1. Adjudication v insolvency rules; and the winner is...?
A respondent to an adjudication claim by a party in liquidation, and with its own cross-claim, said that, because of the automatic operation of insolvency set-off under the Insolvency Rules, all claims and cross-claims under the contract then ceased to exist, and were replaced by a single claim to the balance (by whichever party turned out to have the larger claim). The Court of Appeal disagreed, but continued an injunction stopping the adjudication because, it said, since there could be no enforcement, it would be futile. Was it right?
The Supreme Court confirmed that the existence of a cross-claim operating by way of insolvency set-off does not mean that the underlying disputes about the company's claim under the construction contract and, if disputed, the cross-claim, disappear and are consequently incapable of adjudication.
It ruled, however, that it is no answer to the utility (rather than futility) of construction adjudication, in the context of insolvency set-off, to say that the adjudicator's decision is unlikely to be summarily enforceable. The reasons why summary enforcement will frequently be unavailable are set out in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd  1 All ER (Comm) 1041 at paras 29-35. The court is well-placed to deal with those difficulties at the summary judgment stage, simply by refusing it in an appropriate case as a matter of discretion, or by granting it, but with a stay of execution. There is in those circumstances no need for an injunction, still less a need to prevent the adjudication from running its speedy course, as a potentially useful means of ADR in its own right. Summary enforcement will not be inappropriate in every case and the proper answer to the issues about enforcement is that they can be dealt with at the enforcement stage, if there is one.
The Supreme Court also noted that adjudication is costs neutral and that it is inherent in the adjudication procedure that a party may be put to expense in having an incorrect decision put right in later litigation (or arbitration), at least part of which will usually be irrecoverable even if the litigation succeeds. That cannot of itself be a reason for preventing, by injunction, the statutory right to adjudication.
2. Court says 25-year PFI contract is paradigm example of relational contract with implied good faith duty
In a dispute under a 25 year PFI contract for a waste treatment plant the court had, once again, to consider whether a duty of good faith was to be implied. After reviewing the case law, including the characteristics of a relational contract identified in Bates v. Post Office (No. 3), it noted a number of factors in favour of the contract in question being a relational contract. It was long term, the parties plainly intended a long-term relationship, it required a close collaborative working relationship in which the parties must have intended their respective roles to be performed with integrity and with fidelity to their bargain and their shared environmental objectives. And while the relationship was essentially commercial, the parties intended that they should each repose trust and confidence in the other. The contract required a high degree of communication and co-operation, significant investment by both parties and involved exclusivity between them and the court concluded that the contract was "...a paradigm example of a relational contract in which the law implies a duty of good faith." It contained an entire agreement clause but that did not exclude the implied duty. Entire agreement clauses do not usually preclude the implication of terms because the implication of a term is elucidating what the written contract means.
The court also considered the content of such a duty, concluding from case law that:
- whether a party has not acted in good faith is an objective test;
- dishonest conduct will be a breach of the duty, but dishonesty is not of itself a necessary ingredient of an allegation of breach. The question is whether the conduct would be regarded as 'commercially unacceptable' by reasonable and honest people;
- what is required in any individual case depends on the contractual and factual context.
The court also had to decide whether there was an implied term that a contract right of termination had to be exercised in a reasonable time. In doing so, it rejected the argument that there is an immutable rule of law that all rights of termination must be exercised within a reasonable time after such right first arises. In this case, whether the contractual right of termination had to be exercised promptly was to be tested on the usual principles as to implication of terms, and there was no such term.
3. Challenges to adjudication enforcement: no jurisdiction or breach of natural justice, but what about the "correction principle"?
Enforcement of an adjudicator's decision can be resisted if the adjudicator had no jurisdiction or there has been a material breach of the rules on natural justice. But is there a third way, the "correction principle"? A contractor argued that enforcing an adjudicator's decision would be inconsistent with, and undermine, the 'correction' principle in the case law, that interim payments can be corrected in the next interim payment cycle. It claimed that the correction in question occurred long before the adjudication was commenced and that the earlier payment entitlement therefore ceased to exist and was replaced by the sum then due pursuant to s111 of the Construction Act.
The court confirmed that there is something established by case law, which could, for the purposes of the case, be referred to as, the "correction principle" and which meant that, if an interim application was subject to a party's failure to issue the required notices, so that the sum applied for became due, any correction to reflect the work's true value was permissible on later applications. The amount due on the original application, however, as a result of the failure, was still the amount due and applying the correction principle could not result in the amount not being due at all. The fact that the application in question was interim, and could be corrected later, did not assist the contractor on enforcement.
The contractor claimed that enforcement in the circumstances of the case would undermine the correction principle but the court disagreed. The contractor's analysis ignored a Construction Act contract party's ability to adjudicate "at any time" and implicitly meant that a party making subsequent interim payment applications removed the possibility of any possible disputes on earlier payment applications remaining as disputes. The court said that disputes on earlier applications did not cease to exist because a subsequent application was made on an interim basis. Nor did some sort of estoppel operate because a contractor makes another interim application in the cycle. The notified sum under the relevant application did not become incapable of adjudication simply because the payment cycle moved on to the next, and subsequent, interim applications.
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Originally published July 2020
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