July 13, 2015

Ruling turns spotlight on adjudication

Construction sector and other businesses may need to review adjudication clauses in contracts following a Supreme Court ruling.

The 17 June decision followed an appeal by Higgins Construction Plc against an Appeal Court ruling in favour of Aspect Contracts (Asbestos) Limited.

The case stemmed from a dispute between the two companies that began after Aspect surveyed and reported on some properties Higgins was considering redeveloping. When Higgins began working on the properties in 2005, it found asbestos not identified in Aspect’s report and referred the matter to adjudication, which was allowed for in an implied term – something understood to be included, although not clearly stated – in the contract between the two companies.

Higgins claimed £822,482 plus interest for breach of Aspect’s duties and the adjudicator found in Higgins’ favour in 2009, awarding it £490,627 plus interest. Aspect paid Higgins £658,017 later that year.

The contract also contained the implied term that the adjudicator’s decision was binding “until the dispute is finally determined by legal proceedings, by arbitration…or by agreement”. Higgins took no legal action to recover £331,855, the balance of the money it had originally claimed, before six years – the usual limitation period in breach of contract claims – expired in early 2011.

The following year, Aspect sought to recover the money it had paid Higgins, arguing that no payment was due, based on the merits of the original claim. Higgins then sought to counterclaim £331,855, which Aspect argued was not possible because of the time that had passed.

The case went to the High Court and then the Court of Appeal, which found in Aspect’s favour. The Supreme Court upheld the Court of Appeal’s decision in its 17 June ruling, citing reasons including:

  • adjudication lasted only “until the dispute is finally determined”. The contract contained the implied term that Aspect, having made the payment ordered by the adjudicator, had the right to recover this if, on final determination, Higgins was found not to be entitled to the money
  • the limitation periods for Aspect’s claim was six years from the date of the payment it made in 2009
  • Higgins was time-barred from counterclaiming £331,855 as a “consequence of Higgins’ own decision not to commence legal proceedings to have the dispute finally determined within the limitation periods applicable”.

Construction businesses may wish to be more specific about adjudication in contracts to avoid the potential for awards made under adjudication to be challenged up to six years from the date of payment, by which point their own six-year limit for initiating legal proceedings to confirm their award is likely to have expired.

Palmers can provide expert advice on drafting of contracts to protect against such circumstances arising, for example by stipulating that adjudication will become finally binding unless a claim is lodged within a certain time following the adjudication. For more information on how we can help, please contact Adam Davis.