Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 64
CA141/10	OPINION OF LORD MENZIES in the cause PROFILE PROJECTS LIMITED Pursuers; against ELMWOOD (GLASGOW) LIMITED Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuer: Richardson; ADLP Limited, Solicitors

Defender: Sandison Q.C.; Russell & Aitken, WS

8 April 2011

Introduction

[1] The parties entered into a contract whereby the pursuers were engaged as sub-contractors to the defenders for carrying out the design and installation of partitions and other works for NHS Lothian. A dispute arose as to the pursuers' entitlement to payment in terms of their interim application 3. The contract was a construction contract within the meaning of the Housing Grants, Construction and Regeneration Act 1996 ("the Act"). The Act makes it obligatory for such contracts to contain provision for disputes to be resolved by adjudication. The pursuers referred the dispute to adjudication in terms of a Notice of Adjudication dated 3 September 2010, and a referral notice dated 9 September 2010. The parties were not agreed as to who should act as adjudicator. On the application of the pursuers, the Scottish Building Federation appointed Mr John Nicolson as adjudicator. The defenders immediately challenged the jurisdiction of Mr Nicolson, for reasons set out in a document entitled "Notice of Challenge by Respondent to Jurisdiction of Adjudicator" dated 9 September 2010. The defenders maintained their objection to Mr Nicolson's assumption of jurisdiction throughout the purported adjudication, but the adjudicator rejected this objection. He issued his determination of the parties' dispute on 6 October 2010, and amended it to correct an error in calculation on the following day. He found that payment was due by the defenders to the pursuers. He also found the defenders liable in the costs of his fees.

[2] The defenders have refused to make payment of these sums to the pursuers. The pursuers have accordingly raised this action for payment. In their defences the defenders have reiterated their objection to the jurisdiction of the adjudicator, and argue that as his determination was pronounced without jurisdiction, it was null and void and should be reduced ope exceptionis. The matter came before me for debate on the defenders' first plea-in-law, being a general plea to the relevancy. At the same time, the pursuers' motion for summary decree in terms of the first two conclusions of the summons was heard, and in the alternative counsel for the pursuers sought decree de plano. Both parties helpfully lodged detailed notes of argument (nos. 11 and 12 of process); I do not seek to repeat these verbatim here, but I have taken their whole contents into account, together with the submissions made at the bar, and the written replies for the parties (nos. 17 and 18 of process) which were lodged after the debate.

The relevant provision of the contract

[3] Clause 27(ii) of the sub-contract between the parties provided as follows:-

"In the event of any dispute or difference arising between the Main Contractor and the Sub-contractor under or in connection with the Sub-contract which cannot be settled by informal means then either party may give notice at any time of its intention to refer said dispute or difference to adjudication. The provisions of the Scheme for Construction Contracts in Scotland then in force will apply to the adjudication, save where inconsistent with any of the provisions of this Clause. The Adjudicator shall be agreed between the parties, and failing which nominated by the Chairman or Vice Chairman for the time being of the Scottish Branch of the Royal Institution of Chartered Surveyors (RICS). Upon the agreement on or, as the case may be, the nomination of an Adjudicator able and willing to act, the parties shall thereupon execute with the Adjudicator adjudication agreement in the form then current adopted by the Scottish Building Contract Committee as amended or deemed to have been amended to the effect (one) that the referring party shall bear the whole costs of the adjudication including, but not limited to the Adjudicators fees and costs in their entirety and both parties' legal expenses (on a solicitor and client basis and upon the scale of charges applicable to Court of Session business) in and incidental to the adjudication and (two) that the Adjudication Agreement and any award of the Adjudicator thereunder may be registered in the Books and Council for preservation only and not for execution. Financing charges associated with matters being pursued under the adjudication process shall not be subject to award. Unless and until the Adjudicator's decision is issued, the Main Contractor and the Sub-contractor shall proceed as if the subject matter of the dispute or difference is not in issue and the decision of the Adjudicator shall be final and binding as a matter of contractual obligation between the parties, unless and until it has either been set aside by a competent tribunal or the matter has been determined by a Court or arbitrator."

The statutory framework

[4] Section 108 of the Housing Grants, Construction and Regeneration Act 1996 provides inter alia as follows:

"(1) A party to a construction contract has the right to refer a dispute arising under the contract for adjudication under a procedure complying with this section.

For this purpose 'dispute' includes any difference.

(2)              The contract shall-

(a)   enable a party to give notice at any time of his intention to refer a dispute to adjudication;

(b)  provide a timetable with the object of securing the appointment of the adjudicator and referral of the dispute to him within 7 days of such notice;

(c)   require the adjudicator to reach a decision within 28 days of referral or such longer period as is agreed by the parties after the dispute has been referred;

(d)  allow the adjudicator to extend the period of 28 days by up to 14 days, with the consent of the party by whom the dispute was referred;

(e)   impose a duty on the adjudicator to act impartially; and

(f)    enable the adjudicator to take the initiative in ascertaining the facts and the law.

(3)              The contract shall provide that the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement.

The parties may agree to accept the decision of the adjudicator as finally determining the dispute.

(4)              The contract shall also provide that the adjudicator is not liable for anything done or omitted in the discharge or purported discharge of his functions as adjudicator unless the act or omission is in bad faith, and that any employee or agent of the adjudicator is similarly protected from liability.

(5)              If the contract does not comply with the requirements of subsections (1) to (4), the adjudication provisions of the Scheme for Construction Contracts apply....".

[5] The Local Democracy, Economic Development and Construction Act 2009 made provision for insertion of a new section 108A (not yet in force), as follows:-

"108A Adjudication costs: effectiveness of provision

(1) This section applies in relation to any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract.

(2) The contractual provision referred to in subsection (1) is ineffective unless-

(a) it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties, or

(b) it is made in writing after the giving of notice of intention to refer the dispute to adjudication."

The Scheme for Construction Contracts (Scotland) Regulations 1998 provide, in paragraph 2 of part I of the Schedule as follows:-

"2.- (1) Following the giving of a notice of adjudication and subject to any agreement between the parties to the dispute as to who shall act as adjudicator -

(a) the referring party shall request the person (if any) specified in the contract to act as adjudicator;

(b) if no person is named in the contract or the person named has already indicated that he is unwilling or unable to act, and the contract provides for a specified nominating body to select a person, the referring party shall request the nominating body named in the contract to select a person to act as adjudicator; or

(c) where neither head (a) nor (b) above applies, or where the person referred to in (a) has already indicated that he is unwilling or unable to act and (b) does not apply, the referring party shall request an adjudicator nominating body to select a person to act as adjudicator.

(2) A person requested to act as adjudicator in accordance with the provisions of sub-paragraph (1) shall indicate whether or not he is willing to act within two days of receiving the request.

(3) In this paragraph, and in paragraphs 5 and 6 below, "an adjudicator nominating body" shall mean a body (not being a natural person and not being a party to the dispute) which holds itself out publicly as a body which will select an adjudicator when requested to do so by a referring party."

Submissions for the defenders

[6] Senior counsel for the defenders invited me to sustain the first plea-in-law for the defenders, repel the pleas-in-law for the pursuers and grant decree of dismissal. He submitted that there were three questions for determination in this case; only if the first and second questions were answered in the affirmative and the third question was answered in the negative could the action survive dismissal.

[7] The first question is whether the adjudication provisions in the contract are - because they require the party referring a dispute to adjudication to bear the costs relating to the adjudication - incompatible with the relevant requirements of section 108 of the Act in such a way as to render them ineffective. Until 2010, the settled answer to that question would have been in the negative, on the basis of Bridgeway Construction Limited v Tolent Construction Limited (2000) CILL 1662. The argument that "Tolent" clauses were not prohibited by section 108 of the 1996 Act was strengthened by the enactment of the Local Democracy, Economic Development and Construction Act 2009, ("the 2009 Act")which made provision for the insertion of a new section 108A into the Act. It has not yet been brought into force, but the effect of the new section will be to render a "Tolent" clause ineffective unless (a) it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties, or (b) is made in writing after the giving of notice of intention to refer the dispute to adjudication. The inference which must be drawn from the passing of the 2009 Act is that Parliament recognised that the law as it stands does not prevent the enforcement of "Tolent" clauses, and has given Ministers the power to render them ineffective if they decide that it is appropriate to do so. Moreover, it is significant that Parliament has not given Ministers the power to render all such clauses ineffective - parties will still be entitled to agree such clauses in some circumstances. It is clear that "Tolent" clauses were the mischief to which section 108A was directed when one looks at the observations of the relevant Minister at second reading in the House of Lords (House of Lords Debates, Volume 706, No. 10, Column 293. See also House of Commons Debates, Volume 497, No. 122, Column 185). This Parliamentary material is relevant because it is important to ascertain what mischief Parliament was seeking to address in 2009. It is clear from these passages that this mischief was to prevent the "party with greater clout" from using the costs of the adjudication process as a barrier. When this passage of the 2009 Act is brought into effect, parties will still be able to agree "Tolent" clauses in certain circumstances. If the decision in Yuanda (below) is correct and the Act had already nullified "Tolent" clauses, the 2009 Act will actually have a liberalising effect by allowing agreements as to allocations of costs which, on the reasoning of Yuanda are already banned - precisely the opposite of what Parliament thought it was doing. It is also important to note that there is nothing in the Parliamentary material to suggest that parties' rights are inalienable.

[8] It is to be assumed that Parliament knew the existing law when it passed the 2009 Act - Young & Co v Mayor of Leamington Spa (1883) 8 App Cas 517. If "Tolent" clauses were ineffective under the Act, Parliament was wasting its time in enacting this section of the 2009 Act.

[9] In Yuanda (UK) Ltd v W W Gear Construction Ltd [2010] EWHC 720 (TCC), [2010] 1 COC 491, Edwards-Stuart J declined to follow Bridgeway v Tolent. In doing so he was careful to state that he was not seeking to establish a general principle, but reaching his decision on the basis of the wording in the particular contract before him (see paragraph 51). The contract in Yuanda differed from the present contract in two respects. First, the Yuanda clause dealing with the costs of adjudication was not reciprocal but one sided - if the contractor referred a dispute to adjudication he was required to pay the costs, but there was no corresponding obligation on the employer. This lack of reciprocity was considered relevant in Yuanda (see paragraph 38). In the present contract there is reciprocity; the clause applies to both parties to the contract, and was agreed when no one knew to whose benefit it might operate. Second, the clause in Yuanda placed no limit on the amount of expenses which the respondent might incur and for which the referring party would be liable - there was no provision for reasonableness. This was an important factor in the judge's reasoning in the Yuanda - see paragraph 47. By contrast, the clause in the present case provides an entitlement to refer the account of expenses to taxation on the Court of Session scale, so there is provision for reasonableness.

[10] Senior counsel drew five propositions from the decision in Yuanda, as follows:

(a) Parliament did not make any provision relating to the question of who should bear the costs of an adjudication in enacting the 1996 Act, so an adjudicator has no power to award costs unless that power is specifically conferred upon him by the parties to the adjudication. (Paragraph 42).

(b) Parties are, at least in the abstract, entitled to make agreements conferring upon an adjudicator the power to make an award on costs. (Paragraph 43).

(c) However, an agreement that a party would not have to pay an amount awarded to another party by the decision of an adjudicator except to the extent that that award exceeded the costs incurred by the first party in the adjudication would conflict with the requirement of the Act that parties have to comply with the award of an adjudicator. (Paragraph 43).

(d) An agreement requiring one party to bear the whole costs of the adjudication is not in practice different from the kind of agreement described in (c) above, because it would pro tanto deprive the successful party who had agreed to bear the costs of the adjudication of his substantive remedy. (Paragraphs 44 and 45).

(e) A "Tolent" clause is accordingly "directly contrary to the purpose of the Act" (paragraph 45), or "conflicts with the requirements of section 108". (Paragraphs 53 and 54).

[11] Senior counsel did not dispute propositions (a) and (b). Proposition (c) was debatable, but propositions (d) and (e) were wrong. A "Tolent" clause may or may not have the effect described in (d), depending on a variety of circumstances. The dispute may not be about payment of money, but may be about contractual rights and responsibilities. In any event, it is incorrect to analyse a "Tolent" clause as depriving the winning party of his remedy; he has simply incurred certain costs in getting that remedy, and he has done so because he agreed to incur them. Whether such an agreement is contrary to an implicit prohibition in the 1996 Act depends on the sort of analysis of the Act which was carried out by the House of Lords, in the context of the Agricultural Holdings Act 1948, in Johnson v Moreton [1980] AC 37. There was no such analysis in Yuanda; rather, the judge concluded that the existence of "Tolent" clauses must discourage parties from referring their disputes to adjudication, but there was no evidence before him to this effect. There is a wide variety of circumstances which might have the effect of discouraging parties from referring their disputes to adjudication. The party may consider that it would be better to continue working rather than diverting time and financial resources into arguing about an interim matter. The party may consider that his chances of success in an adjudication are not sufficiently high to make it worthwhile; he may not wish to sour his commercial relationship with the other party, either in relation to the same contract or in relation to others. If anything which might discourage a party from exercising his statutory right to adjudication is subject to an implied prohibition under section 108 of the 1996 Act, it is difficult to see where this might end. Moreover, in paragraph 53 of Yuanda, Edwards-Stuart J effectively disregarded section 141 of the 2009 Act, stating that it was not relevant to the point which he had to decide. For the reasons already stated, this was wrong, and the passing of section 141 of the 2009 Act was significant in determining whether Parliament intended to ban "Tolent" clauses in terms of the Act.

[12] In determining whether an Act impliedly strikes down an agreement, it is necessary to ask (1)  what rights have been given to parties by Parliament? (2)  are those rights inalienable? and (3)  does the agreement in question amount to the alienation of an inalienable right? That is the process which should be followed to assess if the contractual provision is struck down by the Act. This was not done in Yuanda. In that case the judge stated his opinion (without any evidence to support it) that some parties might be discouraged from exercising their right to go to adjudication, notwithstanding that the contract does not purport to take away that right; he took the view that a clause which has the practical effect of discouraging a party from availing himself of a statutory right falls to be equiparated with a clause which deprives that party of the statutory right. Senior counsel described that as a giant and unjustifiable leap. In the present case, the contract does not omit any of the matters which section 108 of the Act requires it to include; on the contrary, every right which section 108 requires to be conferred on the contracting parties is conferred. Neither of the parties appears to have ever entertained any apprehension that the pursuers had been deprived, either as a matter of form or of practicality, of their right to adjudication, and the pursuers exercised that right without any apparent hesitation. For these reasons, the contract terms in the present case are effective and are not inconsistent in any relevant way with the requirements of the Act.

[13] The second question is whether, if the criticised provisions in the subcontract do indeed fall to be regarded as inconsistent with the requirements of section 108, the result is that the whole contractual adjudication provisions are swept away and replaced with the Scheme for Construction Contracts (Scotland) Regulations 1998? Both Scottish authorities answer this question in the negative. In Ballast Plc v The Burrell Company (Construction Management) Limited 2001 SLT 1039 Lord Reed observed (albeit obiter) (at paragraph [28]) that it was possible that an adjudication might be governed partly by express contract terms and partly by the scheme, since the contract might comply only in part with the requirements of section 108(1) to (4) and that is reflected in the terms of section 114(4). Effectively Lord Reed was contemplating a situation in which that part of the contractual arrangements which contravened section 108 would be replaced by the equivalent part of the scheme. This runs contrary to the pursuer's submissions, which are to the effect that if any part of the contract contravenes section 108, the whole contractual provisions for adjudication fall and are replaced by the scheme. (Senior counsel did not accept the observation in Yuanda at paragraph 60 that this passage of Lord Reed's opinion was somewhat opaque and nothing more than passing comments).

[14] Hills Electrical and Mechanical Plc v Dawn Construction Limited 2004 SLT 477 agreed with Lord Reed's observations in Ballast. Lord Clarke's reasoning at paragraphs [18] and [19] was sound, and supports the view (at least with regard to payment provisions) that one may have a result which is partially contractual and partially scheme. The fact that section 114(4) of the Act requires the court to give effect to the scheme provisions as implied terms of the contract between the parties also suggests that the scheme was seen by Parliament as performing a supplementary role, not a wholly substitutionary role. Support for this position is also to be found in the judgment of May LJ in Pegram Shopfitters Limited v Tally Weijl (UK) Limited [2003] EWCA Civ 1750, [2004] 1 WLR 2082.

[15] The contrary view, namely that if the adjudication provisions in the contract are to any extent non-compliant then they are replaced in their entirety by the provisions in part 1 of the scheme, finds support in Yuanda and in the various first instance English decisions referred to in paragraph 58 of that judgment. Senior counsel submitted that these proceeded on a narrow distinction being drawn between the wording of section 108(5) of the Act, and the wording relating to payment provisions in sections 109, 110(3) and 113. The answer is this: as Lord Clarke observed in Hills Electrical, "It is to be assumed, as a matter of statutory interpretation, that the legislature intended to innovate on parties' freedom of contract only to the extent that this was clearly provided for, either expressly or by clear implication by the terms of the legislation itself". Any implication which arises from the differing terms of section 108(5) and sections 109, 110(3) and 113 is not strong enough to displace this assumption. The approach in Hills is correct not only in relation to payment provisions but in relation to adjudication - if Parliament intended to make such a major curtailment of parties' freedom to contract, one would expect to see this stated clearly. None of the English decisions confront this principle, they merely observe that there would be difficulties if there was a result which was partly contractual and partly scheme. However, that is the position with regard to payment provisions, and this has not caused insuperable difficulties. The court should adopt a principled approach and proceed on the assumption that parties have freedom of contract except where Parliament has clearly stated otherwise. Accordingly, even if the "Tolent" type clause in the present case relating to adjudication costs falls to be struck down as impliedly contrary to the policy of the Act, the consequence is that it is struck out of the contract as ineffective, but the rest of the adjudication provisions (and in particular the provisions for the appointment of an adjudicator) stand. The second question should also be argued in the negative.

[16] The third question is whether the result of any application of the Scheme to govern the parties' rights simply results in a reference back to the contractually-nominated appointment body as that entitled to appoint an adjudicator in the absence of agreement between the parties as to the identity of an adjudicator. If, contrary to the submissions above, the contractual provisions are ineffective as a result of section 108, and if they fall to be struck out in their entirety and replaced with the Scheme, paragraph 2 of Part I of the schedule to the Scheme will apply. Paragraph 2 is set out above. In the present case there was no agreement between the parties as to who should act as adjudicator, and no person was specified in the contract to act as adjudicator. The contract provides for a specified nominating body (the Scottish branch of the RICS) to select a person as adjudicator. This is a body which routinely selects arbitrators, adjudicators, experts and the like in the context of building contracts. The pursuers were therefore obliged to adopt the mechanism provided for by paragraph 2(1)(b) of Part I of the schedule to the Scheme; they failed to do so, and purported to adopt the mechanism contained in paragraph 2(1)(c). In doing so they obtained an invalid nomination by the Scottish Building Federation. The defenders admittedly objected at once, and have maintained their objection to the jurisdiction of the nominated person throughout. The pursuers' argument is to the effect that not only is the contract invalid, but it has never existed in the first place. That cannot be right - paragraph 2(1)(b) of the schedule refers back to the original contractual provisions, and these cannot be disregarded. The third question therefore falls to be answered in the affirmative.

[17] There is reference in the note of argument for the pursuers to an additional ground of incompatibility between clause 27(ii) of the contract and section 108 of the Act, namely the restriction on claiming financing charges in an adjudication. This argument was never raised before the adjudicator, and no part of his determination on jurisdiction addressed this or turned on it. The issue was never raised and never determined. There is no mention of it in the pursuers' pleadings, so there was nothing for the defenders to answer. The first time that it was raised (and then only briefly) was in the note of argument for the pursuers, which was lodged after the note of argument for the defenders. This is not a matter on which the court should rule. Senior counsel was not making a technical pleading point, but no fair notice had been given and, more importantly, the adjudicator had not been asked to determine his jurisdiction on this basis. In any event, the reference to financing charges in clause 27(ii) is for the avoidance of doubt - there was nothing elsewhere in the contract which would allow finance charges to be claimed, so the clause was not taking away a right which the parties already had, but merely clarifying that there was no right to claim finance charges under the contract. This aspect of the clause was therefore not incompatible with section 108 of the Act, as finance charges could not be the subject of a dispute.

Submissions for the pursuers

[18] Counsel for the pursuers moved for summary decree, or alternatively for the pursuers' fourth plea in law to be sustained. He accepted that the point discussed in the foregoing paragraph regarding financing charges was not raised before the adjudicator, but that was not relevant - the question of the adjudicator's jurisdiction is one for the court to decide. It is purely a matter of law, and therefore not appropriate to be spelt out in the pursuers' pleadings in the summons. (Similarly, the "Tolent" argument is not spelt out in the pleadings either.)

[19] Counsel advanced five propositions regarding the incompatibility of the contractual adjudication provisions with section 108 of the Act, in relation to the first question posed by senior counsel for the defenders:-

(1) It is well established that the intention of Parliament in enacting the Act was to secure that every construction contract contained provisions which enabled the parties to the contract to obtain from an adjudicator, in respect of any dispute arising under the contract, a speedy decision which was binding and enforceable. Courts must interpret construction contracts consistently with that objective and lend their assistance to the prompt enforcement of decisions made by adjudicators within the scope of their jurisdiction - Construction Centre Group Limited v Highland Council 2003 SC 464 at paragraph [14].

(2) Section 108 requires that there is no restriction on the scope of disputes or differences which may be referred to adjudication - adjudication must be open for any dispute arising under the contract. The restriction on financing charges in clause 27(ii) clearly restricted the scope of the dispute. This is incompatible with section 108.

(3) Section 108(2)(a) requires the contract to enable a party to give notice at any time of his intention to refer a dispute to adjudication.

(4) It follows that a provision which places an obstacle in the way of a party referring a dispute to adjudication at any time will not comply with section 108(2)(a).

(5) A clause such as clause 27(ii) allocating all costs of the adjudication to the referring party, independently of the outcome of the adjudication process, is such a provision.

[20] In Yuanda a series of factors were identified which, taken together, resulted in a contractual provision which fettered the right to adjudication. Counsel accepted that the two distinctions between Yuanda and the present case which were identified by senior counsel for the defenders did exist, but neither was significant. The lack of reciprocity in the Yuanda clause was not material, because if a clause fetters the right to go to adjudication, it matters not that both parties are so fettered. With regard to the reasonableness of the responding party's expenses, it will still be impossible for the referring party to assess what these are likely to be, and in any event the reference to legal costs would necessarily imply taxation by the auditor - Deko Scotland Limited v Edinburgh Royal Joint Venture 2003 SLT 727. Section 108 of the 1996 Act was concerned with enabling or empowering a party to refer a dispute to adjudication, and the court can strike down anything which is a fetter or obstacle to the enforcing of this right. Any provision that imposes all the costs of an adjudication on the referring party trespasses on the position that costs are neutral, and makes it less attractive for a party to refer a dispute to adjudication. There were two factors identified in Yuanda which were decisive - first, the practical effect of a responding party's entitlement to costs on a referring party's ability to enforce the award (paragraph 45) and the dissuasive effect that the responding party's entitlement to costs would have for a referring party in a dispute of relatively small value, which would fall foul of the entitlement to refer a dispute to adjudication at any time (paragraph 48).

[21] Three arguments were advanced on behalf of the defenders against Yuanda - (a)  that the reasoning in Yuanda was deficient, (b)  that the reasoning in Bridgeway Construction was to be preferred, and (c)  the inferences to be drawn from the passing of the 2009 Act. With regard to (a), the defenders' characterisation of the reasoning in Yuanda is misconceived. They suggest that there is a wide variety of circumstances which might discourage parties from referring their dispute to adjudication, and it would be impossible to identify where the line should be drawn. However, the circumstances which they suggest do not relate to the terms of the present contract; it is not relevant to consider hypothetical examples of other possible disincentives, because they do not arise from the terms of this contract.

[22] With regard to (b), the reasoning in Yuanda should be preferred to that in Bridgeway Construction, for three reasons: (i)  there was a much fuller and more detailed discussion of the issue in Yuanda than there was in Bridgeway Construction; (ii)  the decision in Yuanda was made with the benefit of much longer experience of the practical effect of the Act than was the case in Bridgeway, and this experience clearly showed that clauses of this sort have had a negative impact within the construction industry on issues of cash flow to which the Act was addressed, and have discouraged adjudication; and (iii)  too much emphasis was placed in Bridgeway Construction on the form of the provision, and not enough on the substance of what Parliament was trying to achieve. The phraseology used by the House of Lords in Johnson v Moreton, quoted in Bridgewater Construction, applied with equal force in the present circumstances - the contractual term purports "to avoid, get round, eliminate, the difficulties" caused by the 1996 Act. Counsel invited the court to take a purposive approach to the construction of this legislation.

[23] With regard to (c), Parliament's understanding of the existing law is relevant to construction of the 2009 Act, but not to construction of the 1996 Act. The exercise engaged in by senior counsel for the defenders was a form of "reverse engineering", and confused the constitutional distinction between the role of Parliament in enacting legislation and that of the courts in construing it - Office of Government Commerce v Information Commissioner [2008] EWHC 774 (Admin), [2010] QB 98 (particularly at paragraph 50). The exercise in which the defenders seek to engage does not satisfy the requirements of Pepper v Hart [1993] AC 593; the Parliamentary Debates to which reference was made occurred long after the 1996 Act, and are not a relevant aid to the construction of that act. Moreover, the 2009 Act is not simply a statutory overturning of the Bridgeway Construction decision, but a nuanced development of the law. The court should follow the reasoning in Yuanda.

[24] Counsel emphasised that the pursuers maintained two attacks against clause 27(ii) of this contract. The first was that it was equivalent to a "Tolent" clause, and the reasoning in Yuanda with regard to the practical effect on enforcement of an adjudicator's award and the fettering of the right to refer a dispute to adjudication at any time applied to render it incompatible with section 108 of the 1996 Act. The second related to the provision which purported to prevent a party referring a dispute as to financing charges to adjudication. The defenders' argument that there was no entitlement to financing charges under the contract in any event, and that this was merely a provision for the avoidance of doubt, is misconceived. It would be a strange place to find such a provision, if this were correct. In any event, clause 2(iii) of Part 3 of the contract recognises that there may be claims for additional payments as a result of delay, and places no restrictions on such claims. There is a reference to clause 15, but no reference to clause 27. This supports the view that clause 27 regulates procedure, and is not concerned with substantive entitlement. Clause 15 provides for a specific restriction on the right to recover expenses, but no restriction on recovery of financing charges. The restriction in clause 27(ii) is accordingly another ground of incompatibility with section 108.

[25] The answer to the second question lies in the clear wording of section 108(5); this was not referred to in either Ballast or Hills. This subsection envisages a binary provision - either the contract is compatible with section 108, in which case the contractual provisions apply, or it is not, in which case the Scheme applies in toto. This falls to be contrasted with the provisions for payment - section 109(3) refers to "the relevant provisions of the Scheme", section 110(3) provides that "if or to the extent that a contract does not contain such provision" and section 113(6) refers to "the relevant provisions of the Scheme". These provisions in relation to payment recognise that the terms of the parties' contract may be supplemented by the provisions of the Scheme. This distinction is repeated in the Scheme itself, and the regulations to which it forms the schedule. Regulation 3 makes no qualification with regard to section 108 - where a construction contract does not comply with the requirements of subsections (1) to (4) of section 108 of the Act, the adjudication provisions in part 1 of the schedule to these regulations shall apply. This falls to be contrasted with Regulation 4, which relates to payment provisions, and which provides only that the relevant provisions in part II of the schedule to the regulations shall apply. This distinction is repeated in part II of the schedule - paragraphs 1 and 3 make it clear that only the relevant provisions shall apply. The treatment of the provisions for adjudication is plainly different from the provisions for payment. Hills was not concerned with section 108(5) but with the payment provisions, and to that extent counsel did not take issue with it. The reasoning in paragraphs 55 to 57 of Yuanda is sound, and should be followed. All of the cases listed in paragraph 58 which were concerned with adjudication held that the Scheme replaced the contractual provisions in their entirety; Hills was not addressing the same statutory provision, but was considering the payment provisions, and Ballast and Pegram made remarks which were obiter.

[26] With regard to the third question, if the contractual provision is to be replaced "lock, stock and barrel" by the Scheme, there are no provisions to which to have reference for the purpose of paragraph 2(1)(b) of the Scheme - any provisions in the contract have been replaced, so nothing remains. That view is consistent with Aveat Heating Limited v Jerram Falkus Construction Limited [2007] EWHC 131 (TCC), [2007] 113 Comm LR 13, particularly at paragraphs 7 and 8.

[27] For each and all of these reasons counsel invited me to sustain the pursuers' fourth plea in law (and to grant summary decree if necessary).

[28] Submissions for each party having been made, owing to lack of court time it was not possible to hear submissions in reply. Parties agreed that a brief written reply for the defenders (and, if necessary, a written reply for the pursuers) should be lodged within two days of the debate, and that no further oral submissions should be made. Both parties availed themselves of the opportunity to lodge such a written reply, that for the defenders being number 17 of process and for the pursuers number 18 of process. I summarise these as follows.

Reply for the defenders

[29] Although it is accepted that the courts ought generally to interpret construction contracts in a way that facilitates rather than obstructs the enforcement of decisions made by adjudicators, this only applies to decisions made by adjudicators within the scope of their jurisdiction. There is a clear distinction between jurisdictional and non-jurisdictional issues; the present case admittedly concerns a jurisdictional issue. Section 108(2)(a) of the Act requires a contract to enable a party to give notice at any time of his intention to refer a dispute to adjudication. The provisions of the present contract as to cost allocation do not have the effect of disabling either party from doing this. The most that can be said is that they may discourage a party from exercising that right. In order to sustain the argument for the pursuers, the court would have to take the view that parliament must be taken to have intended discouragement to be placed on the same footing as disablement. There is nothing to support the view that such equiparation was intended. It must have been within the contemplation of parliament that parties to a construction contract might incur costs and fees in implementing the right to adjudicate, but it said nothing, either in the Act or in any of the Schemes, to deal with costs allocation agreement. The argument for the pursuers goes beyond a purposive approach and amounts to the assumption of the mantle of a remedial legislator who knows better than parliament itself what "ought" to have been done. That was what occurred in Yuanda, and it is unwarranted.

[30] If discouragement is enough to warrant the intervention of the court, there is no stopping point. If the court can intervene if the "discouragement" takes a contractual form, why should it not intervene if there are extra-contractual forms of "discouragement". Even in the context of contractual forms of "discouragement", it might be argued that a clause requiring each party to bear its own costs in an adjudication, whatever the outcome, could operate as a discouragement for a party with a good (but small) claim from taking that claim to adjudication. That might have the bizarre result that the whole contractual provisions about adjudication would be disapplied and replaced with the Scheme provisions, which would produce exactly the same result as the disapplied contract term because they do not permit an adjudicator to award costs in the absence of a contractual agreement. "Disablement" is a clear concept; if one moves to the more subjective concept of "discouragement" there is no logical stopping point, and the desirable element of certainty in adjudication provisions is lost.

[31] Senior counsel reiterated that what parliament did, and the mischief which it was seeking to address, in passing the 2009 Act is relevant to the construction of the Act in light of facts and circumstances known in 2011. Parliament must be assumed to know the existing state of the law, and what it did in passing the 2009 Act must be taken into account in construing, in 2011, the Act which it passed in 1996. Further material has become available which casts light on parliament's intention in 1996, and the court cannot close its eyes to this material.

[32] With regard to the pursuers' argument regarding financing charges, in order to succeed they must show that the contract provides a right to financing charges. There is no express contractual entitlement to recover financing charges. In these circumstances they would be recoverable only if they are a loss arising naturally out of the breach of contract or delay which is complained of, or were otherwise in the actual contemplation of the parties at the time of contracting as being a loss likely to be incurred as a result of such a breach or delay. The pursuers have no averments about facts or circumstances which might give rise to a right to financing charges, and they cannot therefore demonstrate at debate that clause 27(ii) seeks to remove from adjudication a claim which they would otherwise be able to make. In any event, the pursuers never raised this argument before the adjudicator and have made no averments about it in these proceedings. The argument is clearly an irrelevant afterthought.

[33] Senior counsel accepted that there was a difference in form between section 108(5) of the Act and the provisions relating to payment, but this difference in form is not sufficient to justify the construction that if the adjudication provisions are non-compliant to any extent they must be disapplied in their entirety. Both Lord Reed in Ballast and May LJ in Pegram referred to section 108(5) and their observations suggested that the adjudication provisions should not be disapplied in their entirety. The contrary argument is based solely on the suggestion that chaos would otherwise result, by the operation of a procedure which was partly contractual and partly Scheme. Such chaos has not arisen in the "mixed" procedure which may fall to be applied in the payment provisions, and there is no reason why it should result from a "mixed" procedure in the adjudication provisions. Nothing said in Ballast, Pegram or Hills suggests that such chaos is likely. Standing the basic principle that parliament should not lightly be taken to have intended to interfere with freedom of contract, there is no substance to the pursuers' argument.

[34] The pursuers could point to no authority to support their argument with regard to the third question. If they were correct, paragraph 2(1)(b) of the Scheme would only apply where parties had entered into a contract which adopted the Scheme in its entirety and made the sole further contractual provision of naming a specific nominating body. This was a most unlikely construction. There was no authority which suggested that where the provisions of a contract have been held to be ineffective as contravening section 108 of the Act, they must be disregarded as a source of relevant information as to the nominating body which the parties had agreed would be the appropriate one to appoint a suitable adjudicator. The pursuers have not even attempted to explain why they did not approach the Scottish branch of the RICS for a nomination - if they had done so, all the jurisdictional issues would have been resolved.

Written reply for the pursuers

[35] The pursuers were not suggesting that the courts should be sympathetic to decisions of adjudicators made outwith their jurisdiction. However, it is all too easy for a party dissatisfied with an adjudicator's decision to characterise points as amounting to an excess of jurisdiction - see Carillion Construction v Devenport Royal Dock Yard 2006 BLR 15, at paragraph [87]. The defenders did not take issue with the adjudicator or the process adopted by him.

[36] With regard to the restriction on claims for financing charges, these are recoverable as a head of damages under a contract which allows for recovery of loss and expense - F G Minter Ltd v Welsh Health Technical Services Organisation (1980) 13 BLR 1; Ogilvie Builders Ltd v City of Glasgow District Council 1995 SLT 15. The recovery of financing charges arises under the first branch of the rule in Hadley v Baxendale (1854) 9 Ex 341; it is therefore unnecessary to demonstrate that such recovery was in the contemplation of the parties. In the present contract the pursuers were entitled to claim for loss and expense, as appears from clauses 2 and 15. There is accordingly no need for proof on this point. In any event, the wording of clause 27(ii) amounts to a blanket exclusion of claims for financing charges from the scope of disputes referred to adjudication; the clause is therefore incompatible with section 108(1) of the Act if it is possible for such claims to arise under the wording of the contract. The defenders' suggestion that this matter was somehow irrelevant to the "live dispute" between the parties because it was not articulated before the adjudicator is unsound. It is directly relevant to the question of the compatibility of the contractual provisions with the provisions of section 108 of the Act. The fact that the argument was not made before the adjudicator is irrelevant - for example, in Aveat Heating the court determined that the contractual provisions were incompatible not on the basis initially argued but on an issue arising from the judge's own analysis.

[37] The suggestion by senior counsel for the defenders that had the pursuers sought a nomination from the RICS none of the jurisdictional arguments would have arisen is telling - if that had happened, would the nomination have been in terms of the contract or the Scheme? This would have caused an immediate difficulty when an adjudication agreement, required by the contractual provisions, had to be executed. Moreover, if the pursuers had elected, notwithstanding the unfairness of the requirement to pay the defenders' costs, to proceed under the contractual route, it would have been open to the defenders to resist enforcement of the adjudicator's decision on the basis that the provisions were incompatible for the reasons advanced by the pursuers. Section 108 of the Act, and the Scheme, were not intended to enable such wrangling to take place over the merest technicality of the identity of the adjudicator nominating body. For these reasons the second and third questions should be answered as contended for by the pursuers.

Discussion

[38] There are two aspects to the question of whether clause 27(ii) of this contract is incompatible with section 108 of the Act in such a way as to render it ineffective - (1) the provision relating to the costs of the adjudication, and (2) the provision that associated financing charges shall not be subject to award. With regard to the first of these, I do not consider that the provision that the referring party shall bear the whole costs of the adjudication and both parties' legal expenses renders this clause incompatible with section 108 of the Act. I reach this view essentially for the reasons advanced in the submissions for the defenders. Section 108 of the Act requires a contract to comply with certain specific requirements, and if it does not do so the provisions of the Scheme will apply. Subject to the limitation on financing charges, to which I turn below, I consider that clause 27(ii) of this contract complies with each of these requirements.

[39] When passing the Act, it would have been open to parliament to make it a requirement that if a contract makes allocation of the costs of adjudication, such allocation must meet certain conditions. Such a requirement has been added prospectively by parliament by section 141 of the 2009 Act, but this was not a requirement at the date of this contract (nor indeed is it a requirement until such time as the new statutory provision is brought into effect). In passing the Act parliament did not see fit to include such a requirement, and in these circumstances I agree with the conclusion of HH Judge Mackie QC in Bridgewater Construction Ltd v Tolent Construction Ltd that there should be no interference with this contract. This approach is consistent with the assumption, in a question of statutory interpretation, enunciated by Lord Clarke in Hills Electrical (quoted at [16] above). This, it seems to me, is an important principle which should not be forgotten.

[40] Counsel for the pursuers invited me to take a purposive approach to the interpretation of section 108 of the Act. I am not persuaded that this is appropriate in the circumstances of the present case. The argument which he advanced depends heavily on the reasoning in Yuanda. As senior counsel for the defenders observed, the circumstances of that contract were different in two material respects from the contract in the present case. Counsel for the pursuers relied heavily on the terms of clause 108(2)(a) to the effect that the contract shall "enable a party to give notice at any time of his intention to refer a dispute to adjudication". I do not consider that the present contract disables a party from giving such notice at any time. The provision requiring the referring party to meet not only the adjudicator's fees and costs in their entirety but also both parties' legal expenses may act as a discouragement or disincentive, but it does not amount to a disablement. Indeed, in the present case, it is clear that the pursuers did not consider themselves disabled from referring this dispute to adjudication. The pursuers' argument would require the court to read the words "the contract shall enable a party to give notice" as meaning "the contract shall not offer any discouragement or disincentive to a party". This goes further than adopting a purposive interpretation, and in any event there is no material before me to suggest that this was parliament's purpose or intention. Even if this was the intention of parliament, this would amount to a considerably greater innovation on parties' freedom of contract than that resulting from the language actually used in the Act. I do not consider that such an innovation on parties' freedom of contract is justified by any express term of the Act, nor by clear implication from its terms.

[41] Even if, contrary to the views expressed above, it is appropriate to apply a purposive interpretation to the provisions of section 108 of the Act, I am unable to conclude that a provision such as clause 27(ii) of this contract is directly contrary to the purpose of the Act. There are many circumstances which may amount to a disincentive or discouragement to a party considering referring a dispute to adjudication; examples of some of these were given by senior counsel for the defenders. While these may discourage or deter, they do not disable or prevent. A potential litigant may be discouraged from raising court proceedings because of the risks involved. If he is ultimately unsuccessful he may be found liable in his opponent's expenses as well as his own. Even if successful, it is unlikely that he will recover all his own expenses, which may diminish significantly (or even exceed) the sum awarded to him. He may find it expensive, or even impossible, to enforce any award in his favour. Such results are unsatisfactory, and clearly may cause a potential litigant with a good right of action to think twice about seeking to vindicate it. He may be discouraged or deterred from litigation, but he still has a right to litigate, and his right is not extinguished by such practical considerations. Looking to the language of the Act, I consider that the costs provision in clause 27(ii) of this contract complies with the requirements of section 108 of the Act.

[42] Although not necessary for my reasoning on this point, I find some support for that reasoning in the enactment of section 141 of the 2009 Act. I consider that senior counsel for the defenders' submissions on this point are sound. Reference to the enactment of section 141 of the 2009 Act is a different exercise from that considered in Pepper v Hart. It is, I think, unnecessary to look to the content of the parliamentary debates leading up to the enactment of the 2009 Act, but it is in my view relevant to look to what it was that parliament enacted in 2009 when considering the purpose and scope of the earlier Act. It is to be assumed that parliament knew the existing law when it passed the 2009 Act. If the existing law had the effect contended for by the pursuers, it is difficult to understand why parliament enacted section 141 of the 2009 Act. This reinforces me in the view expressed above, to the effect that the provision relating to costs of adjudication in clause 27(ii) of this contract are compliant with section 108 of the Act.

[43] For completeness, I should observe that the observations in Construction Centre Group Ltd v Highland Council which were relied on for the pursuers apply only to decisions of adjudicators within the scope of their jurisdiction. It is of course the case that courts should lend their assistance to the prompt enforcement of decisions made by adjudicators within their jurisdiction. However, it has been repeatedly pointed out that no such principle applies when the court is considering whether an adjudicator has acted outwith the scope of his jurisdiction.

[44] I now turn to the second part of this question, namely whether the provision in clause 27(ii) which provides that associated financing charges shall not be subject to award is compliant with section 108 of the Act. On this point I consider that the pursuers' submissions are well founded. There is no express exclusion of the right to claim financing charges elsewhere in the contract. Indeed, clause 2(iii) of Part 3 of the contract envisages the possibility of a claim by the Sub-Contractor for an extension of time or for any additional payment or for expense occasioned by or consequent upon any such delay, provided that notice specifying the reason for the delay is timeously given in accordance with the contractual provisions. The contract provides for the recovery of loss and expense, and financing charges are recoverable as a head of damages (F G Minter Ltd v Welsh Health Technical Services Organisation; Ogilvie Buildings Ltd v City of Glasgow District Council). In any event, I am of opinion that the recovery of financing charges falls within the first branch of the rule in Hadley v Baxendale.

[45] It follows that the argument for the defenders that there is no entitlement to financing charges under the contract in any event, and that the provision in clause 27(ii) that financing charges associated with matters being pursued under the adjudication process shall not be subject to award is merely a provision for the avoidance of doubt, is misconceived. I consider that this provision amounts to a clear restriction on the right of a party to give notice of his intention to refer a dispute to adjudication. For this reason it is not compliant with section 108 of the Act.

[46] Senior counsel for the defenders submitted that I should not rule on this point, because the argument was never raised before the adjudicator nor was it determined by him, and there is no mention of it in the pursuers' pleadings. There was only a brief mention of it for the first time in the Note of Argument for the pursuers. I am not persuaded by this argument. This is a point of pure law, and I do not consider that good Scottish pleading practice requires averments to be made about the law. In commercial actions, arguments about the law are quite properly raised for the first time in Notes of Argument - whereas the necessary factual basis still requires to be the subject of averment in the pleadings. Where an argument on a pure point of law does not require factual averments, the absence of such averments cannot be a point of criticism. In any event, it is pars judicis to take note of an apparent lack of competency, such as an excess of, or absence of, jurisdiction. I consider that the defenders have been given fair notice of this line of argument. The fact that it was not argued before the adjudicator is not material. It is a point which goes to the root of the question of whether the contract is compliant with section 108 of the Act, and I cannot ignore it.

[47] I turn to the second question, namely whether, if the adjudication provisions in the contract are not compliant with section 108 of the Act, they are replaced in their entirety by the provisions of the Scheme. The wording of section 108(5) of the Act at first sight might be thought to support the view that if the adjudication provisions in the contract are non-compliant with the requirements of section 108 of the Act, then those provisions are replaced in their entirety by the provisions of the Scheme. That was the construction accepted by the court in Yuanda, and by the various courts of first instance in England referred to at paragraph 58 of that judgement. It is certainly the case that the wording of section 108(5) is more stark than the wording to be found in the provisions for payment, where reference is made to "the relevant provisions of the Scheme" in sections 109(3) and 113(6), and section 110(3) uses the formulation "if or to the extent that a contract does not contain such provision ... the relevant provisions of the Scheme apply".

[48] Is this distinction material? I have reached the conclusion that it is not. The argument that if a contractual adjudication provision is in any respect non-compliant with section 108 then the whole provision falls and the adjudication provisions of the Scheme are brought in "lock, stock and barrel" appears to proceed on the basis that any form of "mixed" procedure would be a recipe for confusion and chaos. It is not clear to me why this should be so in relation to the adjudication provisions in section 108, if it has not proved to be the case in relation to the payment provisions in the following sections. Lord Reed in Ballast does not appear to have envisaged chaos ensuing if a "mixed" procedure is followed, nor does Lord Clarke in Hills Electrical. Nor for that matter does May LJ in Pegram Shopfitters. For my part I see nothing unworkable about a result which incorporates the Scheme provisions only in respect of those contractual provisions which are non-compliant with the requirements of section 108.

[49] I note that the judgment of the Court of Appeal in Pegram Shopfitters was not referred to in the court in Yuanda. In Pegram Shopfitters, May LJ, delivering the leading judgment (with which the other two members of the court agreed) observed (at paragraph 3) that the Act "provides that every written construction contract has to contain the right to refer disputes to adjudication under a procedure which complies with section 108. If the written construction contract itself contains provisions for such a right, those provisions will apply. If and to the extent that it does not, the adjudication provisions of the Scheme for construction contract apply: see section 108(5)." It seems to me that this is, at the very least, persuasive authority against the "lock, stock and barrel" argument.

[50] Lord Reed adopted a similar analysis in Ballast. Although Lord Clarke was considering the payment provisions in Hills Electrical, he expressly agreed with Lord Reed's views in Ballast. It is worth noting that in each of these three cases reference was made to section 114(4) of the Act, and the wording of that subsection clearly played a part in the reasoning of the court in each case. By contrast, there is no reference to, or consideration of the effect of, section 114(4) in Yulanda. This subsection provides that "where any provisions of the Scheme for Construction Contracts apply by virtue of this Part in default of contractual provision agreed by the parties, they have effect as implied terms of the contract concerned." The Act itself therefore requires the court to give effect to the Scheme provisions as implied terms of the contract. This appears to me to sit more readily with the view that an adjudication may be governed partly by expressed contract terms and partly by the Scheme. I consider that the submissions for the defenders on this point are sound.

[51] I also prefer the submissions for the defenders on the third question. The terms of paragraph 2 of Part I of the Schedule to the Scheme apply. No person is named in the contract as adjudicator, and the contract provides for a specified nominating body to select a person. Paragraph 2(1)(b) directs the referring party in these circumstances to request the nominating body named in the contract to select a person to act as adjudicator. The nominating body in this contract is the chairman or vice-chairman for the time being of the Scottish Branch of the Royal Institution of Chartered Surveyors (RICS). The pursuers made no request of the RICS but requested a nomination from the Scottish Building Federation. They did not adopt the mechanism prescribed by the Scheme.

[52] As I have indicated above, I do not consider that the contractual provision falls to be replaced "lock stock and barrel" by the Scheme, but even if I had taken that view, this would not have caused me to alter my answer to this question. Where contractual provisions are non-compliant with section 108 and fall to be replaced by the Scheme, they merely become ineffective - they do not cease to exist. Paragraph 2(1)(b) of the Scheme refers back to the contract for a point of fact, i.e. whether the parties have identified a specified nominating body. The argument that there is no contract to look at, and so no provision for a specified nominating body, is in my opinion without merit. There is a contract. Even if (as I have held) an element of the contractual adjudication provisions is non-compliant, the parties have clearly agreed a specified nominating body. The Scheme expressly directs the referring party to that nominating body, and I consider that the pursuers were obliged to make their request to that nominating body, and not to another adjudicator nominating body. In short, I consider that the mechanism in paragraph 2(1)(b) falls to be applied. The pursuers have proceeded under paragraph 2(1)(c). The appointment of the adjudicator was neither in accordance with the contract nor in accordance with the Scheme.

[53] For these reasons I shall sustain the first plea-in-law for the defenders, repel the pleas-in-law for the pursuers, and grant decree of dismissal.