual cost, there could never be any room for a pain/gain adjustment on any varied work for which a Target Cost had not been agreed. It will be apparent from what I have said at paragraph 12 above, that I do not share this view: however, that is irrelevant in the context of this application.

24. The adjudicator then considered the cost of the work carried out against the original Target Cost, and for this purpose he took the figure of £2,947,174 given in Hyder's spreadsheet served on 8 April 2011.

25. For the cost of the varied work for which Target Cost uplifts had been agreed, the adjudicator adopted Hyder's figure of £2,339,477, given in response to his request for information; and then he took as the Target Cost uplift for the variations where this had been agreed the sum put forward by Hyder in response to the request for information. At paragraph 139 of his decision he said this:

“By the schedule provided by [Hyder] the agreed Target Cost variation is an uplift of £2,385,647.98."

25. I am doubtful as to whether this was in truth an agreed figure. However, the adjudicator appears to have treated it as such. Even if he was wrong in doing so, that is not a matter on which, in accordance with well-known principles, Carillion can rely as a ground for opposing enforcement of the decision.

26. Having regard to his conclusion about the amount of the Disallowed Costs, the adjudicator found that the value of Hyder's work, as at the date of its Application 21a, was £15,104,399.74. He then commented, at paragraph 142, that "As the net fee claimed is less than the applicable Target Cost no further consideration needs to be given to the Target Cost".

27. Accordingly, the adjudicator decided that, since Hyder had already been paid £12 million, the outstanding fee amounted to £3,104,399.74. This was the amount that he awarded to Hyder, together with interest.

28. I should say at once that, apart from the breach of the rules of natural justice alleged in this case, the adjudicator appears to have conducted the adjudication with care and considerable diligence.

The submissions of the parties

29. In her succinct and well directed submissions Ms Fionnuala McCredie, who appeared for Carillion, summarised the case on the breach of the rules of natural justice as follows:

    1. At a meeting on 4 April 2011 the adjudicator asked the parties to provide detailed figures in response to a number of questions which were subsequently outlined (or clarified) in his e-mail to the parties dated 6 April 2011.

    2. In response to this, on 8 April 2011 Hyder served its answers on a spreadsheet (page 3/9/558) which was supported by 19 further pages of spreadsheets, together with another substantial document in Excel running to some 39 pages of data and a 6 page explanation. Amongst other things, this provided - for the first time according to Carillion - the breakdown of Hyder's figure for the Target Cost of £15,069,799 which had been given in the Referral Notice. This material was served in support of Hyder's alternative case in relation to the Target Cost.

    3. In response to the adjudicator's question, "Value of agreed "Target Cost" uplifts", Hyder's spreadsheet showed a figure of £2,385,647. In response to the question, "Value of resources recorded against the agreed "Target Cost" uplifts ...", Hyder gave a total figure of £2,339,477, thus producing an underspend against the Target Cost of £46,170.

    4. Hyder also gave a figure of £2,947,174 as its actual cost of achieving the original scope of the contract works. However that figure was not shown in the covering spreadsheet, but was to be found in the first of the attached spreadsheets which followed it (page 3/9/559).

    5. These two figures, for the cost of achieving the original scope of work and the cost of achieving the agreed Target Cost uplifts, were taken by the adjudicator and inserted into the table set out in paragraph 140 of his Decision.

    6. The breakdown of each of these figures was given in the first supporting spreadsheet. Ms McCredie submitted that this showed that Hyder's assessment of the actual cost of achieving the original scope of work was not a proper comparison with the original Target Cost. She pointed out that the following items were not included in the actual costs of carrying out the original scope of work:

The same point was made in Reynolds Porter Chamberlain’s letter of 9 May 2011. (There was also an item in the original Target Cost of £416,000 for risk, although I did not understand Ms McCredie to suggest that this was a sum that could ever be reflected in an actual cost. If this was Carillion's case, then I consider that it was misconceived.)

29. 7. The effect of this, if one adds back these figures, would indicate that the actual cost of carrying out the original scope of work was about £1.65 million greater than the figure claimed by Hyder, and a little under £2.1 million if one includes the £416,000 in respect of risk.

    8. As a result of this the adjudicator derived a figure for the revised Target Cost that was manifestly too high.

    9. Thus the adjudicator's assessment of the Target Cost was the result of the adoption of a methodology on which he had not invited submissions from the parties and in circumstances where he should have done this.

    10. If the adjudicator had told the parties that he was proposing to take these figures, Carillion could or would have pointed out to him that they did not provide a true like for like comparison unless some or all of the adjustments set out above were made.

    11. If the adjudicator had made suitable corrections he would have reduced his assessment of the Target Cost to a figure that would or might have triggered the pain/gain adjustment to Hyder's detriment.

    12. Further, the effect of the adjudicator's assessment of the Target Cost is that Hyder became entitled to a windfall under the pain/gain mechanism because the adjudicator's figure for the Target Cost of £17,082,944 would have triggered a gain for Hyder of £989,272.

30. Apart from the claimed breach of the rules of natural justice and the assertions in paragraphs (10) - (12) above, Mr David Streatfeild-James QC, who appeared for Hyder, did not take issue with the factual basis of Ms McCredie's submissions. However, he made the following submissions by way of response:

    1. Following the meeting on 4 April 2011 it should have been reasonably obvious to the parties that the adjudicator would have to consider the parties respective submissions on Target Cost.

    2. This would involve both legal and factual issues.

    3. The legal issues concerned with the proper construction of the Network Rail Contract and the agreement between Carillion and Hyder.

    4. The factual issues flowed from the legal issues: given the relevant principles, what was the consequence for the Target Cost?

    5. The adjudicator had obviously been addressing his mind to how the Target Cost provisions would work, and that was what he said in his e-mail of 6 April 2011.

    6. The adjudicator used only information which was provided to him as part of the adjudication in reaching its conclusion. He did not use his own knowledge and experience: having rejected both parties’ primary position, it was inevitable that he would have to carry out his own calculations.

31. Mr Streatfeild-James submitted that there was no basis for any assumption or expectation by Carillion that the adjudicator would adopt one or other of the methodologies presented by the parties when assessing the Target Cost: he was quite entitled to make his own assessment. The springboard for his assessment was his own analysis of the true construction of clause 9.5 of the contract between Hyder and Carillion, on which both parties had had an opportunity to address him and had done so.

32. In relation to the pain/gain windfall, Mr Streatfeild-James submitted that this was irrelevant because there was no claim for any gain share in the adjudication. He submitted that whether or not the Target Cost might be open to question in a further adjudication may well be a difficult question (because he said that the authorities on serial adjudications are not straightforward), but that was irrelevant to the enforcement of this particular decision.

Analysis of what the adjudicator did (or did not do)

The pain/gain windfall

33. In order to analyse these submissions it is important to establish precisely what the adjudicator did (and did not do).

34. I propose to deal first with Carillion's argument about the windfall in relation to the pain/gain calculation based on the adjudicator's assessment of the Target Cost. The Housing Grants, Construction and Regeneration Act 1996, by section 108(3), provides that any construction contract shall provide that "the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings ...".

35. Under the terms of the Scheme for Construction Contracts (SI No 649 of 1998) an adjudicator is not required to give reasons for his decision, unless requested to do so by one of the parties to the dispute (Part I, paragraph 22). It is now well established by the case law that a defect in the reasoning of an adjudicator will very rarely give rise to good grounds for resisting enforcement: see Coulson on Construction Adjudication, 2^nd edition, paragraph 3.95.

36. Since it is the decision of the adjudicator that is binding on the parties, not his reasoning, one must consider what is meant by "the decision of the adjudicator". In most cases the adjudicator will determine that a sum of money is due from one party to the other and the decision will therefore consist of a declaration that the particular sum is due, together with related declarations in relation to the amount of interest and questions of costs. In that type of decision, it is clear beyond doubt that the adjudicator's conclusion that A owes (and must pay) £X to B is binding until finally determined by litigation or arbitration.

37. However, suppose that the adjudicator’s reason for deciding that the sum owed to B is £X is that he has decided that B was entitled to an extension of time of Y weeks with a weekly prolongation cost of £Z. In this situation, I find it difficult to see how it could be said that the amount of the extension of time to which B was found to be entitled was not also part of the decision and therefore not binding as between A and B (subject, of course, to B having the right to argue in a subsequent adjudication that he is entitled to a further extension of time on the grounds not put before the adjudicator in the first adjudication). In my judgment, in that situation an adjudicator's conclusion on the amount of the extension of time attributable to the stated events would also be binding on the parties (until finally determined otherwise).

38. Accordingly, I consider that an adjudicator's decision consists of (a) the actual award (i.e. that A is to pay £X to B) and (b) any other finding in relation to the rights of the parties that forms an essential component of or basis for that award (for example, in a decision awarding prolongation costs arising out of particular events, the amount of the extension of time to which the referring party was entitled in respect of those events).

39. In the present case the scope of the adjudicator's decision is quite clear because it is set out under the heading "The Decision". What he decided was:

    1. The amount that was due to Hyder in respect of its Application 21a.

    2. The amount of interest payable to Hyder.

    3. The amount of his fees and expenses.

    4. The allocation of his fees and expenses as between the parties.

40. In relation to the Target Cost, the adjudicator concluded that, since the net fee claimed was less than the applicable Target Cost, “no further consideration needs to be given to the Target Cost". The adjudicator determined that the net fee claimed was £15 million odd, nearly £2 million less than his derived figure for the Target Cost (of £17 million odd). Thus his conclusion that the Target Cost was irrelevant would have been the same if he had assessed its value at any figure above the figure that he found to be the net fee due. So, subject only to a finding that the Target Cost was greater than the net fee due, the actual value of the Target Cost played no part in the process by which the adjudicator arrived at his decision. It would have been the same if the adjudicator had found that the Target Cost was only £1 more than the net fee due.

41. In my judgment, therefore, the adjudicator's conclusion in relation to the value of the Target Cost is not a decision that is binding on the parties. Whilst there is probably nothing to prevent Hyder from starting a further adjudication in order to claim the gain based on the adjudicator's calculation of the Target Cost, there is nothing to prevent Carillion from disputing the correctness of that calculation since its actual value did not form part of the adjudicator's decision in this referral.

42. As I have set out above, the corrections that Ms McCredie submitted would have to be made to the adjudicator's assessment of the Target cost, if taken at face value, amounted to a little over £1.65 million. Even if this sum is subtracted in full from the adjudicator's assessment of the Target Cost, the result is still a figure that exceeds the net fee due to Hyder as found by the adjudicator. So if the adjudicator had raised his proposed methodology and choice of figures with the parties prior to issuing his decision, and Carillion had made to the adjudicator points that it has made to the court, the resultant reduction in the adjudicator's calculation of the Target Cost - assuming that he accepted Carillion's submissions in full - would not have been sufficient to affect the outcome.

The calculation of the Target Cost

43. I now turn to the methodology adopted by the adjudicator in order to look a little more closely at what he actually did.

44. The springboard for the adjudicator's assessment of the Target Cost was his conclusion as to the effect of clause 9.5 of the contract between Hyder and Carillion. Clause 9.5 provided as follows:

“If Carillion requires services in addition or variation to those identified in the Agreement they shall be provided at a fee agreed between the parties or, in default of such agreement, at a time-related charge calculated using the hourly rates identified in Schedule B applied to the Designer’s documented records.

Such additional or varied services shall be deemed to form part of the Services and the Designer shall ensure that such additional or varied services are carried out as economically as possible provided that the Designer shall not commence any such additional or varied services without the express instruction of Carillion. The Designer shall advise Carillion of any affect (sic) on the programme resulting from the addition or variation and the programme shall be amended accordingly by Carillion in accordance with Clause 2.6.”

45. At this point it is important to recall that, subject to certain lump sum fees, Hyder was entitled to be paid under the agreement on the basis of time charges at fixed rates (as set out in the contract), less any Disallowed Costs. The pain/gain machinery is then applied to the total recoverable costs to provide an adjustment in the event of any overspend or underspend by Hyder against the Target Cost.

46. I can do no better than to express the adjudicator's conclusion on the application of clause 9.5 in relation to the Target Cost in his own words. Having set out clause 9.5 in full, at paragraphs 123 and 124 of the Decision he said this:

“123. This clearly reinforces the intention that the Target Cost and its amendment are to be agreed values. Nevertheless the contract recognises the reality of being able to do this, and to efficiently progress the works at the same time, by the final part of clause 9.5 where it states:

‘in default of [reaching] such agreement, [the additional Target Cost is calculated] at a time-related charge calculated using the hourly rates identified in Schedule B applied to the Designer’s documented records’.

124. The default position for the value of the variation or addition to the service is that the value is what it cost. The practical effect of which is to pass the risk of the cost to the Respondent.”

47. Since there had been no agreement in respect of the major proportion of the varied works, the adjudicator's conclusion meant that Hyder's actual cost of carrying out that proportion of the works (after deducting any Disallowed Costs) was also the Target Cost of that proportion of the works.

48. This left only two other parts of the works. First, the services that formed part of the original scope of the work. Second, those services that amounted to a variation or addition to the original work and in respect of which the Target Cost had been agreed. Accordingly, in order to establish the total Target Cost in the light of his approach to the construction of clause 9.5, the adjudicator needed to establish, first, the amount of the original Target Cost (which was not in issue) and the amount agreed as the Target Cost of the variations/additions and, second, Hyder's actual costs of carrying out (a) the original scope of works and (b) the agreed variations/additions.

49. The questions posed in the adjudicator's e-mail of 6 April 2004 specifically included the value of agreed Target Cost uplifts and the value of resources recorded against those agreed Target Cost uplifts. However, it seems that he did not ask for the value of the resources recorded against the original scope of work.

50. It is clear that Carillion was fully aware that the adjudicator was interested in having the details of the Target Cost uplifts that had been agreed, together with the costs expended by Hyder in relation to them, because that was what their solicitors asked the adjudicator to confirm in an e-mail dated 6 April 2011.

51. In the 6 page explanatory note that Hyder served together with its spreadsheets that were served in response to the questions posed by the adjudicator, Hyder said this:

“Where no cost is stated as incurred against a work pack for the original scope, this is because Hyder are of the opinion that the work was varied from day 1. For example, Work pack 02, the original scope was changed before work commenced in accordance with the activities scheduled in the programme. Other work packs, such as 08 and 12a were added by variation. We have not included a contract work value against management as we do not consider that Hyder were ever in a position that the original programme of works was not subject to variation.”

52. In his second witness statement served on behalf of Carillion Mr Robert Hogarth, a partner in Reynolds Porter Chamberlain who represented Carillion at the meeting with the adjudicator on 4 April 2011, said this (at paragraph 3):

“The fundamental problem was that Hyder were and are completely unable to identify what hours were expended against the original work scope and what hours were expended against the varied work scope … Further, as Hyder well knew, and as would be expected, Carillion required this information to calculate the Target Cost and are obliged to provide this information in order to obtain payment from the Employer.”

53. Against this background, it is hardly surprising that Carillion is seeking to resist enforcement of the adjudicator's decision. But on the other hand this suggests that one might have expected Carillion to take particular interest in any figures put forward by Hyder showing what resources were spent against both the original work scope and such varied or additional work for which a Target Cost was agreed. The absence of a like for like comparison (and reason for that absence) between the original Target Cost and the figures given by Hyder for the actual cost was actually highlighted by Hyder in the passage that I have quoted above from the explanatory note.

54. As I have already indicated, the adjudicator particularly asked for - and was given - Hyder's figures for the agreed uplifts to the Target Cost and for the resources said to have been spent in respect of the work that was the subject of those uplifts. Having been given that information in the covering spreadsheet that was submitted on 8 April 2011 I would have expected Carillion to have examined closely the supporting spreadsheet which showed how it was made up. On doing that exercise it would have seen also that in the next column of the same spreadsheet Hyder had set out the resources expended against the original scope of work.

55. Since the adjudicator noted each of those figures for himself, I consider that he could reasonably have assumed that Carillion would have looked at them also. In its response served on 20 April 2011 Carillion did not comment on those figures, but of course it had not been specifically asked to do so.

56. At paragraph 139 of his decision the adjudicator recorded that "By the schedule provided by the Referring Party the agreed Target Cost variation is an uplift of £2,385,647.98”. This was the figure that appeared in Hyder's summary spreadsheet of 8 April 2011. As I have indicated, from this it is not clear to me whether the adjudicator was treating this as a figure that the parties had agreed, or was merely recording that this was Hyder's figure for the amount that it said had been agreed. If it was not a figure that Carillion accepted, then the adjudicator appears to have overlooked this.

57. The table set out at paragraph 140 of the adjudicator's decision was as follows:

58. Apart from the figure for the "Agreed TC Uplift", which I have just mentioned, from this it can be seen that the only figures in the table that were not agreed (or derived by subtraction) were (a) Hyder’s figures for the claimed actual cost of carrying out the original scope of works and the work the subject of the agreed uplifts to the Target Cost and (b) the adjudicator's own assessment of the Disallowed Costs.

59. The submission by Mr Streatfeild-James that the adjudicator's calculation of the Target Cost was a logical extension of his construction of clause 9.5 is, it seems to me, plainly correct. Having construed clause 9.5 in the way that he did, the adjudicator had two gaps to fill. He needed the amount of the Target Cost uplifts which had been agreed and he needed Hyder's costs of carrying out the work that was the subject of those agreed uplifts, both of which he was given in response to his e-mail of 6 April 2011. In addition, he needed Hyder's costs of carrying out the original scope of work. As I have said, the latter was to be found in the first supporting spreadsheet to Hyder's answers to the adjudicator's questions.

The authorities

60. This is not one of those cases where the adjudicator took into account material that was not before the parties, or where he applied his own experience in order to resolve a particular question. Carillion's case here is that the adjudicator acted in breach of the rules of natural justice by adopting a methodology different from that advanced by either of the parties without giving them an opportunity to comment on it. Thus the observations of the judges in cases such as Balfour Beatty v LB of Lambeth [2002] BLR 288 and RSL (South West) Ltd v Stansell Ltd [2003] EWHC 1390 (TCC) may be of less relevance than the observations of judges in cases where this did not happen.

61. However, the case of Balfour Beatty v LB of Lambeth is a convenient starting point. It is a decision of His Honour Judge Humphrey LLoyd QC. Balfour Beatty submitted claims for an extension of time and prolongation costs which were referred to adjudication. The adjudicator wrote to the parties saying that he required a schedule setting out further information for each Relevant Event that was relied on by Balfour Beatty. Balfour Beatty submitted the further material and Lambeth notified the adjudicator that it proposed to put in a submission responding to this material. The adjudicator had until 25 January 2002 to issue his award, and on 22 January 2002 Lambeth submitted the first part of its submissions commenting on the material submitted by Balfour Beatty. The second part of its submissions was served on 23 January 2002, just after Lambeth had been told that the adjudicator was "finalising his decision”. 10 minutes after Lambeth faxed the final part of its submissions the adjudicator's assistant informed it by telephone that no further submissions would be accepted as the adjudicator had made his decision.

62. Lambeth resisted enforcement of the adjudicator’s decision on the ground that the adjudicator had made his own analysis of the critical path and had recalculated the appropriate amount of damages for delay without giving either party an opportunity to comment on his methodology or calculations. The judge held that:

“(1) Adjudication . . . require[s] certain basic procedural principles to be applied in order that both parties are treated fairly. An adjudicator was not limited to material put to him by either party. In principle an adjudicator must inform the parties of the information he obtains from his own knowledge and experience, or from other sources, and of the conclusions that he may reach having relied upon those sources. However, in deciding whether a breach of this principle constitutes a sufficient breach of natural justice such that the decision of an adjudicator could be challenged, would depend on whether the point or issue in question were decisive, or of considerable potential importance to the outcome, rather than being peripheral or irrelevant.

2. The Adjudicator took the initiative in ascertaining the facts and applied his own knowledge and experience to do BB’s work for them, as the material submitted by BB did not satisfy the basic requirements such that it could be used to assess delay. However, he did not inform the parties of his proposed methodology and seek their observations on its suitability. He should have done this, and he should also have given Lambeth the opportunity to comment upon the use of his chosen analysis. Constructing a party’s case for it, without giving the other party the opportunity to deal with it, is such a potentially serious breach of the requirement of impartiality or fairness as to render the decision invalid.”

63. The judge also considered that it was wrong of the adjudicator not to have considered the last set of submissions by Lambeth properly or at all. However, he concluded that there was nothing in those submissions that would have caused the adjudicator to reconsider the reasoning in his decision. Accordingly, he concluded that they did not have any material effect on the result.

64. Ms McCredie relied strongly on the observations made by Akenhead J in Cantillon Limited v Urvasco Ltd [2008] BLR 250, at 262 (paragraph 57) where he said:

“(c) Breaches of the rules [of natural justice] will be material in cases where the adjudicator has failed to bring to the attention of the parties a point or issue which they ought to be given the opportunity to comment upon if it is one which is either decisive or of considerable potential importance to the outcome of the resolution of the dispute and is not peripheral or irrelevant.

(d) Whether the issue is decisive or of considerable potential importance or is peripheral or irrelevant obviously involves a question of degree which must be assessed by any judge in a case such as this.

(e) It is only if the adjudicator goes off on a frolic of his own, that is wishing to decide a case upon a factual or legal basis which has not been argued or put forward by other side, without giving the parties an opportunity to comment or, where relevant put in further evidence, that the type of breach of the rules of natural justice with which the case of Balfour Beatty Construction Company Ltd v The London Borough of Lambeth was concerned comes into play. It follows that, if either party has argued a particular point and the other party does not come back on the point, there is no breach of the rules of natural justice in relation thereto."

65. She relied also on the decision in Primus Build v Pompey Centre [2009] BLR 437. In that case Coulson J said, at 445, under the heading "Was there a breach of natural justice?”:

“36. Now assume that I am wrong on the jurisdiction question, and the adjudicator was entitled to look at the accounts. Did the rules of natural justice require him to obtain the parties submissions on his approach, which calculated a figure of 1.3% from the figures in the accounts, or was he entitled to adopt that approach without any reference to the parties?

37. In my judgment, it is plain that the adjudicator was obliged to go back to the parties with his new calculation. There are a number of reasons for this.

38. First, it is worth considering why the adjudicator was going down this path in the first place. As the reasoning in paragraphs 21 to 28 of his decision makes clear, he started off by rejecting the entire approach advanced by Primus, namely the reasonableness of the 3% identified in the contract. It appears therefore that the adjudicator accepted Pompey's principal case, that proof of actual loss of profit was what mattered. The difficulty for the adjudicator was that, because of the way in which Primus had put their case, he had not been persuaded that there was any evidence of actual loss of profit. Hence, he was driven to calculate his own figures from a set of documents that both sides had told him to ignore.

39. In those circumstances, it might be said that the adjudicator was doing something which was very similar to what the adjudicator did in Balfour Beatty and for which he was rightly criticised, namely filling in the gaps in the referring party's case without any reference to the other side. It is a fine line for an adjudicator between wanting to help the parties on the one hand, and making one side’s case for them, on the other. But if an adjudicator believes that, in the interests of justice, there is a legitimate alternative course which has not been considered or put forward by the referring party, but which may, on its face, meet the objections of the responding party, he should immediately ask himself the question: do I need to give notice of, and obtain submissions about, that alternative approach?

40. As I have said, 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."

66. Ms McCredie submitted that the present case falls firmly in the category of those cases where the adjudicator decided upon an alternative approach to that pleaded and argued by the parties. She submits that it was clearly a case in which he should have asked himself the question: “Do I need to give notice of, and obtain submissions about, that alternative approach?". She submits that if the adjudicator had asked himself that question, the answer should have been “Yes”.

67. Finally, Ms McCredie referred me to certain passages in Coulson on Construction Adjudication, 2nd edition, and, in particular, paragraphs 13.51 and 13.52. In paragraph 13.51 the author writes:

“The authorities make clear that the adjudicator is not generally obliged to indicate to the parties that he has formed a particular preliminary view, in order to seek their express comment upon it, unless (as explored above) his view is based on a new approach, which neither party could have anticipated. Whether the failure to share his preliminary views will amount to a serious breach of the rules of natural justice on the part of the adjudicator will always depend on the facts."

The author then went on to discuss various examples.

68. Mr Streatfeild-James relied principally on the decision of the Court of Appeal in Carillion Construction v Devonport Royal Dockyard [2006] BLR 15. Ironically, that was also a case where there was an issue about a Target Cost, but on that occasion it was Carillion that was contending that the Target Cost machinery had broken down or otherwise become inoperable such that Carillion was entitled to be reimbursed Actual Costs together with a Fee.

69. After noting that judges must be astute to examine technical defences with a degree of scepticism consonant with the policy of the 1996 Act and that errors of law, fact or procedure by an adjudicator must be examined critically before the court accepts that such errors constitute excess of jurisdiction or serious breaches of the rules of natural justice, Chadwick LJ (giving the judgment of the court) went on to set out, at paragraph 53 of his judgment, five propositions that had been relied on by the judge, Jackson J, and which were set out in paragraph 81 of his judgment. The third of these propositions was as follows:

“It is often not practicable for an adjudicator to put to the parties his provisional conclusions for comment. Very often those provisional conclusions will represent some intermediate position, for which neither party was contending. It will only be in an exceptional case such as Balfour Beatty v Lambeth London Borough Council that an adjudicator's failure to put his provisional conclusions to the parties will constitute such a serious breach of the rules of natural justice that the court will decline to enforce his decision.”

At paragraph 84 of the judgment, Chadwick LJ said that the court was in broad agreement with the propositions which the judge set out at paragraph 81 of his judgment. He said that those propositions were "indicative of the approach which courts should adopt when required to address a challenge to the decision of an adjudicator appointed under the 1996 Act".

70. At paragraph 87 of his judgment Jackson J gave six reasons for rejecting the defendants’ submission that the adjudicator's decision should not be enforced. In the context of the present case his fourth reason is of some interest. It was:

“The method by which the adjudicator should determine target cost was a matter of controversy between the parties and ultimately the decision by the adjudicator. Both parties provided to the adjudicator voluminous factual and expert evidence to assist him in determining target cost by whichever route he chose to adopt.”

The same might almost be said of this case. Both parties made submissions, both factual and legal, about the correct approach to the assessment of the Target Cost and then left the matter to the adjudicator. It seems to me that on the basis of the authorities already discussed the adjudicator was not obliged to choose between one set of submissions and the other: it was open to him to adopt his own approach if he had decided to reject the submissions of both parties.

Was there a breach of natural justice?

71. I have to confess that I have not found this question easy. Each side's arguments have some merit. However, adjudication is a rough and ready method of interim dispute resolution and was intended to be such. As His Honour Judge Wilcox once observed, there will be casualties. Unless the rules of engagement are fundamentally disregarded by the adjudicator such that the outcome is materially affected, the court will not usually intervene.

72. I have come to the conclusion that Carillion has not demonstrated in this case that the adjudicator's failure to allow Carillion to comment on his methodology in arriving at his valuation of the Target Cost amounted to a breach of the rules of natural justice. I have reached this conclusion for the following reasons.

    1. The calculation of the Target Cost was always an issue in the adjudication, even though it may have been only part of Hyder's alternative case. Each party made more than one submission about the relevant terms of the agreement between Hyder and Carillion in relation to the calculation of the Target Cost.

    2. At the meeting on 4 April 2011 the adjudicator made it clear that he wanted further information to enable him to reach a conclusion about the Target Cost. It was Carillion's position that it was possible to establish a revised Target Cost and that it had included the documentation within its Response that would enable the adjudicator to undertake this task (see paragraph 2.1.29 of its Response).

    3. The adjudicator's calculation of the Target Cost was driven primarily by his construction of clause 9.5 of the agreement between Hyder and Carillion, on which both parties had made submissions. The adjudicator expressly rejected Carillion's submission that the relevant provisions of the Main Contract in relation to the Target Cost "dropped down" and formed part of the agreement between Hyder and Carillion.

    4. The figures used by the adjudicator when calculating the Target Cost were ones that were either agreed between the parties or had been put forward by Hyder (save for the Disallowed Costs, which the adjudicator had assessed himself). The adjudicator did not use any information that Carillion had not had an opportunity to consider.

    5. The arguments presented to the court in relation to Hyder's actual cost of carrying out the original work were arguments that could have been put to the adjudicator on the basis of the material submitted by Hyder on 8 April 2011. However, I accept Carillion's argument that this might have required an unusual degree of prescience on its part as to what the adjudicator might do.

    6. Whilst Carillion was undoubtedly confronted with a deluge of material at a late stage in the adjudication, it told the adjudicator that it would need 14 days within which to respond to that material and it was given that time. It did not, either then or subsequently, complain to the adjudicator that it had not been able to deal with it.

73. If the adjudicator had asked himself the question posed by Coulson J: “Do I need to give notice of, and obtain submissions about [my approach]?”, I consider that he could reasonably have answered it "No", on the grounds that it was open to him to construe clause 9.5 as he thought appropriate in the light of the submissions made to him and that the figures that he was taking for Hyder's actual costs of carrying out the original scope of work and the variations for which agreed uplifts to the Target Cost had been made were figures that have been put before him by Hyder and on which Carillion had had an opportunity to comment. As I have already noted, since the adjudicator had found these figures for himself he could reasonably have expected Carillion to have found them also.

74. In this context, I understood Ms McCredie to accept that the adjudicator was not under any obligation to seek the parties’ views on his construction of clause 9.5. In my view, that was a correct concession. If a judge or adjudicator has heard full argument on the construction of a particular clause or set of provisions in a contract and reaches a conclusion that is different from the submissions put forward by each of the parties, there is no obligation upon him or her to canvass that view with the parties before making his decision.

If there was a breach of natural justice, did it have a significant effect on the outcome?

75. In case I am wrong on the conclusion that I have reached in relation to the breach of natural justice, I shall give my views on how it might have affected the outcome.

76. If Carillion had been specifically invited to comment on the figures that the adjudicator was proposing to take, I consider that it would probably have made the points that were put forward by Ms McCredie in her submissions to the court.

77. The difficulty with Carillion’s argument is that the corrections that Ms McCredie submitted would have to be made to Hyder's figures in order to take account of the various items of cost omitted are not sufficient to bring the Target Cost down to a value below the adjudicator's assessment of the value of Hyder's net claim. She submitted that the difference was about £2 million, which might be just enough to make a difference, but this figure includes the £416,000 in the original Target Cost for risk. That is self-evidently an item that can only ever form part of a Target Cost: it cannot be an actual cost.

78. Accordingly, Carillion has not persuaded me that the adjudicator's failure to notify Carillion of his proposed methodology and the figures that he proposed to adopt would have made any difference to the outcome. It seems to me that nothing that Carillion was likely to say would have caused the adjudicator to reduce his assessment of the Target Cost to a value lower than his assessment of the net fee claimed.

79. If I had held that the adjudicator's assessment of the Target Cost was a conclusion that was binding on the parties, albeit on an interim basis, then I can see that Carillion might have a sustainable argument that the outcome of the adjudication had been materially affected by the adjudicator's failure to notify Carillion of his proposed methodology and the figures that he proposed to use. However, I have not reached such a conclusion.

Summary

80. For the reasons that I have given Carillion's challenge to the adjudicator's decision must fail. Accordingly, there must be summary judgment for Hyder in the sum claimed.

I will hear the parties on costs, if not agreed, and on any other questions that may arise out of this judgment.