Legal notes Can a party with the benefit of third party rights under a construction contract refer a dispute to adjudication? Stuart Pemble considers the issues
Key points
- Hurley Palmer rejected the idea that a third party can use rights granted by the 1999 Act to commence adjudication proceedings against an engineer.
- The decision seems correct but arguably contrasts with Parkwood, which stated that the beneficiary of a collateral warranty could adjudicate.
- Further judicial guidance would be welcomed, given that third party rights and collateral warranties are simply two different means of achieving the same underlying goal.
The Housing Grants, Construction and Regeneration Act 1996 came into force on 1 May 1998 (the “1996 Act”). The Contracts (Rights of Third Parties) Act 1999 (the “1999 Act”) is the 1996 Act’s younger sibling on the statute book by just over 18 months. While the former has been a success and arguably transformed the construction legal landscape, the latter has been a bit of a damp squib. Those involved in construction projects still tend to give third parties the benefit of contractual protection the old-fashioned way, preferring collateral warranties to rights granted under the 1999 Act.
The unwillingness of the construction industry to embrace the 1999 Act could help to explain the length of time it has taken for a case involving both statutes to come before the courts. It also highlights the potential importance of the decision of Ramsey J in Hurley Palmer Flatt Ltd v Barclays Bank plc [2014] EWHC 3042 (TCC), although only time will tell whether it is the first of a number of related cases or is destined to remain a judicial curio (albeit an important one).
Hurley Palmer: the facts
The claimant (“HPF”) was appointed as mechanical and electrical engineer for a new data hall. There were problems with the chilled water system: it was alleged that the rate and direction of flow of the chilled water fluctuated and was unstable. An adjudication was started against HPF claiming damages of more than £4m. HPF commenced these proceedings seeking a declaration that the adjudication and referral notices were ineffective and that the adjudicator lacked jurisdiction.
HPF’s case centred on the fact that the party which commenced the adjudication (and the defendant in this case) – Barclays Bank plc (“Barclays Bank”) – was not the client under its appointment. That was a separate Barclays entity – Barclays plc (“Barclays”).
However, clause 14.3 in the appointment granted third party rights to “affiliates” of Barclays:
“Any Affiliate with a direct interest in the Project shall be entitled to enforce the terms of this Agreement as ‘Client’ always provided that the Consulting Engineer shall be entitled [to] rely on the equivalent defences in respect of such liability which it has against the Client.”
Barclays Bank was caught by the definition of “affiliate” and could therefore “enforce the terms” of the appointment as a consequence of this clause and the 1999 Act. The appointment also incorporated the adjudication provisions contained in the statutory instrument that supports the 1996 Act – the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the “Scheme”). These entitle “any party to a construction contract… to refer any dispute… to adjudication”.
The judgment is silent as to why the adjudication was started by Barclays Bank and not Barclays. Ramsey J had to decide whether Barclays Bank’s rights extended to the right to refer a dispute to adjudication.
The findings
The judge agreed with HPF. He held that clause 14.3 contained the full scope of the third party rights granted to an “affiliate”. Barclays Bank had to show that clause 14.3 entitled it to adjudicate.
But Ramsey J’s next finding presented an insurmountable hurdle for Barclays Bank to overcome: the use of the phrase “such liability” in the clause meant that Barclays Bank was only entitled to enforce those terms in the appointment that concerned HPF’s liability to its client. Barclays Bank’s difficulty was that the right to refer a dispute to adjudication does not concern liability. Rather it is a clause incorporating a possible procedure for assessing that liability. On the specific terms of the appointment of HPF, Barclays Bank’s case failed.
The judge also rejected an idea that the adjudication provision in the appointment could be said to apply to the relationship between HPF and a third party. In reaching his decision, he was also influenced by the fact that section 8 of the 1999 Act makes express provision for third parties to enforce rights contained in contracts that have arbitration as the preferred method of dispute resolution, but does not contain mirror provisions in relation to adjudication. Absent wording similar to that contained in section 8 (or express wording in the appointment itself), a third party could not rely on the general terms of the 1999 Act to enforce an adjudication agreement.
Further, the adjudication provisions in the Scheme deal with adjudication as a right conferred on a party to a construction contract. Barclays Bank was not a party – it was a third party with a right to enforce certain of a construction contract’s terms.
A difference in approach
Ramsey J’s reasoning is compelling and seems correct on all points. However, his findings might suggest a difference in underlying approach to the decision of Akenhead J in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2655 (TCC); [2013] EGILR 31; [2013] 3 EGLR 6 (see An error of judgment, EG, 19 October 2013).
In Parkwood, Akenhead J decided that, on its specific terms, a collateral warranty was a construction contract for the purposes of the 1996 Act and that the third party beneficiary could refer a dispute under it to adjudication. While both cases can be said to have been decided on their own facts (the wording of clause 14.3 in Hurley Palmer and the wording of the collateral warranty in Parkwood), they are concerned with different ways of achieving the same goal – giving rights to a third party to a construction contract caught by the 1996 Act. Allowing the beneficiary of a collateral warranty to adjudicate while prohibiting the beneficiary of third party rights to do likewise seems to be a contradictory and unintended judicial outcome.
Akenhead J’s judgment is open to quite strong criticism and many commentators (including this one) would like to see it overturned on appeal. Unless that happens, however, these seemingly contradictory judicial approaches suggest that there are more differences between collateral warranties and third party rights than many lawyers initially thought. And everyone considering how to grant rights to a third party to a construction project needs to give serious thought as to whether their preferred approach has created a right to refer disputes to adjudication.
Stuart Pemble is a partner at Mills & Reeve LLP
