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When is a third party right not a right?

Posted on 10 February 2015. Source: Nick Lane

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Mr Justice Ramsey’s decision in the case of Hurley Palmer Flatt Limited v Barclays Bank PLC [2014] EWHC 3042 (TCC) is relevant to those wishing to give rights to third parties to enforce construction contracts.  The case concerned the appointment of Hurley Palmer Flatt Limited (“HPF“) as consulting engineer by Barclays PLC.  The appointment contained a provision (clause 14.3) that:

Any Affiliate with a direct interest in the Project shall be entitled to enforce the terms of this Agreement as ‘Client’ always provided that the Consulting Engineer shall be entitled [to] rely on the equivalent defences in respect of such liability which it has against the client.

Barclays Bank PLC (“Barclays“, as distinct from Barclays PLC), which was an affiliate with a direct interest in the project, purported to commence an adjudication against HPF claiming damages for defects in a chilled water system which it considered HPF to be responsible for.  HPF brought Part 8 proceedings, seeking a declaration that the adjudicator lacked jurisdiction because as a third party Barclays had no right to adjudicate under the appointment.

The learned judge decided to grant the declaratory relief sought by HPF.  His principal basis for doing seems to have been as follows:

  1. The appointment contained some rights which were “substantive” and some which the judge characterised “more as procedural rights“;
  2. Clause 14.3 intended the substantive rights, i.e. the rights relating to HPF’s liability, to be enforceable (and he considered that the proviso’s reference to “such liability” supported this), but not the associated procedural rights; and

Therefore an affiliate such as Barclays had no “freestanding right to enforce the adjudication provision in the contract“.

Ramsey J considered that if he was wrong about that, then the clause in the appointment providing for adjudication “would not be applicable to the relationship between Barclays as a third party and HPF“.

However, there are factors which I think render the decision open to question.  Firstly, the wording of clause 14.3 was very clear:

  1. On any ordinary interpretation the provision was clearly intended to grant affiliates the right to enforce any of the terms of the appointment including the term providing for adjudication. The distinction drawn by the judge between substantive and procedural rights in the context of a phrase like “shall be entitled to enforce the terms of this Agreement” was artificial.  The wording did not restrict which rights affiliates might seek to enforce.  More to the point, the question is not here one of procedural versus substantive rights but the available methods of enforcement of a substantive right.  Clause 14.3 did not restrict the methods of enforcement available to Barclays.
  2. Moreover, the express wording “as ‘Client’” (which the judge did not give much consideration to) was clear that affiliates were entitled to enforce the terms as if they were the client, i.e. as if they were the original contracting party, and that would obviously include the right to enforce the terms of the appointment through adjudication. The judge noted that the Scheme is stated to apply to “parties” to a construction contract, and Barclays was not a party.  But in my view the “as Client” wording put Barclays in the shoes of a party and made the same methods of enforcement available to it as would have been available to Barclays PLC.  In addition, the judge’s reliance on the proviso to clause 14.3 (which related not to the terms which the affiliate could enforce but the defences which HPF could raise) rather than the important explanation as to how the affiliate might enforce the terms of the appointment, i.e. as the client, also seems odd.

Secondly, the way in which the judge approached his decision was odd:

  1. He set rather a lot of store on the application of the Contracts (Rights of Third Parties) Act 1999 (“the Act“) and a different clause in the appointment (clause 14.2) which provided that “Save as expressly provided in Clause 14.3 and Clause 10 (Collateral Warranties) nothing in this Agreement shall confer or purport to confer on any third party any benefit or right to enforce any terms of this Agreement“. As to the Act, the judge referred to its Explanatory Notes which state that “It is open to the parties to limit or place conditions on the third party’s right; for example, if he wishes to enforce the right he is to do by way of arbitration and not litigation“.  The judge also said: “I do not consider that there is any such condition on the rights under Clause 14.3 of the Appointment or that there is any limitation on the way in which the rights under Clause 14.3 can be enforced“.  Clearly, the Act envisages that if there are to be any limitations on the third party’s right to enforce then provision should be made accordingly in the contract conferring the right.  However, in this case clause 14.3 did not in any way limit how affiliates might enforce the rights under the appointment.
  2. The judge also placed emphasis on a supposed analogy between arbitration agreements and the right to adjudicate. The judge himself started out by observing that adjudication is unlike arbitration (it is not “a mandatory alternative way in which a party to a contract has to enforce its rights“) and therefore the relevance of arbitration agreements (considered at length by the judge) is doubtful.  The judge seems to have been attracted to the idea that, because section 8 of the Act had to be introduced in order to require a third party to submit to arbitration where a right to arbitrate was being conferred on the third party, without an equivalent provision in the Act for adjudication the third party could not adjudicate.  This comes across clearly from the concluding paragraph (55) of the learned judge’s decision:

This case has raised yet another issue where the position under the provisions of the Arbitration Act 1996 is dealt with but where the position under the deceptively simple ‘Adjudication Act’ in the provisions of Section 108 of the Housing Grants, Construction and Regeneration Act 1996 is not.  It therefore falls to the court, as in the case of other issues such as limitation, to fill in the gaps in the case of adjudication.

But the issue presented by a third party seeking to resolve a dispute through arbitration is that unless both the party to the original contract and the third party submit to arbitration then it has no teeth as an alternative to litigation.  By contrast, adjudication is simply an interim remedy under a construction contract and while HPF would not have been able to adjudicate against Barclays (just as they would not have been able to adjudicate against any permitted assignee of Barclays PLC), if Barclays had obtained an adjudicator’s decision which HPF was not happy with HPF would nevertheless have been able to litigate the dispute afresh against Barclays PLC and the court’s decision would (if different) have dislodged the adjudicator’s.  In other words, adjudication is not a restriction on the right to enforce one’s rights (as arbitration is) but rather a temporary alternative method of enforcement available to (but not imposed upon) a party to a construction contract.  While the point was not considered in the judgment, were one to ask how, if Barclays had been successful and obtained money from HPF which HPF then wanted to recover, HPF would recover it, the answer would presumably be either that HPF would need to recover the same as against Barclays PLC or it would bring a claim in restitution against Barclays.

  1. The judge was not moved by attractive arguments made by counsel for Barclays that the position of the affiliate was analogous to that of an assignee, although there is a clear analogy between assignment and purporting to confer the benefit of a contract, in this case the right to adjudicate, on a third party.

Unless the decision is appealed, it will stand and while it does, if the parties to a construction contract want to confer on a third party the right to adjudicate, they will need to make the provision which confers that right explicit that it carries with it the right to adjudicate.  Take, for example, the wording of the Third Party Rights for Purchasers and Tenants in Schedule 5 to the JCT Standard Form of Building Contract 2011 Edition.  Paragraph 10 provides:

This Schedule shall be governed by and construed in accordance with the law of England and the English courts shall have jurisdiction over any dispute or difference between the Contractor and any Purchaser or Tenant which arises out of or in connection with the P&T Rights of that Purchaser or Tenant.

While the provision does not constrain parties to use litigation (it is simply a governing law provision) because the Schedule does not expressly confer the right to adjudicate on purchasers and tenants, if parties want to confer that right they will need to amend the Schedule to expressly confer the right to adjudicate.  More broadly, this may prove to be a disincentive for funders to accept third party rights schedules in lieu of collateral warranties.

As a result of this decision and that last year in Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited [2013] EWHC 2665 (TCC), the industry seems to be left in a position where:

  1. Parties to collateral warranties which nobody would ever have thought were subject to adjudication are, if they happen to refer to the future performance of construction operations, subject to adjudication.
  2. Whereas, parties upon whom the right to enforce the terms of a construction contract (which need not itself provide for adjudication because it is statutorily implied if it does not) that has been conferred are not allowed to adjudicate unless the instrument conferring the right to adjudicate expressly confers that right.

Ramsey J correctly observed that the court is being required to fill in certain gaps in the Construction Act, but an objective observer might be forgiven for thinking that the way the court is going about doing so is out of touch with the way the underlying documents are drafted in practice.

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