Considering crystallisation – when can a dispute be referred 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.

The recent decisions in Dickie v McLeish arose from such a scenario, and considered when a dispute can be referred to adjudication and whether the adjudicator’s decision can be successfully enforced. The decisions provide helpful guidance to contractors and employers alike in relation to:

1. The courts’ approach as to whether a dispute has ‘crystallised’ (and can be pursued) or not; and
2. What, if any, part of the adjudicator’s decision can still be enforced where an adjudicator lacks jurisdiction in respect of a dispute.

Crystallisation of a dispute

Under s.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 the decision could be challenged on enforcement.

The courts’ approach to crystallisation is noted in Coulson on Construction Adjudication (4th edition):

“…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, parties may disagree about the employer’s valuation of the works and, due to the time limits imposed for challenges and potential impacts on cashflow, contractors are often keen to crystallise the dispute and urgently proceed to adjudication.

Background and claims

The contractor, Dickie & Moore Ltd (Dickie), entered into a JCT Standard Building Contract with Quantities for use in Scotland (2011 Edition) with the employer who comprised trustees for the Lauren McLeish Discretionary Trust (the 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 claim for loss and expense, made a number of deductions for works not completed and gave its valuation 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 usual under JCT contracts, the contract stated that the Final Certificate would be conclusive evidence of certain matters unless 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 (the 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 jurisdictional objections 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 (i.e. its claim for time and loss and expense) in response to the Trust’s 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.

The first decision - 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” when considering 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.

The second decision - severance of the adjudicator’s decision

Following its findings on crystallisation, the court’s second decision in Dickie considered what part, if any, of the adjudicator’s original decision could be enforced.

The Trust argued that the adjudicator’s decision on the final account dispute was a ‘unity’ and if the adjudicator lacked jurisdiction in respect of some part of the dispute, no part of the decision could be enforced. Dickie argued that, because the adjudicator had jurisdiction in respect of the remainder of the claim (for example findings on the valuation of the Bill of Quantities, variations, and architect’s instructions), that part of the decision could be enforced. It could be severed from the other erroneous parts of the adjudicator’s decision.

The court conducted a thorough review of existing severance decisions in both Scotland, and England and Wales, finding that the legislation applied similarly in both jurisdictions. This second decision in Dickie v McLeish is a useful point of reference and guide to practitioners and parties in dispute when considering the issue of severance.

In this particular case, the court declined to answer the Trust’s question of whether there was a single dispute or not. Rather, the court said that the critical question is:

“whether it is clear that there is a core nucleus of the decision that can safely be enforced;”

The above point was made with reference to the recent case of Willow Corp Sarl v MTD Contractors Ltd [2019] EWHC 1591 (TCC), where Pepperall J, in severing part of an 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.

The “core nucleus”

Here, the court said that the adjudicator’s findings in respect of the valuation of Bill of Quantity works, variations, and architect’s instructions “were made separately and independently from his extension of time and loss and expense decisions”. The decisions and calculations made within the adjudicator’s jurisdiction were not in any way dependent upon or influenced by the time and loss and expense findings which fell outside his jurisdiction.

On that basis, the court found that the unenforceable, ‘uncrystallised’ aspects of the adjudicator’s decision could be pruned away, leaving the “core nucleus of the decision” that could be safely enforced.

The Dickie decisions helpfully reiterate the court’s approach to crystallisation and their preference to enforce adjudicator’s decisions wherever possible. Contracting parties can have confidence that the courts will encourage an adjudication process that seeks to achieve tangible enforceable results when used effectively.

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

This article was updated in February 2020 following further court decisions.