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Claiming restitution in adjudication

While the judgment in ISG Retail Ltd v Castletech Construction Ltd is not particularly long, it is interesting case because it concerns some juicy facts and arguments that we don’t often see in adjudication enforcement cases, such as an advance payment, allegations of a total failure of consideration and a claim for restitution.

ISG v Castletech

The parties entered into a contract (although we don’t know the details) and, pursuant to that contract, ISG paid Castletech £35,000 plus VAT. We also don’t know what obligations Castletech agreed to perform, but we do know that ISG alleged it had completely failed to perform them. This meant there was a “complete failure of consideration” and it wanted its money back.

In the notice of adjudication, ISG said it had “suffered loss as a consequence of [Castletech’s] breaches”. Its loss was the amount of the advance payment (plus VAT and interest) and it said that it was entitled to recover this loss in restitution. Castletech argued that restitution was not a remedy available to ISG as it was an equitable remedy. It was not within the adjudicator’s jurisdiction or power because it did not arise “under the contract” (section 108(1) of the Construction Act 1996 and paragraph 1 of part 1 of the Scheme for Construction Contracts 1998).

The adjudicator agreed with ISG, finding that Castletech “had provided nothing of value” to ISG. He ordered Castletech to repay the sum forthwith. It didn’t, hence the case came before Edwards-Stuart J. In those subsequent enforcement proceedings, Castletech maintained its argument that the adjudicator lacked jurisdiction because:

  • He made a decision outside the scope of the dispute referred to him because there was no mention of restitution in the notice of adjudication.
  • The dispute was not a dispute under the contract.

Edwards-Stuart J’s judgment

I want to look at the two most interesting parts in the judgment, which I think are Edwards-Stuart J’s confirmation that:

  • An adjudicator is entitled to order restitution for breach of contract, which is distinct from a claim for damages.
  • It is the nature of the dispute not the nature of the remedy that is important.

Restitution ordered for breach of contract

On the issue of restitution, the judge quoted Moore-Bick LJ in Stocznia Gydnia SA v Gearbulk Holdings Ltd, where he said

“…a buyer who has paid the whole or part of the price in advance is entitled, in the absence of any agreement to the contrary, to recover what he has paid by reason of a total failure of consideration. He therefore has a right to recover in restitution any payments he has made in respect of the price, a right which is quite distinct from any right he may have (if he is the injured party) to recover damages for the loss of his bargain.”

In ISG v Castletech, the judge noted that this was not a claim for damages, it was a claim in restitution. However, it was a claim that was:

“…an ordinary incident of a claim for breach of contract where the breach amounts to a total failure of consideration.”

He went on to note that if the parties did not have a contract, the cause of action would be unjust enrichment.

Applying this to the facts in ISG v Castletech, the judge said:

  • It was clear from the notice of adjudication that the central issue in dispute was whether there had been a total failure of consideration.
  • That dispute arose under the contract, which gave the adjudicator jurisdiction to decide it.
  • The breach was Castletech’s failure to perform, which amounted to a failure of consideration and was a breach of contract.
  • The adjudicator was entitled to order restitution because it was a remedy available for the breach of contract in question (relying on Stocznia v Gearbulk).
  • If there had been no contract then the adjudicator would not have had jurisdiction to make an award of restitution, even though it was the appropriate remedy in law.

I think that this case is an important reminder for parties that, provided there is a construction contract, there is no reason why a claim for breach of contract amounting to a total failure of consideration cannot be made in adjudication, and that an adjudicator will be entitled to order restitution. As Edwards-Stuart J rightly identified:

“There is nothing in the Scheme that deprives an adjudicator of the power to grant relief by way of restitution if that is an available remedy for the breach of contract in question.”

This could be a useful addition to the armoury of referring parties where advance payments have been made, but the party to which payment is made does not perform.

Nature of the dispute not nature of the remedy

On the second  point, the judge noted that it was wrong to confuse the dispute and the remedy:

“The scope of the jurisdiction of the adjudicator is determined by the nature of the dispute identified in the Notice of Adjudication, not by the nature of the remedy.”

I often see jurisdictional challenges made where a responding party concentrates on the redress sought in the notice of adjudication to limit the dispute, whereas Edwards-Stuart J makes clear, the notice as a whole should be considered.

Interestingly, the judge went on to say that once the adjudicator is “seized of the dispute”, he can award any remedy within his power for breach of contract, and that could include repayment of a sum of money. As a total failure of consideration is “almost invariably the result of a breach of contract”, ergo the adjudicator was acting within his power when he ordered repayment of the £35,000.

Wrap-up

So there we have it. A relatively short judgment, but one that raises some interesting issues for parties to adjudication. I can’t see a flurry of claims for restitution as cases involving an alleged total failure of consideration are relatively few and far between, however let’s wait and see…

MCMS Ltd Jonathan Cope

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