Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2012] CSOH 139
	OPINION OF LORD MALCOLM in the cause PIHL UK LIMITED Pursuer; against RAMBOLL UK LIMITED Defender: ________________

Pursuer: J Broome; Anderson Strathern LLP

Defender: Howie, QC; Brodies LLP

29 August 2012

[1] In this action Pihl UK Limited (the pursuer) seeks to enforce an adjudication award of Mr LCH Bunton dated 28 June 2012. Amongst other things he decided that Ramboll UK Limited (the defender) should repay the pursuer £326,825.74 within 7 days, this being a sum overpaid to the defender in the course of a construction contract. The defender resists enforcement of the award on the basis that the adjudicator's decision is invalid and should be set aside. The alleged invalidity is based upon two separate but related grounds, which are said to amount to a breach of natural justice:

1. The adjudicator failed to explain the legal source of the obligation to repay the sum.

2. The adjudicator failed to explain the basis upon which the sum is calculated. Any sum due can only be quantified by reference to the ultimate overall costs of the contract, which, as yet, cannot be ascertained.

The background

[2] The background can be summarised as follows. By appointment document dated 18 February 2010 the defender tendered a fee proposal "based upon staged delivery of our work" for various engineering design services in respect of a construction project known as 1 School Pathfinder at Cowes, Isle of Wight. That proposal was accepted by the pursuer. The fee proposal stated (at page 3) that the defender's percentage fee was calculated on the basis of 2.5% of an outturn project construction cost of £20.8 million. A percentage of that fee was to be paid at various stages of the contract. For example, by stage 5, namely the contract award, 70% of the fee should have been paid, specified at £364,000 (being £20.8m x 2.5% x 70%).

[3] Notwithstanding this arrangement, the defender issued invoices on a monthly basis. On 13 October 2011 agents for the defender wrote to the pursuer demanding payment of £222,350.53, which was considered to be due and payable in respect of outstanding fees. Reference was made to an invoice in that sum dated 30 August 2011, which stated that payment was due on 29 September 2011. The defender's threat to suspend work until that invoice was paid was carried out on 25 October. On 9 November a notice of adjudication was served on the pursuer. It was asserted that the pursuer had failed to issue either a payment notice under section 110 or a notice of withholding under section 111 of the Housing Grants, Construction and Regeneration Act 1996. The dispute was referred to Mr George Ross as adjudicator. In late November 2011 the sum of £288,455.68 demanded in the adjudication was paid by the pursuer "without prejudice to Pihl UK Limited's rights and remedies in law". In these circumstances the adjudication did not proceed.

The Ross 2 adjudication

[4] The parties continued to be in dispute regarding various payment issues. This time, where appropriate, the pursuer issued notices of withholding. The result was a further adjudication before Mr Ross (Ross 2). Amongst other things, the defender asked the adjudicator to ascertain the current outturn project construction cost, and to award the sum of £39,030.01 said to be due under an outstanding invoice.

[5] In the course of his decision Mr Ross concluded that the defender was not entitled to monthly payments, but to stage payments in the terms outlined earlier. He noted that, by agreement of the parties, the specified figure of £20.8 million for the outturn cost had been increased to £21.6 million, with a consequential increase in the fee due at each stage of the progress of the contract, albeit the formula was unchanged. At the time of the Ross 2 adjudication, stage 5 had been reached, by which time 70% of the total fee was payable.

[6] The defender presented various arguments to Mr Ross asking for its entitlement to be ascertained by way of monthly invoices calculated by reference to what was said to be the current view of the pursuer that ultimately the total construction costs would exceed £30 million. Reference was made to clause 9 of the defender's standard terms of agreement. Mr Ross rejected those arguments. He held that clause 9 of the standard terms was superseded by the specific agreement as to staged payments at page 3 of the fee proposal. He rejected an argument that it was an implied term of the contract that, if and when the outturn project construction cost increased, the defender should be kept informed. He also concluded that he was unable to ascertain the "current outturn project construction cost at this juncture". However it was

"clear from the fee proposal that (the defender's) fees were based on an outturn project construction cost of £20.8 million, which was subsequently uprated to £21.6 million, and the fee was set by agreement on those figures" (paragraph 9.44).

[7] The end result was that the defender was not entitled to payment of the invoice in the sum of just over £39,000. At that time, no sum was due to the defender. Given that stage 6 has still not been reached, the effect of Ross 2 is that the defender's entitlement is limited to the stage 5 figure.

The Bunton adjudication

[8] In the light of the Ross 2 decision the pursuer reviewed the sums which it had paid to the defender, and concluded that there had been a substantial overpayment. £650,720.78 plus VAT had been paid, which was well in excess of the stage 5 figure. The pursuer sought repayment of the overpayment. This, in essence, was the subject matter of the adjudication before Mr Bunton. (Other orders sought were ancillary to this issue, and need not be mentioned in this opinion). The pursuer contended that, in accordance with the Ross 2 decision, until stage 6 is reached nothing is due in respect of services rendered after stage 5.

[9] In the referral to Mr Bunton, the pursuer stated:

"In consequence of the (Ross 2 decision) and the agreement that the stage 6 instalment payment was not yet due, Pihl reviewed the payments made to Ramboll and established that fees due to Ramboll at stage 5 of the contract amounted to £378,366 excluding VAT". (I was informed at the hearing that the reference to £366.00 was an arithmetical error). "In fact Pihl had paid to Ramboll the sum of £650,720.78 excluding VAT. That overpayment resulted from Ramboll issuing invoices contrary to the agreed schedule of payments".

[10] In its response the defender relied upon a defence of waiver. It was said that there had been voluntary overpayments. The pursuer was called upon to specify the basis of its right to repayment. An obligation to make repetition did not arise in respect of a payment made in the knowledge that it was not due. It was argued that at all times the pursuer was aware of the relevant facts and the law. The monies were paid to Ramboll to assist cashflow. Furthermore the pursuer had refused to release sufficient information to allow the outturn project construction costs to be calculated, therefore it had no right to seek repayment of the alleged overpayment. "The linking of the fee to outturn costs means that the figures change periodically". It was suggested that it did not follow logically from the Ross 2 decision that the pursuer was entitled to repayment of any sums. "Without knowing the details of the project outturn costs how is the adjudicator meant to calculate the extent of any alleged (and disputed) overpayment?".

[11] In a rejoinder the pursuer explained that in the course of the first Ross adjudication a substantial payment was made expressly without prejudice to the pursuer's rights and remedies in law. There had been no admission of liability. Reference was made to material which indicated an agreement that the outturn construction cost on which the fee was to be based had been increased to £21.6 million. Mr Ross had declined to assess the ultimate outturn project costs because he was unable to do so. It was not open to Ramboll to ask the same question of another adjudicator. Everyone was bound by the Ross 2 decision.

[12] The pursuer stressed that the Bunton adjudication was concerned only with the consequences of the Ross 2 decision. The pursuer had to make the overpayment because it failed to issue a valid notice of withholding in respect of the earlier invoices. This was caused by an administrative failing on the part of an employee. Adjudication was the correct mechanism by which the pursuer could seek repayment. Reference was made to Rupert Morgan Building Services (LLC) Limited v Jervis & another [2004] 1 WLR 1867, and in particular paragraph 14(d) in the judgment of Jacob LJ to the effect that, if a party has overpaid on an interim certificate, the matter can be put right in subsequent certificates; "otherwise he can raise the matter by way of adjudication or if necessary arbitration or legal proceedings".

[13] The pursuer submitted to Mr Bunton that under the 1996 Act it had "to pay now and argue later". Given the administrative failings, failure to pay the invoice would have put the pursuer in breach of contract, and would have allowed Ramboll to continue with their suspension of the work thereby damaging the progress of the project. There had been no waiver of the right to repayment. The pursuer was only obliged to pay Ramboll up to stage 5 - not beyond. It was "nonsense" to suggest that an overpayment could not be calculated until the eventual outturn construction costs were known. The pursuer was seeking repayment in respect of invoices paid relating to work done after stage 5. As per Ross 2, the parties' agreement fixed the stage 5 fee entitlement.

[14] In response to the rejoinder, the defender submitted that the suspension of performance was lawful having regard to the relevant statutory provisions. Had the pursuer considered that the sums claimed were not due because stage 6 had not been reached, there was no legal requirement to serve a notice of withholding, nor to make payment. It was submitted that a notice of withholding is only required when a sum is due. The pursuer could and should have resisted payment on the basis that the invoices were not due. The only course open to the pursuer was to seek repayment at the stage 6 valuation. Furthermore the pursuer had not indicated the basis for its right to repayment. The passage in the Rupert Morgan case was not relevant. Repetition was not available in the present case because the payments were made with full knowledge. They were not made in error. The pursuer had waived its right to repayment until the "next milestone", namely stage 6. "Had Mr Ross decided the extent of overpayment then circumstances would be different.....". "Unless Pihl can show the proper valuation of milestone 5, how they can prove the extent of any overpayment?".

[15] To summarise, the pursuer's position was that Ross 2 had decided that the defender was entitled to a stage 5 payment of £378,000 in terms of the agreed formula for staged payments in the fee proposal, all as applied to the agreed increased outturn cost figure of £21.6 million. An examination of the payments made demonstrated a substantial overpayment, which should be repaid. The defender countered with various arguments, including that there was no right to seek repayment until the stage 6 valuation; that any right to repayment had been waived; and that in any event, in the absence of a figure for the current or ultimate outturn project construction costs, the quantum of any overpayment could not be calculated. Furthermore the pursuer was criticised for an alleged failure to specify the proper legal basis for the obligation to repay.

Mr Bunton's decision

[16] After a short oral hearing, Mr Bunton ordered the pursuer to repay the sum of £272,354.78 plus VAT, thereby totalling £326,825.74, within 7 days of the decision. In his note of reasons he referred to the decision in Ross 2. He noted the consequence of the pursuer having reviewed the payments made by them to the defender in the light of the Ross 2 adjudication. He summarised the defender's submissions in response to the claim. He mentioned the passage in the Rupert Morgan Building Services case quoted earlier, and the pursuer's submission that it vouched its right to recover the overpayment by means of an adjudication. He continued as follows:

"33. In my opinion the contentions of Pihl prevail for the following reasons. During the course of the meeting with the parties on 27 June 2012, the decision of the adjudicator in Ross 2 was discussed. The adjudicator did not determine that any payment would be made. He in fact decided what he was asked to decide.

34. In my opinion it follows that I need to consider the consequences of the adjudicator's decision. His finding was that payment was to be made in the stages as set out in the Ramboll proposal. As such a recalculation was necessary, which is what Pihl has done, and the result, so they contend, is an overpayment. I am at odds with Ramboll's contentions in regard to the Rupert Morgan case, I have referred to above. In my opinion the case is relevant to the circumstances here. Having seen the adjudicator's findings Pihl recalculate the correct fees that are due, and proceed to adjudication. In my opinion they are unfettered to do so.

35. During the meeting, I did refer the parties to paragraph 9 of the Ramboll proposal. Paragraph 9(d) (this should be 9(c)) envisages a recalculation. This could either be up or down. There is no limitation as to when the recalculation takes place.

36. I do not accept Ramboll's contentions in relation to waiver. For whatever reason Pihl made on account payments, but I do not consider that these must be ringfenced until the next stage is reached. Pihl has applied the contractual payment mechanism as agreed between the parties, and the outcome is significant overpayment and in my opinion, Ramboll is bound to repay that overpayment to Pihl".

The submissions for the defender

[17] Mr Howie's complaints as to Mr Bunton's reasoning were summarised earlier in this opinion. He submitted that an adjudicator's award can be challenged on the basis of inadequate reasoning. Mr Bunton did not disclose why certain arguments made by the defender were rejected. In particular, what is the basis of the obligation to make repayment; and if there is such an obligation, why was the repayment quantified at the ordered sum? The quantification of an overpayment depends upon the ultimate outturn construction cost which, at present, cannot be ascertained. Mr Howie submitted that if the courts were ready to accept inadequate reasons, this would encourage "a race to the bottom".

[18] Amongst other cases, reference was made to Balfour Beatty Engineering Services (HY) Limited v Shepherd Construction Limited [2009] EWHC 2218 (TCC) for the proposition that an adjudicator must make it clear that he has decided all of the essential issues properly put before him so that the parties can understand what he has decided and why. Mr Howie submitted that Mr Bunton did not reveal why he decided that the defender should repay the stated amount.

[19] Mr Howie noted that stage 6 has still not arrived. The adjudicator required to explain how and why an overpayment can be ordered in advance of that stage. There was no contractual term requiring repayment in the event of an overpayment, as opposed to paying less when the next stage arrived. Mr Howie also appeared to submit that, even at stage 6, it would not be possible to identify or quantify any overpayment, because it would still remain impossible to ascertain the ultimate outturn construction costs. Alternatively, Mr Howie suggested that the pursuer's quantity surveyor may well be able to provide an update as to the anticipated outturn costs. The adjudicator misapplied the passage quoted in the Rupert Morgan case. Properly understood it supports the defender's case.

[20] Mr Howie referred to an apparent lack of time pressure on the adjudicator, given that he issued his decision almost a week before the expiry of the 28 day time limit. I mention this, but in my view nothing turns on it.

The submissions for the pursuer

[21] For the pursuer Mr Broome drew attention to the main features of the defender's fee proposal and the Ross 2 decision. Mr Bunton had accepted that sums were paid beyond the stage 5 entitlement, therefore there had been an overpayment of a specified amount. This was based upon a simple application of the agreed formula. Although Ramboll wanted a moving outturn cost, Mr Ross had decided that the staged fees were set by agreement and were based upon an application of the agreed formula at each stage, calculated by reference to £21.6 million. It was a relatively simple matter of applying the Ross 2 decision to the facts of the present case, all of which were amply vouched by the supporting material produced on behalf of the pursuer. For example the relevant invoices were lodged.

[22] Paragraph 23 of Mr Bunton's decision demonstrates a proper understanding of the nature of the dispute. He correctly summarises the submissions made on behalf of Ramboll. He refers to and relies on the Rupert Morgan case. There is no basis for any complaint that the adjudicator ignored any relevant material or submission, nor that he misunderstood the question before him. Paragraphs 33 to 36 provide sufficient reasoning as to the outcome. In particular, in paragraph 36 Mr Bunton notes that the pursuer had applied the contractual payment mechanism as agreed between the parties with the outcome being a "significant overpayment". This provides a coherent and intelligible reason for the decision.

Discussion and decision

[23] Largely for the reasons given by Mr Broome I am satisfied that the attack on the validity of Mr Bunton's decision is without merit. An adjudicator's award is not expected to demonstrate the same quality of reasoning as that of a judge. If challenged it should not be subjected to an overly analytical or critical scrutiny. In the case of Diamond v PJW Enterprises Ltd 2004 SC 430, the then Lord Justice Clerk, Lord Gill, stated that:

"a challenge to the intelligibility of (an adjudicator's reasons) can succeed only if the reasons are so incoherent that it is impossible for the reasonable reader to make sense of them. In such a case the decision is not supported by any reasons at all, and on that account is invalid". (paragraph 31).

As to a complaint of inadequate reasoning, his Lordship approached this by asking whether the reasons "are sufficient to show that the adjudicator has dealt with the issues remitted to him and to show what his conclusions are on each".

[24] It is important to adhere to the strictures in Diamond and other cases which warn against a strict approach to the reasons given for an adjudicator's decision. It would be easy to slip into a review of the merits of an award. It is not open to the losing party to refuse compliance with an adjudicator's award on the basis that it is wrong in fact or law. The court should resist any temptation to ask itself - was the adjudicator's reasoning correct? Were it otherwise the purpose of adjudication, which is to provide a swift and binding, albeit provisional resolution to a dispute in the course of a construction contract would be defeated.

[25] It is clear that the adjudicator found the source of the obligation to repay in the fact of the overpayment itself. He gained support for that in the passage quoted from the Rupert Morgan Building Services case. He construed that observation by Jacob LJ as allowing an overpayment to be recovered by way of an adjudication. Plainly Mr Bunton did not accept the proposition that, in the absence of an agreed mechanism for repayment in the parties' contract, any overpayment could not be addressed until the next fee stage in the process. I do not consider that the adjudicator required to embark upon an analysis of the legal basis for the obligation to repay.

[26] It is instructive to note the major errors in the adjudication decision considered by the court in Diamond. The adjudicator upheld a complaint of professional negligence, but he "failed to specify what degree of skill and care he thought was applicable in this case or to provide a cogent reason why the petitioner's allegedly wrong decision amounted to breach of contract" (paragraph 36). It was the Lord Justice Clerk's impression that the adjudicator "had little grasp of the subject". His approach was "naïve". However it was held that the court could not quash the award on the basis that the adjudicator had gone wrong in law. Were it otherwise this would provide "an opportunity for the kind of delay that the system (of adjudication) is designed to prevent...". The correct question had been asked, therefore the decision could not be challenged, even if the adjudicator answered the question incorrectly.

[27] In my view the first complaint made by Mr Howie as to the alleged failure to explain the legal source of the obligation to repay is no more than a thinly veiled attempt to open up the substance of the decision. When read in the context of the dispute and the submissions made by the parties, and with allowance for the non-judicial approach open to adjudicators, in my view Mr Bunton's reasoning on this aspect is not open to challenge.

[28] The larger part of the hearing was taken up with Mr Howie's second ground of alleged invalidity, namely that Mr Bunton did not explain how he quantified the overpayment. As discussed above, initially the defender sought payment on a monthly basis. However the Ross 2 adjudication held that the defender was not entitled to monthly payments, but to payments when various defined stages in the contract were reached. Stage 6 had not been reached, therefore the defender's contractual entitlement was restricted to the application of the fee proposal formula as per stage 5, which, according to Mr Ross, fell to be calculated by reference to a total outturn cost of £21.6 million. That decision caused the pursuer to identify a substantial overpayment. The defender's submissions to Mr Bunton challenged the principle of the claim for repayment, not the calculations which led to its quantification. If repayment was due, the sum sought was not challenged.

[29] In any event, in my view it is clear that Mr Bunton calculated the amount of the overpayment, and thus of the sum which is required to be repaid, in a manner which is wholly consistent with the Ross 2 decision and in line with the case presented to him by the pursuer. He correctly summarised the effect of the Ross 2 decision at paragraph 21 of his reasons. He later stated that he required to consider the consequences of the Ross decision. He noted the pursuer's recalculation of the correct fees due to the defender. At paragraph 36 he stated:

"Pihl has applied the contractual payment mechanism as agreed between the parties, and the outcome is significant overpayment and in my opinion Ramboll is bound to repay that amount to Pihl".

There is no real doubt or uncertainty as to Mr Bunton's reasoning, nor as to the basis upon which he calculated the amount of the overpayment.

[30] As to Mr Howie's submission that any sum due can only be quantified by reference to the ultimate overall construction costs, something which cannot as yet be calculated, that argument is at odds with the Ross 2 decision, which remains binding upon the parties. The Ross 2 decision on this point does not seem surprising, given that the logic of Mr Howie's submission is that, despite the terms of the staged fee proposal, the defender's entitlement to interim payments could never be calculated until the completion of the whole project. As it was, the agreed fee proposal and Ross 2 provided a clear basis for calculating the correct fee at each stage of the contract.

[31] Earlier I summarised the approach adopted by the Second Division in Diamond. Applying that guidance, my view is that the adjudicator's reasoning is not open to challenge in these proceedings. At its most general, a complaint of a breach of the rules of natural justice involves an allegation of obvious unfairness in the decision-making process. I can detect nothing of that nature. I will uphold the pursuer's claim for enforcement of the award.

Summary decree

[32] One further issue arises for decision. It relates to the procedural history of the case. At the preliminary hearing it was obvious that the case could and should be resolved quickly. An early diet was ordered at which the merits of the case would be decided. Shortly before that hearing the pursuer enrolled an application for summary decree. At the hearing Mr Broome invited the court to pronounce summary decree in favour of the pursuer, failing which decree de plano. He observed that the summary decree application raises no separate issue and no different argument from those which require to be addressed to resolve the case. The explanation for the application is that if the court grants a motion for summary decree and thereby resolves the case in favour of the pursuer, the defender will require the leave of the court to appeal (Rule of Court 38.3(1)). (No doubt this is because the procedure is aimed at a defender who has lodged an obviously hopeless defence for the purpose of at least delaying the inevitable.) However, if the court simply grants decree in favour of the pursuer in the normal manner, the defender can reclaim without leave (Rule of Court 38.3(6)). The pursuer prefers summary decree because it increases the prospects of avoiding further delay in the enforcement of Mr Bunton's award.

[33] So the question comes to be - should the court pronounce summary decree, or proceed as if no such application had been made? This has arisen because, by use of the flexible procedure available under chapter 47 of the Rules of Court, the court has managed to achieve more or less as swift a final resolution of the case as could have been gained by a successful application for summary decree alone.

[34] On behalf of the defender Mr Howie's submission was that the court ordered an expedited hearing for the purpose of pronouncing a final interlocutor, one way or the other, and that to lay that aside and deal with a subsequently enrolled summary decree application would subvert the court's interlocutor. He complained about a tactical device aimed solely at thwarting the defender's right to reclaim.

[35] In the context of the enforcement of an adjudicator's award, it can be argued that there is good reason to avoid further delay. The purpose of an adjudication is to provide a swift yet provisional decision. An award can be opened up and reviewed at a later date. Frequently the courts have stressed that, in all but rare and exceptional cases, complaints as to the alleged invalidity of an adjudicator's award should not lead to a delay in its enforcement. In Rainford House Limited v Cadogan Limited [2001] BLR 416, at pages 421/2 Judge Richard Seymour QC said:

"The policy underlying Part II (of the 1996 Act) is, in my judgment, that there should be a swift mechanism by which a dispute under a construction contract as to who has to pay what to whom while the construction work to which the contract relates is in progress can be resolved on a binding, but interim, basis, leaving the final resolution of disputes, if that proves to be necessary, to follow at leisure".

In Construction Centre Group Limited v Highland Council 2003 SC 464 (Extra Division) Lord Hamilton observed that the court procedure is "an enforcement mechanism", and that the court is not concerned with the underlying question of the true and ultimate indebtedness (if any) of the employer (page 473).

[36] All of the above suggests that it would make good sense if the defender could reclaim only with leave of the court. This could be achieved by choosing the summary decree route. However there are counter arguments. Mr Howie was correct that the intention of the court was to fix an early hearing which would result in a final interlocutor disposing of the case in favour of either the pursuer or the defender. Had I found in favour of the defender, the pursuer would have had an unqualified right to reclaim. Why should the defender be deprived of the same privilege? Furthermore, if summary decree is granted, does this mean that a pursuer can always gain this potential benefit by enrolling a summary decree motion shortly before a final hearing in a case? If it is thought that those who have failed in an attempt to resist an action for enforcement of an adjudication award should be deprived of an automatic right of appeal, it might be argued that this should be specifically addressed by way of an amendment to the Rules of Court.

[37] The argument that, if one party has an absolute right of appeal, so should the other, has a certain appeal. However it ignores the context of the hearing in this case. Two separate processes have been conjoined; namely the pursuer's attempt to enforce the adjudicator's award, and the defender's challenge to its validity. The award is valid unless and until it is set aside by the court. Meanwhile the parties are subject to all the consequences of the adjudication process. Those include the features outlined earlier, all of which support the proposition that the unsuccessful defender should not have an unqualified right to reclaim. On the other hand, there is no equivalent express or implied agreement which justifies or even points to a similar restriction on the pursuer's right to appeal in the event of a successful judicial review of the award.

[38] In any event, and for the reasons outlined earlier, if our procedures afford a mechanism by which, in an appropriate case, a judge can avoid further delay in the enforcement of an adjudicator's award, in my view that option should be exercised. It does not prevent the defender from seeking to persuade the court that, in the particular circumstances, leave to reclaim should be granted. Given the provisions relating to summary decree, no amendment to the Rules of Court is required. I note that in Integrated Building Services Engineering Consultants Ltd v Pihl UK Ltd [2010] CSOH 80, Lord Hodge spoke of a

"practice in our commercial court to seek to conjoin any challenge to the decision (of an adjudicator) with the action for its enforcement and to determine both in the context of a summary decree motion in the latter" (paragraph 30).

I agree with his comment that this "supports the prompt enforcement of adjudicators' decisions."

[39] I will grant the pursuer's application for summary decree. I shall do this by upholding the pursuer's first, second, third, fourth and fifth pleas-in-law. (The sixth plea-in-law does not arise in that Mr Howie withdrew the argument focused in that and the defender's equivalent plea.) I will repel the defender's pleas-in-law, and pronounce decree in terms of conclusions 1, 2, 3, 4 and 5. The question of expenses shall be reserved.