Practical Law

The idiom “all duck or no dinner“, if you’re not familiar with it, means “all or nothing“. I once worked for a partner that was quite fond of using it, particularly in the context of limitation periods and time bars: if you’re in time, your clients will usually have a smorgasbord of dispute resolution options open to them. If you’re out of time, they go hungry.

Construction contracts often include clauses requiring a party to notify the other party within a specified time if it wishes to make a claim. In some cases, time-bar notice provisions are more than a mere obligation, rather they are a condition precedent to a valid claim.

We are frequently advising clients about conditions precedent in construction contracts, particularly in relation to timely notices for extensions of time and/or loss and expense (for example, under a JCT contract) and compensation events (for example, under an NEC contract). But what about notice requirements for referring a dispute to adjudication? We can often fall back on the position under the Housing Grants, Construction and Regeneration Act 1996 (Construction Act), being that disputes may be referred to adjudication “at any time”. If the Construction Act doesn’t apply, the parties may agree to limit that right.

It is in the latter context that I heard my former partner’s voice in my head as I read Sitol UK Ltd v Finegold. This case is about referring a dispute to adjudication in accordance with the notice provisions in an NEC3 contract. It demonstrates that the courts, albeit reluctantly, may bar an otherwise valid claim on the basis that it was referred to adjudication out of time.

In this blog, I will take a look at this case and consider similar time-bar provisions in referring disputes under the NEC4 engineering and construction contract (ECC), in circumstances where the Construction Act doesn’t apply.

The background

Mr and Mrs Finegold engaged Sitol, a specialist tiling and ceramic company, under what I understand to be a NEC3 engineering and construction short contract (ECSC) to undertake tiling work at their home. Sitol had commenced proceedings in the TCC to enforce an adjudication decision against the Finegolds for outstanding payment under the contract and adjudicator’s fees in the amount of approximately £86,000. Relevantly, the Finegolds argued that there should be no summary judgment because the adjudication was referred out of time.

The dispute resolution regime

A few points about the dispute resolution clause in Sitol’s NEC3 contract. First, Part II of the Construction Act didn’t apply, presumably because the Finegolds were residential occupiers. This meant that the requirement that the contract allowed the parties to refer a matter to adjudication “at any time” didn’t apply.

This form of NEC contract provides different dispute resolution procedures depending on whether the Construction Act applies. As it didn’t apply here, Justice Waksman referred to the parties’ right to refer a dispute to adjudication under clause 93.3(1):

“A party may refer a dispute to the adjudicator if the party notified the other party of the dispute within four weeks of becoming aware of it”

Arguably, this meant that notifying the other party of the dispute within the stipulated time period was a condition precedent to a valid claim (more on this later).

The third point is that a party could only refer a dispute to arbitration if it had first been referred to adjudication. Hence, all duck or no dinner.

No dinner

The question for the court was whether Sitol had referred the dispute to adjudication in accordance with the notice provisions. That is, whether it had provided notice to the Finegolds within four weeks of becoming aware of the dispute.

Interestingly, from the judgment it appears that Sitol did not dispute that timely notice was a condition precedent to the claim. Lord Salmon’s oft-cited test in Bremer Handels GmbH v Vanden-Avenne Izegem PVBA [1978] 2 Lloyd’s Rep. 109, provides the relevant test, being that the contract:

• States the precise time within which the notice is to be served; and
• Expressly states that unless the notice is served within that time, the claiming party will lose its rights under the clause.

On the wording that Waksman J referred to alone, the clause would be difficult to construe as a condition precedent. The answer is found in the final part of the clause, which says:

“If a disputed matter is not notified and referred within the times set out in this contract, neither Party may subsequently refer it to the Adjudicator or the tribunal.”

Having accepted that clause 93.3 constituted a valid time-bar, compliance with it was a purely factual question. Waksman J hesitated to consider in detail what constitutes awareness for the purpose of the clause, but concluded that it had to be determined objectively. On the evidence, Sitol became aware of the dispute when it received a letter from the Finegolds’ lawyers disputing the existence of a contract between the parties.

That letter was received more than four weeks before the notice of adjudication was served. Somewhat reluctantly, Waksman J held that the notice was therefore issued out of time:

“On that basis, then, I have come to the conclusion (with no great enthusiasm, I should add), that this adjudication was started too late. It may be regarded as a technical point, but I have to apply the law, I am afraid. The analysis and the correspondence here I am afraid only points one way. Therefore, the second defence succeeds.”

Waksman J’s sympathy is understandable: the failure to give timely notice barred Sitol’s rights to refer the matter to both adjudication and arbitration.

Wider application

This was a difficult outcome for Sitol. However, this only serves to strengthen the key point: it is crucial to review the disputes regime in the contract closely, take note of any time bars and ensure that they are complied with as far as possible – particularly if the Construction Act doesn’t help to save your bacon. Such contracts can include residential contracts (as in Sitol), supply contracts, drilling or extraction of oil or natural gas or international contracts.

How unique was the situation in Sitol? The NEC3 ECSC is deliberately drafted for use in straightforward work that imposes low risk on both the employer and contractor alike. Therefore, the dispute resolution regime is intended to encourage the parties to resolve disputes themselves. Presumably, the strict operation of clause 93.3 as barring a valid claim is not intended to lead to grave injustices.

What about other NEC forms of contract that may apply in more complex, higher risk situations? For example, take the NEC4 ECC Option W1, as retained from NEC3 (adjudication then tribunal) and the new Option W3 (a Dispute Avoidance Board (DAB) then tribunal).

In the case of adjudication under Option W1, a party issues a notice of adjudication within two weeks of producing the list of issues, or the date when it should have been produced, with the dispute referred to the adjudicator within one week of the notice. Option W1.3(2) contains effectively the same time bar as the NEC3 ECSC:

“If a disputed matter is not notified and referred within the times set out in the contract, neither Party may subsequently refer it to the Adjudicator or the tribunal.”

On the basis of Sitol (and, arguably, the previous TCC decision in Costain Ltd v Tarmac Holdings Ltd), this would also operate as an enforceable time-bar. It could apply in any of the higher risk scenarios mentioned above.

In the DAB context in Option W3, the time bar is expressed differently. Potential disputes are referred to the DAB between two to four weeks after notification of the issue, after which the DAB prepares a recommendation for resolving the potential dispute. If a party is dissatisfied with that recommendation, it may notify the other party that it intends to refer the dispute to the tribunal. Note that this option also provides a time bar, but expresses it differently:

“The dispute is not referred to the tribunal unless this notification is given within four weeks of notification of the Dispute Avoidance Board’s recommendation.”

Reasonable minds may differ as to whether this would be enough to operate as a condition precedent, and bar a claim if it was missed. In my view, while the drafting is different from Option W1 and doesn’t express a bar in equivalently clear terms, it probably still operates as a condition precedent. Read in the context of Option W3 as a whole, it’s difficult to arrive at a different conclusion.

In any case, Sitol provides a timely reminder that courts and arbitrators will be forced to uphold time bars if that is what the parties clearly agreed, despite their general reluctance to do so. The similar language in the NEC4 ECC gives food for thought in the context of higher risk, more complex contracts.