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The “menace that lies behind any threat to adjudicate” and section 106

Gotch and Gotch v Enelco Ltd was a feisty judgment from Edwards-Stuart J, one I’m sure that lends itself to being blogged about and oft quoted. It concerned an application for declaratory relief. Essentially, the Gotchs argued that the contractor, Enelco, had no right to refer a dispute to adjudication. They claimed the building contract had been amended to exclude adjudication and they fell within the residential occupier exception in section 106 of the Construction Act 1996. It is how Edwards-Stuart J dealt with the matter that I find interesting.

Gotch and Gotch v Enelco Ltd

Enelco was appointed to carry out work on two properties, “The Vinery” and “Woodwell”, which were to be constructed on a plot of land the Gotchs owned.

Exactly what Enelco was contracted to do is unclear from the judgment, but the dispute came about after part of the works were withdrawn from Enelco and given to others to carry out. Enelco claimed this was a repudiatory breach and, as is often the way with repudiatory breach arguments, the Gotchs alleged that Enelco affirmed the contract and so it remained in force.

This all happened in the summer of 2014. It seems the dispute dragged on, such that by March 2015, Enelco was suggesting that the dispute should be referred to adjudication. Rather than using the ANB in the contract (RIBA), four barristers’ names were put forward.

The Gotchs’ response was to argue that the contract had been amended and articles 7 and 8 had been struck out. This meant there was no contractual adjudication (or arbitration) clause and, because of section 106, no statutory right to adjudicate either. (Coincidentally, Jonathan looked at this point recently, following Ramsey J’s judgment in Harding v Paice.)

At this point, Enelco pointed out that Woodwell was being marketed as a year-round holiday let, with a weekly rent of £2,750 – £5,250. This commercial element to the works meant that section 106 could not apply to the Gotchs.

Section 106

To my mind, that all seems fairly clear-cut. The case law on section 106 is relatively well-established following Coulson J’s judgment in Westfields Construction Ltd v Lewis, where he clarified that in terms of an intention to occupy under section 106, what matters is the alleged residential occupier’s intention at the time of the formation of the contract. In that case, the property was going to be let commercially and Coulson J suggested that occupation was not simply something to be assessed as a “snapshop in time”, but required on-going occupation (which may include a future intention to occupy).

Part 8

However, Edwards-Stuart J did not consider whether section 106 applied (or not). Instead, he focused on whether it was appropriate for the Gotchs to seek declaratory relief. This centred on whether the threat actually existed or whether it would serve “no useful purpose” to have a declaration in relation to the right to adjudicate under the contract.

The threat to adjudicate had been made on 20 March 2015. The parties then exchanged correspondence. By 13 April, Enelco had withdrawn its threat. It also said it would not take part in any Part 8 proceedings related to the section 106 residential occupier point. It considered it to be a waste of time and costs and, instead, proposed that the parties litigate the termination/repudiatory breach issue.

The Gotchs’ clearly disagreed with Enelco as they issued their Part 8 application on 16 April. When the application came before Edwards-Stuart J, he refused to issue directions, instead calling for a CMC to “consider the way forward”. That way is for the Part 8 proceedings to become Part 7 proceedings, and to proceed as any case would through the TCC to trial.

No declaratory relief

Pausing there, it surprised me that the question of whether the residential occupier exception applied was not dealt with. I have often written about parties’ applications for declaratory relief and it has always been my view that it is a useful way of having an issue finally determined. After all, the alternative is for the parties to have their adjudication, only for the issue to rear its head on enforcement.

Here, even if Enelco was not keen to adjudicate in April, what happens if it changes its mind? Parties do change their minds, particularly when they want to use adjudication as a negotiating tool.

The “menace that lies behind any threat to adjudicate”

…and that leads me back to Edwards-Stuart J’s judgment. He too was concerned about the threat of adjudication as a negotiation tactic. He:

  • Noted that the issue about the right to adjudicate was effectively a procedural one.
  • Said that Enelco was not being deprived of a substantial remedy, but was being deprived of the possibility of obtaining a temporarily binding decision that could be subsequently reversed (or confirmed) in litigation.

But he went further:

“I am quite satisfied that [Enelco]’s threat of adjudication was a negotiating tactic. Financially, adjudication would not achieve a better outcome for [Enelco] than litigation because, unlike litigation, the adjudicator would have had no power to make the loser pay the winner’s costs. Any recovery by [Enelco], therefore, would always be reduced by its own costs of pursuing the referral. But the other side of this coin is that [Enelco] would have taken no risk of having to pay the [Gotchs]’ costs were it to lose. Consequently in any settlement negotiations this would have made it worth the [Gotchs] while to accept some reduction in their claim to buy off the prospect of having to pay their own costs of any referral to adjudication even if they were successful. That is a menace that lies behind any threat to adjudicate.”

The reference to “menace” made me think of Reservoir dogs, and a track from the film, “I Gotcha“.

MCMS Ltd Matt Molloy

One thought on “The “menace that lies behind any threat to adjudicate” and section 106

  1. Matt may have suggested this judgment would be referred to, and we have already seen the first example of that.

    In GSK Project Management Ltd v QPR Holdings Ltd [2015] EWHC 2274 (TCC), Stuart-Smith J repeated and adopted Edwards-Stuart J’s observations. This was in the context of a hearing to consider the claimant’s costs budget, which the court noted was “grossly excessive, being overstated by almost 100%”, and which it reduced from some £824,000 to just under £423,000.

    In doing so, Stuart-Smith J noted:

    “It is hard to imagine anything more sterile than arguing about a grossly excessive costs estimate. It does not go to the issues, it is wasteful of Court and the parties’ time, and it offends against the obligation to keep costs to the reasonable minimum (both in the fact of the estimate and the need to whittle it down)… It justified the effort and expense of the detailed attack made on it by the Defendant.”

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