Court of Appeal decision on limitation periods could have adverse consequences for contracting parties, says expert

Out-Law News | 12 Dec 2013 | 2:10 pm | 3 min. read

A recent court decision which changed the point at which the six years within which a contractor must begin litigation in the courts starts to run could lead to uncertainty for the successful party to an earlier adjudication, an expert has said.

The Court of Appeal found that the losing party to a dispute resolved through adjudication under the Scheme for Construction Contracts had six years from the date of the adjudicator's decision to challenge that finding in the courts. However, for the successful party to the adjudication, this 'limitation period' runs from the date of the cause of action, it said.

Michael Hopkins, a construction disputes expert with Pinsent Masons, the law firm behind Out-Law.com, said that the decision made "perfect sense" at first glance. However, it could also prevent parties successful in an adjudication from settling contracts until a further six years had passed, he said.

"The decision avoids the potential injustice of a contractor having to pay out on a wrongly-decided adjudication commenced before the six-year limitation period expires under the construction contract, but decided by the adjudicator after that period expires," he said. "At second glance, however, it will certainly give the losing party the opportunity to challenge decisions that they are unhappy with following the expiry of the original limitation period under the construction contract, knowing that any cross-claim by the party that referred the dispute to adjudication will be statute barred."

"Secondly, the original losing party in the adjudication will have a further six years to pursue repayment under the implied term inserted by the Court of Appeal. For accounting purposes, therefore, a winning party to a typical 'final account' type adjudication may well have difficulty in closing out the contract until the expiry of the new six-year limitation that now runs from the date of the adjudicator's decision," he said.

Although he said that the full ramifications of the Court of Appeal's decision could take a number of years to become clear, Hopkins said that the decision could lead to contracting parties amending their dispute resolution provisions "to the effect that the adjudicator's decision itself becomes final and binding unless the party who is not content with the decision disputes it within a short time frame". Doing so would be consistent with the dispute resolution provisions contained in PFI contracts that are subject to adjudication, for example, he said.

Changes to the Construction Act, which took effect from 1 October 2011 in England and Wales, required parties to a construction contract to make adequate provision for adjudication, which is a speedy and less formal means of dispute resolution. If parties do not do so, then the adjudication provisions within the Scheme for Construction Contracts, which supplements the Act, will be inserted as implied terms.

The Court of Appeal's decision in this case relied on the insertion of an additional implied term into the Scheme which giving the losing party, Aspect Contracts (Asbestos) Ltd, the right to have the dispute finally settled through the courts. In addition, if the losing party was successful in the courts it would also be entitled to have the money awarded under the overturned adjudication repaid to it. In doing so, it overturned an earlier High Court decision in which Mr Justice Akenhead ruled that there was no such implied term.

In 2004 the contractor, Higgins Construction, had commissioned Aspect to carry out an asbestos survey. The adjudication provisions in the Scheme applied to this contract. In 2009, a dispute between the two parties over whether Aspect had failed to spot additional asbestos and so caused critical delay to a building project was referred to adjudication by Higgins, and the adjudicator found in its favour. Aspect paid the award, but in 2012 began its own proceedings to overturn the adjudicator's decision. This was more than six years after its alleged breach of contract, but less than six years after the adjudication and Aspect's payment.

According to Lord Justice Longmore in the Court of Appeal, it was clear from the Scheme that the binding decisions of an adjudicator were meant to be temporary, and could later be finally settled through "legal proceedings, arbitration or agreement". It was also essential that if those later proceedings found that an award should not have been paid; there would be some way to recover it. This being the case, the date of the 'cause of action' from which the six-year limitation period ran must be the date that the payment was made, since "the losing party is ... 'entitled' to have the overpayment returned to him".

"If a wily claimant begins an adjudication (as he is apparently entitled to do) shortly before any relevant six year period of limitation expires and himself issues (but does not serve) precautionary proceedings for the full amount of his claim in case he does not get all he wants from the adjudicator, it is asking a lot to expect a perhaps less wily defendant to appreciate that he must immediately himself issue proceedings claiming he is not liable to the claimant, if he wishes to preserve his own position," he said.

"[Higgins] submits that the playing field is, on this view, not a level playing field because the unsuccessful party in the adjudication has six years from the overpayment while the successful party (unless she succeeds on her cross-appeal) must sue within six years of the breach of contract or duty. This is a difficulty more apparent than real because the successful party always knows he has a claim and can easily issue proceedings any time he chooses," he said.