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23 October 2019

Considering Crystallisation: What dispute should (or can) you refer to adjudication?

It’s a scenario we see all too often.  Employer meets Contractor.  Employer and Contractor enter into a contract, and for a while, everything seems rosy.  Then as the project progresses, unresolved claims start escalating and the relationship deteriorates. Inevitably, the parties’ minds turn to adjudication, and the potential recourse that they may find there.

Crystallisation of a dispute

Under section 108 of the Housing Grants, Construction and Regeneration Act 1996, the parties to a construction contract are entitled to refer a dispute arising under the contract to adjudication at any time.  However, the dispute must first have crystallised. If a dispute has not crystallised before the Notice of Adjudication is served, the adjudicator (without the consent of the other party) will lack jurisdiction to determine the dispute and could be challenged on enforcement.

The courts’ approach to crystallisation is noted in Coulson on Construction Adjudication (4th edition, Oxford University Press, 2018):

“…the court will adopt a pragmatic approach to the crystallization issue, analysing the material that passed between the parties before the notice ‘with a commercial eye’.”

In the context of final account disputes under JCT contracts, parties often disagree on the employer’s final statement or payment notice and, due to the time limits imposed for challenges and potential impacts on cashflow, contractors are often keen to urgently proceed to adjudication to recoup allegedly wrongfully deducted monies. 

The recent case of Dickie & Moore Ltd v McLeish and others [2019] CSOH 71 demonstrates why it is important to ensure the dispute being referred to adjudication has in fact crystallised.

Background and claims

The contractor (Dickie),entered into a JCT Standard Building Contract with Quantities for use in Scotland (2011 Edition) with the employer, who were trustees for the Lauren McLeish Discretionary Trust (Trust).  The works related to the construction of a large house in Westfield, Scotland.

Dickie submitted a claim for payment in respect of an interim valuation.  The Trust later produced a Final Adjustment Statement that assessed the value of Dickie’s claims for loss and expense, made a number of deductions for works not completed and gave their value of the final account. 

Dickie challenged the Final Adjustment Statement on a number of grounds. The Trust nevertheless issued the Final Certificate in similar terms to the Final Adjustment Statement and without taking into account Dickie’s objections.  As is common with JCT contracts, the contract stated that the Final Certificate would be conclusive evidence of certain matters, save for matters raised in proceedings, where those proceedings (including adjudication) were commenced within 60 days of the issue of the Final Certificate.  

Dickie twice wrote to the Trust claiming that the Final Certificate was incorrect, and that the Trust had made wrongful deductions.  Dickie then issued a Notice of Adjudication (Notice) stating that its rejection of the Final Certificate was sufficient to crystallise a dispute between the parties.

Challenges to enforcement

The adjudication proceeded under a reservation of the Trust’s objections to jurisdiction and the enforcement action was challenged by the Trust on a number of grounds. All of these failed, save for its argument concerning crystallisation of the dispute.

The Trust noted that some items included within the Notice were of a considerably different flavour than those originally put forward by Dickie in its challenge to the Final Adjustment Statement and included (amongst other matters) a claim that Dickie was entitled to further extensions of time (an additional 46.5 weeks), together with increased associated loss and expense claims.

Dickie argued:

  • as it was challenging the Final Certificate, and had to commence adjudication within 60 days in order to prevent the Final Certificate becoming conclusive evidence of certain matters, it was not necessary for the dispute to have crystallised;
  • the fundamental dispute related to the fact that the value of the Final Certificate was lower than payments made to Dickie as part of the interim valuations, and that this in itself amounted to a claim by the Trust against Dickie;
  • it was entitled to raise any defence it had (that is, its claim for time and loss and expense) in response to the Trusts’ claim against Dickie in the Final Certificate; and
  • in any event, a dispute had existed before the Trust’s claim in the Final Certificate as was evident from Dickie’s correspondence at that time. 

However, Dickie accepted that the initial dispute had not been as extensive as the dispute in the Notice. In particular, claims for extensions of time and loss and expense contained in the Notice had not previously been advanced. 

A “robust, practical” approach

In reaching its decision, the Court of Session referred to the approach outlined in Coulson on Construction Adjudication and noted that:

“An over-legalistic analysis should be avoided.  The court should seek to determine in broad terms whether a claim or assertion was made and whether or not it was rejected… It should discourage nit-picking comparison between the dispute described in the notice and the controversy which pre-dated the notice.”

Even adopting this broad approach, the court found that the claims in the Notice were of “a different nature and order of magnitude” to the previous disagreements between the parties.  There was a “very marked discrepancy” when a comparison was made of Dickie’s initial objections and the claims made in the Notice. On that basis, the court found that “a very material part of the dispute” described in the Notice had not crystallised before the Notice was served.

This decision demonstrates that while courts will not adopt “an over-legalistic analysis” with issues of crystallisation, there are limits. In the rush to adjudicate or comply with contractual time limits care must be taken to ensure that the Notice of Adjudication does not overstep the boundaries of the existing dispute between the parties.  If there are valid claims to extensions of time and/or loss and expense, these should be made at the appropriate time.

Severance of adjudicators’ decisions

Notwithstanding that no submissions were initially made by the parties to the court on the issue of severance of the adjudicator’s decision, the court asked the parties for their views on the issue. Could that part of the adjudicator’s decision which dealt with a crystallised dispute be severed such that part could be enforced? Or, as Lord Doherty noted, is the adjudicator’s decision “a unity which stands or falls in its entirety”?

The position in England and Wales on severability of adjudicator’s decisions has developed considerably over time. Without reviewing the numerous judgments on the issue, the courts have drawn distinctions between the circumstances in which severance may be possible – for example, whether one or more disputes could be identified or whether the whole award was tainted such that severance of the offending part was not possible. While a number of principles have been outlined and applied, each case will turn on its facts and the nature of the disputes and the decision in question.

Most recently in Willow Corp Sarl v MTD Contractors Ltd [2019] EWHC 1591 (TCC), Pepperall J, in severing part of the adjudicator’s decision, suggested that the focus may be shifting from whether there was a single identifiable dispute, to “whether it is clear that there is anything left that can be safely enforced” once the erroneous part of the decision is severed. In effect, looking at what is clearly enforceable, rather than what is severable.

Watch this space

Although the parties in Dickie v McLeish had agreed that the matter referred to the arbitrator had been a single dispute, they (unsurprisingly) disagreed on the severance question. Unfortunately, the submissions put forward by the parties were not fully developed, and accordingly, the case was put out for hearing by order of the court.

The ball is currently in Dickie’s court on this one. If Dickie proposes to argue for severance, it will be dealt with at a further hearing.

 

A version of this article was published by Practical Law Construction on 21 October 2019.


This article was written by Carolyn Davies.  For more information please contact Carolyn via carolyn.davies@crsblaw.com or +44 (0)20 7438 2149

 

 

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