Construction contract – Defective work – Damages – Appellant carrying out drainage works on respondent’s residential development – Adjudication resulting in award to appellant – Respondent seeking repayment of part of award sum on grounds of defective works giving rise to counterclaim or set-off against appellant’s entitlement – Counterclaim dismissed in county court – Whether burden on appellant to prove entitlement to disputed sum or respondent to prove claim for repayment of that sum – Appeal on costs allowed – Cross-appeal on counterclaim dismissed
In November 2003, the respondent developer engaged the appellant to carry out drainage and highway works on a development of 300 homes. The contract for the works was a construction contract for the purposes of the Housing Grants Construction and Regeneration Act 1996 and the adjudication provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 therefore applied to it.
When the works were completed, a dispute arose between the parties in respect of the final payment claimed by the appellant, so far as it concerned payment for drainage and other remedial works that the respondent had carried out pursuant to site instructions issued by the respondent’s consulting engineer and project manager. County court proceedings brought by the appellant were stayed while the dispute was referred to adjudication. The respondent argued that the appellant was not entitled to be paid for the remedial works since they had been necessitated by the appellant’s own defective construction of the drainage works. The adjudicator rejected the respondent’s argument and its claim for set-off and/or abatement in respect of damage that it claimed to have suffered as a result of the allegedly defective drainage works. He made an award of £23,440.72, plus interest, in the appellant’s favour.
The appellant continued its county court claim in respect of one retention of £1,773.65 made by the respondent, which had not been dealt with in the adjudication. The respondent advanced a counterclaim for £87,404.22, including £8,941.16 of the sum paid pursuant to the adjudicator’s award, which it claimed was not properly due and should not have been awarded.
The judge gave judgment for the respondent in the net sum of £10,035.91 and awarded it most of its costs. However, he dismissed its claim for the return of the alleged £8,941.16 overpayment. He held that: (i) the respondent had a cause of action, based on an implied contractual term, for the return of sums paid by the employer pursuant to an adjudicator’s award in respect of which the liability to pay was not substantiated in subsequent legal proceedings; but (ii) the claim failed on the technical ground that the respondent’s pleadings did not identify the breach of contract or even assert that there was such a breach.
The appellant appealed against the costs order. The respondent cross-appealed against the dismissal of its claim for the £8,941.16. It contended that once the dispute went to court, the burden was on the appellant, as the claimant in the action, to prove its entitlement to that sum; the burden of proof did not shift to the respondent just because there had been an adjudication.
Held: The appeal was allowed; the cross-appeal was dismissed.
(1) The respondent’s claim was effectively a claim, or counterclaim, to set off damages in respect of allegedly defective works. The appellant was not seeking to recover at trial any sum in respect of those works since it had already been paid pursuant to the adjudication award that remained contractually binding. It was the respondent that was seeking to set off, arguably counterclaim and obtain payment in respect of the sum of £8,491.60. In those circumstances, in accordance with basic principles, it was for the respondent, as the party asserting its right to set-off, repayment and/or damages, to plead and adduce evidence to prove its entitlement. The evidential burden and the burden of proof at trial was on the respondent; it had to plead and adduce evidence that the original construction of the drainage works by the appellant had been defective so as to give rise to a counterclaim for damages. It had failed to call any evidence in support of that contention. Accordingly, irrespective of any pleading point, the judge had no grounds, on the material before him, on which he could reach a final determination in relation to the respondent’s claim for damages for breach of contract. The adjudicator’s award was therefore bound to stand. Accordingly, the judge had been correct, although not for the reasons he gave, to conclude that he should not order repayment of the £8,941.16 or any part thereof.
Furthermore, the respondent’s pleaded counterclaim for the return of the £8,491.60 was defective since there was no identification or particularisation of the alleged defects in the drains and no allegation that they amounted to a breach of contract, or as to why, under the terms of the contract, it was the appellant’s obligation to rectify them at no cost, or as to the basis for the respondent’s entitlement to repayment of that sum. Although the absence of a satisfactory pleading of breach of contract might not have mattered if the respondent had called evidence at trial to support its claim, it had adduced no such evidence but had simply adopted the attitude that it was for the appellant to prove its contractual entitlement to payment of the sum of £8,491.16. The appellant had no obligation to prove its entitlement in circumstances where it was not making any claim in respect of that sum. It followed that the respondent had not established its entitlement to set off the sum of £8,491.60, or to be paid that sum by way of damages for breach of contract, or to be repaid that sum on the basis that the adjudicator’s decision was wrong.
Per curiam: There was an issue, on which the outcome of the instant case did not turn, as to the status of the adjudicator’s decision after it payment had been made in compliance with that decision but prior to the final determination of the relevant dispute in court or arbitration proceedings. In particular, there was a question as to the significance of payment having been made under the award, when the court came to consider the outstanding disputes between the parties, and their respective obligations, as at the date of trial. It was not disputed that the court in subsequent litigation was not bound by the decision of the adjudicator and could come to a completely different conclusion on the relevant issues. The adjudicator’s decision did not give rise to res judicata. However, that did not mean that the adjudication had no effect whatsoever on the burden of proof in subsequent proceedings. Until the court had finally determined the case, the parties were bound to proceed on the basis that the award was binding. In litigation following an award, the unsuccessful party in the adjudication, who had paid under the award, was claiming repayment of sums that it contended it had wrongly paid. A contractor who had been paid pursuant to an adjudicator’s award had no need to bring court proceedings to claim payment or even to seek a declaration that it was entitled to have been paid. It was entitled to contend that, until the contrary was proven to the court’s satisfaction, the adjudicator’s decision remained binding and that the onus of proof was therefore on the employer, as the losing party in the adjudication, to adduce evidence and prove on that evidence that it was entitled to its money back
(2) The judge had erred in his approach to the award of costs. When considering the history of the matter and assessing various offers made by the parties, he had failed adequately to take into account the commercial reality of the litigation, how it was conducted on each side, its ultimate outcome, and who, on an objective basis, had been the more successful party. Those were matters to which he was obliged to give appropriate consideration under CPR 44.3. The exercise of the discretion to award costs had to reflect the reality that the respondent had substantially failed on its counterclaim, which on any basis had been substantially exaggerated. Taking all relevant matters into account, the respondent should receive 50% of its costs.
Lord Marks QC and Martin Hirst (instructed by CJ Hough & Co Ltd, of Crawley) appeared for the appellant; Simon Browne QC and Tim Sharpe (instructed by Furley Page LLP, of Canterbury) appeared for the respondents.
Sally Dobson, barrister
