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Court of Appeal finds implied term in construction contract

The Court of Appeal handed down its judgment in Aspect Contracts (Asbestos) Ltd v Higgins Construction plc on 29 November 2013. The judgment determines by what cause of action and by what date a paying party that is dissatisfied with the substance of an adjudicator’s decision needs to issue proceedings to seek to recover that payment.

The issues

Adjudication is designed to aid cash-flow. In most cases, the party seeking payment does not wait until the end of the limitation period to commence an adjudication. Whatever the outcome of the adjudication, either party is then able to refer the underlying dispute to a court or arbitrator for final determination without questions of limitation arising.

However:

  • Is it necessary for a paying party to do so or does it have a separate right to seek repayment that accrues only on payment?
  • Does the paying party have six years from payment to bring its claim to court?
  • Can a paying party wait to issue such claim until the limitation period applying to the underlying claim has expired and thereby prevent the receiving party from bring a cross-claim?

The parties’ positions

Aspect asserted that, in addition to any rights in respect of the underlying dispute, it could rely on an implied term in its construction contract with Higgins that a paying party could seek recovery of a sum paid following an adjudication, and that this cause of action accrued on payment. The benefit to Aspect of doing so was that it could wait until Higgins’ counterclaim was statute barred before issuing those proceedings.

Higgins argued that such a term should not be implied into the contract. It contended that:

  • The parties’ rights to have a dispute determined by the court are preserved by, but do not stem from, the Construction Act 1996 (and the LDEDC Act 2009).
  • The Acts and the Scheme for Construction Contracts 1998 do not alter or extend the limitation periods for bringing a dispute before the court.
  • There is no basis for implying such a term as both parties are adequately protected by existing rights in relation to the underlying dispute.

It argued that there was therefore no gap in the contract to be filled by an implied term and that, in any event, such a term was not “obvious” or “necessary” and did not accord with business common sense, fairness or wider policy considerations (as set out by Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd).

Aspect relied on the only other decision on the issue, Jim Ennis Construction Ltd v Premier Asphalt Ltd. In that case, the court held that there was such an implied term. However, in doing so, it had proceeded on the basis of crucial concessions and without oral argument. Aspect v Higgins is the first occasion when the court has heard full argument.

Akenhead J’s first instance decision

Akenhead J agreed with Higgins and held that there was no gap. Aspect could have:

  • Sought a negative declaration at any stage after purported performance of the contract.
  • Brought the dispute to court for final resolution within the limitation period. It was unnecessary to imply a term to ensure that it could do so.

Such a term did not satisfy the criteria for implying a term into a contract. It was not:

“…reasonable, equitable or necessary to make the contract work (business efficacy) and it does not go without saying.”

Further, having regard to the Parliamentary debates, there was nothing to suggest that:

“Parliament meant in effect to create in every construction contract incorporating the Scheme an implied term along the lines suggested… I can not see any overriding policy reason why such a term should be implied.”

Akenhead J held that the situation was quite different from that where a successful party sought to enforce an adjudicator’s decision. In that case, there was a new cause of action in favour of the successful party to compel the losing party to comply with the decision. It did not follow that a new cause of action arose in favour of the losing party.

In considering issues of fairness, the court noted that Higgins did not refer the matter to adjudication at the end of the limitation period. Aspect paid the sum that the adjudicator, Rosemary Jackson QC, awarded in full. At that stage there were still some months until the limitation period for both contract and tort claims expired. However, Aspect took no action. As the court noted, Aspect “chose not or otherwise failed to initiate court proceedings” for a further two and a half years. By that time, limitation in respect of the underlying contract and tort claims had expired. Aspect contended that, as a result, although it could bring proceedings to recover the amount that it had paid, Higgins could not counterclaim for the balance between the sum it had sought in the adjudication and the sum awarded. The court noted that such a situation could arise relatively commonly and questioned whether parties must be taken to have agreed such consequences.

The court also noted that if such a term was implied, in theory a claim could be brought more than 12 years after the original cause of action arose (depending on the date of payment) with, on Aspect’s case, the burden of proof nonetheless being on the defendant. It noted Higgins’ argument that an adjudication would have the effect of potentially postponing final determination of a dispute, contrary to the intent and policy of the Construction Act 1996.

The court also noted the difficulty where an adjudication involved claims and cross-claims if “the paying party” was taken to mean the party that paid the net amount due.

The court rejected Aspect’s argument that an implied term was necessary to protect Aspect’s human rights. Article 6(1) of the European Convention on Human Rights requires the state to provide a right to challenge an adjudication decision before a judicial body with full jurisdiction. The court held that there was sufficient access, as both parties were, before limitation expired, free to bring the dispute to court for final resolution.

In the alternative, Aspect sought repayment on the basis of restitution. The court rejected this claim, accepting Higgins’ argument that any right to repayment could only arise if and when the court had determined the dispute in Aspect’s favour. To do so the court needed to be seised of the claim. If there was no implied term, it could not make this determination. The restitutionary claim simply fell away.

Court of Appeal’s decision

Aspect appealed the decision as to the existence of an implied term and the Court of Appeal allowed the appeal. In a short judgment given by Longmore LJ, the court suggested that the term may be express. However, there is no clear finding to that effect. The reading of the Scheme for Construction Contracts 1998 also relied on a misquotation of paragraph 23(2).

The court considered that three matters pointed to an implied term, despite the existence of a right to a negative declaration:

  • The onus on a potentially defending party to claim against a possibly “wily” claimant. There was no apparent recognition that a referring party cannot commence an adjudication without a dispute existing. For a dispute to exist, the other party must be at least aware of it. There is no opportunity for a “wily” claimant to ambush a defending party as the Court of Appeal supposed. Further, the term implied would be far wider than necessary to address any such very narrow gap.
  • Apparent uncertainty as to whether the court had a remedial jurisdiction to order repayment. Akenhead J had found that such a jurisdiction existed and there was no appeal on that point. The Court of Appeal did not proceed to decide whether there was such a jurisdiction, or what its juridical basis might be, but held the uncertainty to be relevant to whether a term should be implied.
  • Lack of clarity over the applicable time limit. The court did not reach a decision on the applicable time limits but assumed the position was uncertain. Notably, the court in its discussion of time limits referred to causes of action accruing on breach, whereas a cause of action in tort would accrue on the occurrence of damage. It did not address any of the authorities cited on the limitation periods applying to declarations.

Given these matters, the court found the term was sufficiently “necessary” to satisfy the Belize test.

The court did not address what the precise nature of the dispute brought under such an implied term would be or which party would bear the burden of proof. It also did not address the difficulty that would arise where an adjudication involved claims and cross-claims and whether “the paying party” only referred to the party that paid the net amount, as found by the adjudicator.

Significance of the decision

Aspect did not argue that the term should be implied due to any facts specific to this case. The term will therefore be implied not just into the contract between Aspect and Higgins, but into every construction contract under the Construction Act 1996. This decision is therefore of significance for every construction contract.

Appeal to the Supreme Court?

Given the Court of Appeal’s reasoning, it is anticipated that these issues will need to be revisited either in the Supreme Court or in another case.

Isabel acted for Higgins Construction plc, both at first instance and in the Court of Appeal, and discussed Akenhead J’s judgment in Blog post, No implied term extending limitation period following adjudicator’s decision.

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