Adjudication - "Pay first, argue (now up to twice as much) later"

07 January 2014

The recent Court of Appeal decision in Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2013] EWCA Civ 1541 clarifies that a limitation term is implied into every construction contract under the Construction Act 1996, where no express term exists.

The case concerned whether or not an adjudicator's decision itself gives rise to a new cause of action and thereby starts a new limitation clock or whether limitation is purely linked to the underlying claims in contract and/or tort. In so determining, it was necessary to consider what terms were implied into a construction contract as regards adjudication and subsequent legal proceedings.

Adjudication was introduced to provide a quick and cost effective means of resolving construction disputes, with the aim of maintaining cash-flow during the course of projects. Although a party to a construction contract has the right to refer a dispute to adjudication at any time, by its very nature, a party seeking payment to protect against cash-flow issues will be unlikely to wait until near the expiry of a statutory limitation period before referring the dispute. Thus, limitation is not ordinarily a concern at the outset of adjudication but the limitation bar might descend to block referral of the underlying dispute to a court or arbitrator for final determination.

Aspect was engaged by Higgins to survey a site for asbestos in March 2004. In February 2005 Higgins found additional asbestos and claimed this had caused it 17 weeks delay. Higgins referred the dispute to adjudication in June 2009 claiming £822,000 in damages, the adjudicator awarding circa 80% of that sum. In February 2012, Aspect commenced litigation to seek "a final and binding resolution of a dispute which was referred to adjudication". 

Aspect claimed that there must be an implied term that an unsuccessful party in adjudication is entitled to have the dispute determined by litigation and that a new limitation period began to accrue from the date of payment of the adjudicator's award; payment giving rise to a new cause of action.

Higgins argued the litigation was time barred in contract and in tort, with the contractual limitation period having expired in April 2010 (6 years after the date on which Aspect delivered the asbestos report to Higgins). The limitation period in tort had expired in June 2011 (6 years after the date on which Higgins could continue work on site following the delay caused by removal of additional asbestos containing materials).

Generally, the costs are reluctant to interfere with negotiated contracts and the law imposes strict constraints on the implication of terms. The most commonly cited test for implying terms into a contract was proposed by Lord Hoffman in Attorney General of Belize and others v Belize Telecom Ltd [2009] UKPC 10 (the 'Belize test'). This test requires:

• that the term to be implied must be necessary to make the contract work and to give business efficacy to the contract; and

• that if an officious bystander were to suggest that the term be included in the contract, that the parties would agree that it was so obvious that it goes without saying.

Higgins argued that the implied term was neither necessary nor obvious and did not accord with business common sense, fairness or wider policy considerations (as set out by Lord Hoffmann in the Belize test).

There were 4 preliminary issues that the parties asked the court to decide:

Firstly, was it an implied term that an unsuccessful party would be entitled to seek final determination by litigation and recover payments made in compliance with an adjudicator's decision; secondly, if so, what was the applicable limitation period; thirdly, what limitation period applied to any counterclaim the Defendant might have; and, finally, was there a claim in restitution for unjust enrichment.

At first instance, Mr Justice Akenhead found that there was no implied term that a paying party must be entitled to have the dispute finally determined by legal proceedings. The court noted that if such a term was implied, in theory, a claim could be brought more than 12 years after the original cause of action arose.  The court noted Higgins' argument that adjudication could have the effect of potentially postponing final determination of a dispute which was contrary to the intent and policy of the Construction Act 1996. On the facts of the case, Aspect could have commenced proceedings immediately upon receipt of the adjudicator's decision, which was well within the underlying limitation period. Thus, the court found that it was not necessary to imply a contractual term enabling it to do so or to start a new limitation clock.

Aspect appealed the decision as to the existence of the implied term. The Court of Appeal handed down its decision on 29 November 2013, finding unanimously that the implied term did pass the threshold of the Belize test. In the absence of such an implied term, the court consider that a 'wily claimant' could wait until toward the end of the underlying limitation period before commencing an adjudication, thereby eliminating the possibility of the responding losing party commencing litigation to challenge the decision.  This was not now Parliament intended adjudication to be used.

As to the relevant limitation period, the court highlighted that as a cause of action is an assertion of entitlement, the accrual of that cause of action is the date of payment or overpayment pursuant to an adjudicator's decision as that is the point from which the losing party can claim to be 'entitled' to have the payment or overpayment returned. Thus, a new limitation clock does start on date of payment for a losing party to commence proceedings.

As for the third issue, both the court of first instance and the Court of Appeal concurred that the limitation period applicable to the counterclaim accrued from the date of breach of contract or duty as the successful party always knows he has a claim and can issue proceedings at any time.

The court of first instance rejected the final issue and the restitutionary claim fell away. 

In some standard form contracts, such as the NEC3, there is an express term governing the limitation period that shall apply following an adjudicator's decision. In the case of NEC3 the period for notifying a party that you do not accept an adjudicator's decision is restricted to 28 days. Where no such express term applies to a construction contract, in light of the decision in Aspect, a term enabling an unsuccessful party to bring litigation or arbitration proceedings for final determination of an adjudicator's decision will be implied and a new limitation clock will begin to accrue following the adjudicator's decision. It awaits to be seen if and when the Supreme Court will be asked to verify or reverse this position.

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