EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2014] CSIH 83

CA76/14

Lord Eassie

Lord Bracadale

Lord Drummond Young

OPINION OF THE COURT

delivered by LORD BRACADALE

the reclaiming motion

T CLARKE (SCOTLAND) LIMITED

Pursuer and Reclaimer ;

against

MMAXX UNDERFLOOR HEATING LIMITED

Defender and Respondent :

Act: MacColl; Brodies LLP

Alt: Weir QC, A McKenzie; MacRoberts

15 October 2014

Introduction
[1] This is a reclaiming motion by the pursuer against an interlocutor dated 26 March 2014 by which the Lord Ordinary refused to grant interim interdict against the respondent and defender from referring for adjudication any disputes arising from a contract between the pursuer and the defender.

Background
[2] The pursuer is a building services company. In 2012 it had a subcontract to carry out mechanical and electrical works in the redevelopment of West Linton Primary School. These works included the design, supply and installation of heat pumps and underfloor heating systems. After a period of negotiation the defender became the sub-subcontractor in respect of the installation of ground source heat pumps, bore holes and underfloor heating systems. In November 2012 the contract between the pursuer and the defender was set out in a written document which included a clause providing that the subcontract was a “construction contract” for the purposes of the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 (the 1996 Act). This allowed for settlement of disputes arising from the contract to be achieved by way of adjudication.

The adjudications
[3] Between June 2013 and March 2014 there were nine adjudications in relation to the contract. Of these, eight were initiated by the defender and one by the pursuer. The Lord Ordinary summarised the adjudications under reference to the date of commencement of each proceeding:

“(a) Adjudication 1 (21 June 2013)

The defender sought payment of £184,740. The adjudicator declined jurisdiction and resigned on 4 July 2013, on the basis that the defender had failed to refer the dispute to adjudication in the contractually stipulated manner.

(b) Adjudication 2 (19 July 2013)

The defender again sought payment of £184,740. The adjudicator again declined the jurisdiction and resigned on 30 July 2013, on the basis that the defender had failed to refer the dispute to adjudication in the contractually stipulated manner.

The defender again sought payment of £184,740. The adjudicator determined that the sum sought was significantly exaggerated. The defender was awarded £17,028. The parties were each found liable for 50 per cent of the adjudicator's fees.

(d) Adjudication 4 (8 August 2013)

The adjudicator declined jurisdiction and resigned on 19 August 2013, on the basis that the defender had failed to refer the dispute to adjudication in the contractually stipulated manner.

(e) Adjudication 5 (20 November 2013)

The defender sought to maintain that the contractual payment mechanism did not comply with statutory requirements and that in consequence, it was entitled to further payments from the pursuer. The adjudicator rejected the claim and ordered the defender to pay her fees.

(f) Adjudication 6 (20 December 2013)

This pursuer commenced this adjudication, in which it unsuccessfully sought to recover monies relating to the defender's delays. The parties were each ordered to pay 50 per cent of the adjudicator's costs. The adjudicator levelled various criticisms at the conduct of the defender.

(g) Adjudication 7 (19 February 2014)

The defender contended that it was entitled to further payments, because the pursuer had failed to serve certain notices. The defender dropped this adjudication on 25 February after the adjudicator asked it to demonstrate that it was in a position to meet his fees.

(h) Adjudication 8 (27 February 2014)

The defender sought the same determination as in adjudication 7. The pursuer challenged the jurisdiction of the adjudicator on the ground that she had not been appointed in accordance with the contract and she subsequently resigned.

(i) Adjudication 9 (11 March 2014)

The adjudicator resigned on 20 March 2014 after queries had been raised about the validity of her appointment.”

The pleadings
[4] In the light of this history of references for adjudication the pursuer raised this action for interdict in which it concluded for interdict and interim interdict against the defender “commencing or insisting upon any adjudications… in relation to matters arising or purporting to arise under or in relation to a contract...”

[5] It was averred that the working relationship between the pursuer and the defender had quickly deteriorated. Mr Neil McFarlane, who was a director of the defender and said to be the controlling mind of the company, was the principal point of contact with the pursuer. His behaviour in relation to the works under the contract, including the references for adjudication, was the subject of criticism by the pursuer. The pursuer’s averments were supported by affidavits. The Lord Ordinary continued the case for one week in order to give the defender an opportunity to set out its position in writing, either by way of defences or an affidavit from Mr McFarlane. At the continued hearing, no such documents having been lodged, counsel for the defender explained that there had been insufficient time to do so and he accepted that the Lord Ordinary should proceed on the basis that the averments contained in the summons were true.

[6] The Lord Ordinary summarised some of the averments by the pursuer as to the behaviour of Mr McFarlane as follows:

“(a) Mr McFarlane refused to address a health and safety issue that arose when a hose on the defender’s drilling rig failed. Instead he claimed that the subsequent delay had been caused by the pursuer.

(b) He made unjustified threats to suspend the works.

(d) He sent a large volume of inaccurate correspondence to the pursuer’s contract administrator.

(e) He claimed that the defender had negotiated different payment terms from those agreed.

(f) He required specific instructions for works that the defender was obliged to undertake.

(g) He made erratic applications for payment sometimes seeking different sums for the same work. When queried about this, he responded by stating that he was doing so ‘because I can’. The pursuer concluded that this was an attempt to create as much confusion as possible.

(h) By mid May 2013 the installation of the heat pumps in the plant room by the defender was critical. Until that work was completed the whole project would be delayed. At that stage the defender made further unjustified demands for payment.

(i) Throughout May the defender threatened to suspend the works. The pursuer sought a meeting to try and resolve matters. Mr McFarlane replied by email in which he stated (i) ‘what MMAXX wants is CASH, not meetings to talk about it’; and (ii) ‘for the record, we can both avoid a “protracted legal dispute”, if you pay us a fair and reasonable payment.’

(j) On 7 June, he sent a further erroneous notice of suspension.”

In addition, the pursuer made averments as to what was said by Mr McFarlane in a number of telephone calls to Mr Boyle who was the pursuer’s commercial director. During the course of a call in May 2013 Mr McFarlane said that he was the defender’s only shareholder and had only invested £1 in the company, implying that it had little to lose. He threatened to commence an adjudication and added that he had prior experience of obtaining money in such proceedings and “would never give up”. He also stated that the pursuer would incur expense in resisting the defender’s claims. During the course of another telephone call in early June Mr McFarlane stated: "I'm a maverick, I don't play by the rules". He also stated that he would do whatever he needed to do, including suspending the works. The pursuer would face significant legal costs. In relation to the first adjudication, in the course of a telephone conversation on 25 June 2013, Mr McFarlane said, “The cost of defending adjudications will be massive to T Clarke. I know what it will cost for Brodies to review and respond to my referral, it is currently sitting at over 2,000 pages.” During the course of the second adjudication, on 29 July 2013, in a further telephone call to Mr Boyle, Mr McFarlane stated that he would do whatever was required to obtain monies by way of adjudication, including making use of misinformation and misdirection. He added that he did not care whether his claims were valid or not, and would simply use the adjudication process as often as required on an item by item basis to force a settlement.

[7] The pursuer averred that in relation to the third adjudication the defender misrepresented a number of key facts both in the adjudication process and in earlier correspondence. Examples were cited, including averments that the defender had falsified quotes from the defender’s sub-contractor, Phoenix Drilling, and that prior to the adjudication the defender had claimed that it was entitled to a payment in respect that the pursuer had instructed the defender to stop drilling, which, as the defender admitted at the adjudication, was untrue.

[8] The pursuer averred that the circumstances set out in the summons demonstrated that the conduct of the defender was malicious and in bad faith. It was a nimious and oppressive use of the adjudication process. No true dispute was being pursued.

The decision of the Lord Ordinary
[9] The Lord Ordinary noted that the pursuer’s averments disclosed a “troubling picture”. Given the various statements made by Mr McFarlane and the “slew of adjudications” it was understandable that the pursuer should query the defender’s underlying motives. As the Lord Ordinary put it, “A cloud of suspicion hangs over [the defender’s] conduct”. He noted, however, that the power of the court to dismiss a claim for abuse of process should be exercised sparingly. It would only be in the most exceptional circumstances that a court would deprive a party of an express right conferred by Parliament; it would hardly ever do so.

[10] The Lord Ordinary considered that the circumstances of the case did not yield the clear inference that the defender had acted unreasonably and oppressively. He noted that most of the earlier adjudications foundered on procedural problems; in the third adjudication the defender had a measure of success; the sixth adjudication was initiated by the pursuer. He further noted that Mr McFarlane’s conduct and the comments attributed to him were also consistent with a “robust approach”.

[11] The Lord Ordinary expressed the view that a key consideration was that the grant of interim interdict would prohibit the defender from initiating any further adjudication, no matter how well vouched. He considered that the suggestion advanced on behalf of the pursuer that it would be open to the defender to apply to the court for partial recall when it sought to initiate a further adjudication to be cumbersome, expensive and a difficult question for the court to determine.

[12] The Lord Ordinary concluded that the pursuer had failed to establish a prima facie case. It had not passed the high threshold required. In concluding that the balance of convenience favoured the defender, the Lord Ordinary considered that the defender would be significantly prejudiced if it could not take advantage of the speedier and cheaper means of dispute resolution provided by adjudication; it would be unjust if the pursuer but not the defender could refer a dispute for adjudication; in any event the pursuer did have a remedy as it could raise an action seeking damages for abuse of process.

Submissions
Pursuer
[13] Mr MacColl, on behalf of the pursuer and reclaimer, moved us to recall the interlocutor of the Lord Ordinary. The Lord Ordinary had been wrong to hold that the pursuer had not set out a prima facie case which would justify the grant of an interim interdict against the defender.

[14] The test that would allow the court to intervene in a case of abuse of process was met. The court should restrain proceedings brought for improper, ulterior purposes or founded on a false factual basis ( Shetland Sea Farms Ltd v Assuranceforeningen Skuld 2004 SLT (Notes) 30 paras [143] to [145]; Walker Delict 2 ^nd Edition p 850).

[15] The court in England had been willing to grant injunctions to preclude adjudications that were unreasonable and oppressive ( Mentmore Towers Ltd v Packman Lucas Ltd 2010 EWHC 457 (TCC); Twintec Ltd v Volkerfitzpatrick Ltd [2014] EWHC 10 (TCC)).

[16] Support for the argument that the court could intervene could be found in the old law relating to diligence on the dependence. Prior to the introduction of sections 15A to 15N of the Debtors (Scotland) Act 1987 it was recognised that a person who was reasonably apprehensive that diligence on the dependence would be sought in circumstances in which it would be nimious and oppressive could seek and obtain interdict against the grant of a warrant for diligence, notwithstanding that there was, absent such an interdict, a right to obtain such a warrant.

[17] The Lord Ordinary had failed to give sufficient weight to the full nature of the pursuer’s case as averred in the summons. The pleaded case, which was fully vouched by productions and affidavits, amply demonstrated grounds for the pursuer’s apprehension that in the future the defender would make use of adjudications, not for the resolution or genuine disputes between the parties, but with a view simply to placing commercial pressure on the pursuer to pay otherwise unjustified sums of money to the defender.

[18] Further, it was clear from the representations made by Mr McFarlane that the adjudication procedure was being used for ulterior and oppressive purposes. It was being pursued in bad faith and was an illegitimate use of the adjudication process. What had been said by Mr McFarlane in the course of the telephone calls was clearly indicative of an approach based on bad faith. This was reinforced by the averment that the defender had falsified quotes from Phoenix Drilling.

[19] The Lord Ordinary’s concern at para [19] that the grant of interim interdict would prohibit the defender from initiating any further adjudication, no matter how genuine and well vouched, was without true substance. The circumstances squarely indicated that the only purpose behind the adjudications brought by the defender was an ulterior motive and that they had all been brought in bad faith. The defender had been given every opportunity to explain what legitimate disputes might arise, particularly as the contract was now concluded and there was no more work to be done. The defender had failed to offer any legitimate or genuine dispute suitable for adjudication. If any genuine dispute were to emerge between the parties it would be open to the defender to bring proceedings before the courts. In addition, the defender could return to the court to seek a partial recall of any interim interdict that had been pronounced.

[20] As to the balance of convenience, the Lord Ordinary had erred at para [22] of his opinion where he found that the balance of convenience favoured the defender as it would be “significantly prejudiced if it could not take advantage of the speedier and cheaper means of dispute resolution provided by adjudication” and also because it would be “unjust if the pursuer but not the defender could refer a dispute to adjudication”. It would remain open to the defender to litigate before the courts any disputes that it wished to have determined. Traditional litigation could not be assumed to be more expensive than adjudication. The successful party would normally be entitled to recovery of expenses which was not the case in adjudications. The defender had not demonstrated any need for a speedier road of dispute resolution to be used in relation to any future disputes arising from the parties’ contract, despite having been afforded an opportunity to lodge defences and affidavit evidence. If the defender’s own wrongful conduct and abuse of the adjudication process was the foundation for an interim interdict, the question of whether the pursuer could still refer a dispute for adjudication while the defender could not was neither here nor there.

[21] In response to the competency point advanced on behalf of the defender Mr MacColl submitted that the contract between the parties did not provide for a right to adjudication in bad faith. If bad faith could be demonstrated no separate issue of competency arose.

Defender
[22] Mr Weir QC submitted that the motion for interim interdict to prevent any future adjudication was incompetent. The court was being invited to innovate on the parties’ contract. Standing the public policy reasons behind the introduction of section 108 of the 1996 Act, such an innovation would be significant (see Carillion Construction Ltd v Devonport Royal Dockyard Ltd 2005 EWCA Civ 1358 at para 26). When dealing with interim orders the court must avoid significantly innovating on the parties’ contractual rights and obligations ( Scottish Power Generation Ltd v British Energy Generation (UK) Ltd 2002 SC 517 at p 526 E to F). The nature of adjudication was that it was a contractual process underpinned by statute. Neither the 1996 Act nor the Regulations made thereunder gave an adjudicator power to strike out an adjudication for abuse of process. When the court dealt with abuse of process in an action before it, the court was protecting the integrity of its own procedures. It did not follow from that, that the court had power to intervene to prevent a party from exercising a contractual right in the future, which is not otherwise the subject of litigation before the court, simply because the exercise of that right is alleged to be an abuse of process. The adjudication process was not one in which the court had any direct interest: it was a private process which did not involve the court and which did not depend on the existence of any court action.

[23] The analogy with the old law relating to diligence on the dependence was not apt. Diligence was an ancillary and protective remedy. In allowing its use to be interdicted the court was regulating the use of a court procedure, albeit one otherwise available as of right once a summons had passed the Signet.

[24] It would be necessary for the pursuer to show that prima facie there was a contractual basis for the court’s intervention in the adjudication process, for example, that the commencement of an adjudication by the defender would be a breach of contract. The pursuer did not seek to found on any breach of contract on the part of the defender. Mr Weir accepted that the court could be involved in circumstances where the process of adjudication was commenced and the adjudicator had no jurisdiction. He also accepted that had the pursuer sought to interdict the third adjudication it might have been competent for the court to intervene. Specific allegations had been made in relation to that adjudication.

[25] The English authorities did not vouch the proposition that a party can be prevented from referring any future dispute to adjudication. Relief was being sought in those cases in circumstances in which an individual adjudication had already commenced.

[26] If the motion for interim interdict was competent the Lord Ordinary was correct in identifying the high threshold which the pursuer required to meet and in holding that the circumstances in the present case did not yield the clear inference that the defender had acted unreasonably and oppressively. As the Lord Ordinary had pointed out, most of the earlier adjudications had foundered on procedural problems; in the third adjudication the defender had a measure of success; the pursuer itself initiated the sixth adjudication after five earlier procedures; Mr McFarlane’s conduct and the comments attributed to him were also consistent with a robust approach. The reference of multiple disputes to adjudication was unobjectionable standing the statutory right to adjudicate “at any time”.

[27] The order sought by the pursuer was far too broad. It would have the effect of prohibiting the defender from initiating any further adjudication, no matter how genuine, no matter how well vouched. That would represent a significant innovation on the parties’ contractual rights and obligations. Past words could not turn a future genuine dispute into bad faith. If the court were to be involved at all it could only be on an adjudication by adjudication basis.

[28] In relation to the balance of probabilities the Lord Ordinary was correct to hold that it tipped in favour of the defender. The right to refer a dispute to adjudication at any time confers a commercial advantage on the referring party and this must be taken to have been known by Parliament when the 1996 Act was passed. If the order were granted the defender would be deprived of that commercial advantage and would be prejudiced. It would be unjust if the pursuer could retain the commercial advantage conferred by adjudication in circumstances where that advantage was denied to the defender even in respect of well-founded genuine adjudications.

Discussion and decision
[29] Section 108 (1) of the 1996 Act provides:

"A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section.”

The applicable procedure is set out in the Scheme for Construction Contracts (Scotland) Regulations 1998. The purpose of the legislation was to introduce a speedy mechanism for settling disputes in construction contracts on a provisional, interim basis. The decision of an adjudicator is binding and is to be complied with until the dispute is finally resolved ( Carillion Construction Ltd v Devonport Royal Dockyard Ltd ( supra ). It is therefore an important practical procedure available to those who operate in the construction industry. It is a right provided by Parliament and one which was incorporated into the contract between the pursuer and the defender in the present case. These considerations would in themselves indicate that the court should be slow to intervene in such a process.

[30] It is not in doubt that the court has an inherent power to intervene in a case before it where the party pursuing a claim has been guilty of abuse of process. As the Lord Ordinary (Gill) explained at paragraph [143] of his opinion in Shetland Sea Farms Ltd v Assuranceforeningen Skuld ( supra ) that in doing so the court “protects the integrity of its procedures by preventing one party from putting the other at an unfair disadvantage and compromising the just and proper conduct of the proceedings”. It was, however, recognised that the power, which is a drastic one, should be exercised sparingly, “because it may involve the denial of a well-founded claim”.

[31] In Shetland Sea Farms Ltd a number of examples of ways in which a litigant could abuse the process of the court were cited. These included: by pursuing a claim or presenting a defence in bad faith and with no genuine belief in its merits; by fraudulent means; for an improper ulterior motive, such as that of publicly denouncing the other party; or founding a claim on a false narrative of fact supported by fabricated documents.

[32] As to whether the court has power to grant an interdict to prevent the pursuit of a particular adjudication, we note that in Mentmore Towers Ltd v Packman Lucas Ltd ( supra ) the court found that it had jurisdiction. That was a matter of concession. Edwards-Stuart J concluded at para 22:

“…there is no difference in principle between the approach to be adopted by the court when considering whether or not to order a claim brought by way of litigation to be stayed on the grounds that it is being brought unreasonably and oppressively, and the approach to be adopted when considering whether or not to restrain the further pursuit of an identical claim by way of adjudication on the same grounds.”

In Twintec Ltd v Volkerfitzpatrick Ltd ( supra ) the same judge expressed the view that a party should not be prevented from pursuing its right to adjudication save in the most exceptional circumstances (para 69).

[33] With the latter proposition we would agree. It is not necessary in the context of this case to express a view on the circumstances in which the court might interfere in a particular adjudication. What is clear is that neither of these cases provides any support for granting the type of interdict against future reference for adjudication as sought by the pursuer.

[34] It is important to bear in mind what it was that the pursuer sought from the Lord Ordinary. The pursuer was not seeking to prevent the defender from persisting in a particular adjudication embarked on in bad faith or on an untruthful basis. The pursuer sought to prohibit the defender from referring any future dispute, whether or not well vouched and brought on a legitimate basis. It is immediately obvious that such a step by the court would constitute a significant innovation on the contractual dealings between the parties and a significant limitation on the right provided by Parliament in the 1996 Act. The potential to involve the denial of a well-founded claim was precisely the reason advanced in Shetland Sea Farms Ltd for the sparing use of the power to intervene to prevent an abuse of process.

[35] Could the circumstances of this case merit such a drastic curtailment of the rights of the defender? The Lord Ordinary commented that the alleged conduct of the defender and the statements made by Mr McFarlane gave cause for concern. The averments in relation to the circumstances surrounding the third adjudication, in particular, were of a serious nature. Mr Weir accepted that these averments might possibly have founded a basis for the court to intervene in relation to that adjudication. That said, we consider that the Lord Ordinary was entitled to come to the view at para [18] of his opinion that the circumstances did not yield the clear inference that the defender had acted unreasonably and oppressively and that Mr McFarlane’s conduct and the comments attributed to him were also consistent with a robust approach. We agree with the Lord Ordinary’s conclusion at para [19] that the key consideration was that the grant of interim interdict would prohibit the defender from initiating any further adjudication, no matter how genuine and well vouched. We agree with his view that the suggestion that the defender could apply to the court for partial recall when it sought to initiate a further adjudication was not realistic and that such an application would be cumbersome, expensive and a difficult question for the court to determine.

[36] In these circumstances we are of the view that the Lord Ordinary was correct to conclude that the pursuer had failed to set out a prima facie case such as would allow the court to intervene to grant the interim interdict sought. In addition, we reject the pursuer’s contention that the Lord Ordinary erred in holding that the balance of convenience favoured the defender. In our view the reasons given by the Lord Ordinary for exercising his discretion in favour of the defender were sound and we reject the criticisms of them advanced by Mr MacColl.

[37] In the result the reclaiming motion must be refused.