UK: Court Of Appeal Rules On Time Limits For Challenging An Adjudicator's Award

The Court of Appeal recently held that there was an implied term in a contract that a party who pays sums under an adjudication award is entitled to seek a final determination of that award and, if successful, recover any payment it has made. The applicable limitation period commences on the date of payment and not the date of the alleged original breach (Aspect Contracts (Asbestos) Ltd v Higgins Construction PLC[2013] EWCA Civ 1541). This decision overturns the first instance judgment which found that the relevant period ran from the time of the (supposed) original breach of contract. 

The judgment was not fact specific and so is likely to apply to most 'construction contracts' under the Construction Act and all which incorporate the Scheme for Construction Contracts (the "Scheme").

Background
The background to this matter is set out in our bulletin on the first instance decision. By way of summary, Aspect had made a payment to Higgins in accordance with an adjudicator's award and later sought to challenge that decision. Aspect sought a declaration that it was not liable to pay damages to Higgins, but this cause of action was barred by limitation and so Aspect claimed that there was an implied term in the construction contract between the parties in the terms set out above. Higgins denied the existence of the alleged implied term. 

The first instance court held that there was no basis on which to imply the term since it was not "reasonable, equitable or necessary to make the contract work ... and it does not go without saying." 

The decision
The Court of Appeal held that such a term did exist. In coming to this finding, it noted that the implied term sought by Aspect was very similar to paragraph 23(2) of 'the Scheme'. This states "The decision of the adjudicator shall be binding on the parties and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration ... or by agreement between the parties". In the court's view, the true intention of the scheme (although it did not say so expressly) was that any overpayment was recoverable. 

The court also held that the accrual of that cause of action is the date of payment and not the underlying dispute, since the losing party is entitled to have the payment returned to it.  

The court did not think that negative declaratory relief was a viable alternative to the implied term. The court thought that this remedy had "a number of potential disadvantages", including that a party who claims not to be liable should not have to take the initiative and start legal proceedings seeking such a declaration. The court noted that a claimant could begin an adjudication shortly before any relevant time period might expire, having itself issued protective proceedings, and that it was "asking a lot" to expect a defendant to have to issue protective proceedings itself. 

Finally, the court considered Higgins' cross-appeal. Higgins argued that if Aspect succeeded with its claim for an implied term then this must work in favour of both parties and allow Higgins' claim for additional sums on top of the adjudication award - which would otherwise be time barred. The Court of Appeal did not allow the cross-appeal. It considered that granting the implied term did not create unequal rights between the parties, not least since a party which commenced an adjudication (as Higgins had done) "always knows he has a claim and can easily issue proceedings any time he chooses".  

Comment
The court's decision was made by reference to 'the Scheme' rather than to any particular facts of the case and is therefore likely to apply to most 'construction contracts' under the Construction Act and all which incorporate 'the Scheme'. Given the importance of the decision, it is possible that it will be further appealed to the Supreme Court and/or be subject to comment in other cases. 

From a practical perspective, if parties wish to avoid the uncertainty of whether or not (and when) an adjudication award might be challenged, they can amend their contracts to state that an adjudication decision will be finally binding unless formal proceedings are brought within a certain period following the adjudicator's decision.

In the meantime, the decision has some potentially unwelcome practical consequences for claimants in adjudications. Assume that (1) Party A brings an adjudication against Party B claiming £1 million; (2) the adjudicator awards Party A £500,000, which Party B pays; and (3) whilst Party A is not entirely happy with the award, because of the costs and risks of taking the dispute to court or arbitration it chooses to accept the award rather than continue the dispute. If Party B later decides to challenge the award, the basis on which Party A came to its decision not to continue the dispute has gone, since Party A must now face the costs and risks of the continuing dispute in any event. However, given the Court of Appeal's decision in Aspect and as Higgins found to its cost, Party A's cause of action for the remaining £500,000 of its original claim is potentially time barred in circumstances where Party B's challenge of the adjudicator's award is not. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.