Does an adjudicator’s decision on the value of an interim application bind the parties for the purposes of a final account process?

Essential Living (Greenwich) Limited –v- Elements (Europe) Limited

A recent judgment of the High Court of England & Wales has provided guidance on the extent to which an adjudicator’s decision on the value of an interim application binds the parties for the purposes of a final account process.

The judgment is essential reading for parties that administer construction contracts and those involved in adjudication.

Background

The case arose out of works at a mixed-use development in Greenwich. A contractor, Elements (Europe) Limited (Elements), was engaged by Essential Living (Greenwich) Limited (Essential Living) under a JCT Construction Management Trade Contract, 2011, that had been amended by the parties (the Contract).

The original Contract Sum was £25,751,956 million, and was subject to adjustment in accordance with the terms of the Contract.

The Contract provided for monthly periodic payments and a timetable and procedure for calculation and payment of a final contract sum. The Contract was administered by a Construction Manager.

Delays occurred and completion of the works was not achieved within the original contract period. The works were certified as practically complete in July 2019.

In April 2019 Essential Living commenced an adjudication concerning the correct valuation of Elements’ account, following an application for payment and valuation in March 2019. The adjudicator’s decision included findings on:-

1.The sum due to Elements for the original scope of works;

2.The sum due to Elements for variations;

3.Amounts due to Essential Living for remedying defects and liquidated damages.

The issues for the Court to determine included the impact of the adjudicator’s decision. Essential Living argued that it was binding for the purposes of he calculating the final contract sum, fixing the completion period under the contract and any subsequent adjudication.

The Law

The Construction Contracts (Northern Ireland) Order 1997 (the 1997 Order) is the legislation that governs adjudication and payment in "construction contracts" in Northern Ireland.

Under the 1997 Order, a party to a "construction contract" has a statutory right to refer a dispute to adjudication at any time. An adjudicator's decision is binding on an interim basis, that is, until the dispute is finally determined by arbitration, litigation or agreement.

The regime in England & Wales is similar, albeit different legislation applies.

Decision

The Court confirmed that the parties were bound by the adjudicator’s decision on any dispute or difference until it is finally determined by a court or by settlement.

As regards the impact of the adjudicator’s decision on the final account process:-

1.the adjudicator’s decision was not binding on the parties for the purpose of the Construction Manager’s final determination of the completion period under the Contract;

2.the adjudicator’s decision was not binding on the parties for the purpose of determining the final contract sum;

3.the adjudicator’s decision was binding in respect of variations considered and assessed by the adjudicator, unless and until the decision was overturned, modified or altered by the court, or either party identified a fresh basis of claim that permitted such variation claim to be opened up and reviewed under the terms of the Contract.

The Court commented that it “is a matter for the Construction Manager, carrying out his obligations under the Contract, to consider the arguments and evidence put forward by the parties on each element of the final account that is disputed. In respect of each disputed element, the Construction Manager must determine whether it is agreed under the Contract, determined in the adjudicator’s decision and binding, or whether there is a fresh basis of the claim that requires or permits him to make a fresh assessment.”

Carson McDowell view

The adjudicator’s decision was not binding on the parties for the purposes of the Construction Manager’s determination of the completion period, or the determination of the final contract sum. However, the terms of the Contract were therefore a key consideration for the Court in this case.

The Contract provided for a process for a review of the contract period after practical completion and calculation of the final contract sum. The adjudicator’s decision related to an interim application, and did not purport to determine the final contract sum.

Whilst the starting point is that an adjudicator’s decision is binding until a dispute is finally determined by arbitration, litigation or agreement, the terms of any construction contract and their interaction with an earlier adjudicator’s decision will need to be carefully considered by a party administering a contractual final account process.

In the words of the Court, these things will require “careful analysis” and be a “matter of fact and degree”.

Although the judgment was given by an English court, it is likely to be persuasive to a court in Northern Ireland tasked with determining the same issue.

If you would like further information on the issues discussed in this article, please contact John Dugdale or another member of the Construction Law Team.