Supreme Court rules on overpayments
Louise Elmes examines the implications of a Supreme Court decision that is applicable to all contracts that come under the 'Construction Act'. Successful parties in particular could be affected by it.
- The party which makes a net payment pursuant to an adjudication decision (payor) has a right to a final determination of the dispute and to recover any overpayment made as a result of the decision on an implied contractual or restitutionary basis
- The payor has six years from the date of the net payment to do so
- If the party receiving a net payment (payee) wishes to pursue payment additional to that ordered in the adjudication, it must do so within the limitation period of the original causes of action
- The payee should consider obtaining the payor's written agreement that the adjudication decision is binding, or commence proceedings seeking a final determination of the dispute within the limitation period on the original causes of action
On 17 June 2015 the Supreme Court decided by which cause of action, and by when, an unsuccessful party to an adjudication may seek to recover any overpayment it considers it has made as a consequence of an adjudication decision.
The decision, Aspect Contracts (Asbestos) Ltd v Higgins Construction plc  UKSC 38, is of particular significance to adjudication under the Scheme for Construction Contracts, and is applicable to every construction contract to which the Housing Grants, Construction and Regeneration Act 1996 (the HGCRA 1996) applies and in which the adjudication provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the Scheme) are implied. The decision has significant practical consequences, particularly for the successful party to the adjudication. It is also of interest in general as to the implication of terms, declarations of non-liability and restitution; however, this article looks at the significance for adjudication.
Aspect Contracts (Asbestos) Ltd (Aspect) is a company which specialises in the provision of asbestos management services including asbestos surveys. Higgins Construction Plc (Higgins) is a substantial UK construction company which specialises in the construction and refurbishment of community housing, education and healthcare properties.
Higgins was considering whether to enter into a contract with Notting Hill Housing Trust for the demolition and redevelopment of the Ivybridge Estate, Hounslow, London. As part of this consideration, in March 2004, Higgins engaged Aspect to carry out an asbestos survey and provide a survey report. The contract did not comply with the HGCRA 1996and the adjudication provisions of the Scheme were implied into the contract. Aspect carried out the survey on 23 and 24 March 2004, sent its report to Higgins on 27 April 2004 and raised its invoice to Higgins on 30 April 2004. Higgins paid the Invoice on 24 June 2004. In October 2004, Higgins entered into a design and build contract with Notting Hill Housing Trust for the demolition and redevelopment of the Ivybridge Estate. On 9 December 2004, Higgins entered into a sub-contract with Falcon Refurbishment and Demolition (Falcon) for asbestos removal, demolition and site clearance. In February 2005, Falcon allegedly discovered asbestos containing material additional to that identified in the Aspect report in the apartment blocks at the Ivybridge Estate. Higgins agreed with Falcon additional payment for the removal of the additional asbestos containing materials. Falcon removed such additional materials and Higgins paid Falcon for this work. Higgins alleged that Aspect should have identified the presence of the additional asbestos containing materials and that 17 weeks' critical delay and additional costs were attributable to their discovery and removal. Aspect denied liability. A dispute accordingly arose between Higgins and Aspect.
Higgins referred the dispute to adjudication on 26 June 2009 (approximately 5-51/2 years after Higgins causes of action accrued) contending that Aspect was in breach of its contractual and/or coterminous tortious duties to exercise reasonable skill and case and claiming payment of the sum of L822,482.67 in damages and interest. The adjudicator issued her decision on 28 July 2009 and ordered Aspect pay Higgins the principal sum of £490,627, plus interest (£166,421.05 at the date of the decision) and the adjudicator's fees (£8,750 plus VAT). Pursuant to that decision, Aspect paid Higgins £658,017 on 6 August 2009. Aspect commenced these proceedings on 3 February 2012 (approximately 8-81/2 years after Higgins' causes of action accrued and 21/2 years after Aspect's payment pursuant to the adjudication decision) to recover the sum it paid to Higgins on 6 August 2009.
The parties' arguments
Aspect denies that any sum is due to Higgins in the adjudication, seeks a declaration that it is not liable to pay damages and/or interest to Higgins in the amount decided by the adjudicator or at all and repayment, or alternatively restitution, of the sum of £658,017 or such other sum as the court determines, interest and costs. The basis upon which Aspect alleges to be entitled to such a final and binding resolution is, relying, inter alia, upon jam Ennis Construction Ltd v Premier Asphalt Ltd  EWHC 1906 (TCC) and para 23(2) of the Scheme—which provides as follows:
'The decision of the adjudicator shall be binding on the parties, and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration (if
the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement between the parties.'
—the implication of the following term:
'... that in the event that any dispute between the parties was referred to adjudication pursuant to the Scheme and one party paid money to the other in compliance with the adjudicator's decision made pursuant to the Scheme, that party remained entitled to have the dispute finally determined by legal proceedings and if or to the extent that the dispute was finally determined in its favour, to have that money repaid to it.'
—which has the effect that Aspect has six years from the date of payment pursuant to the adjudication decision to bring its claim.
Higgins' primary case is to deny the implication of such a term; assert that Aspect's claim for declaratory relief is brought out of time and should fail by reason of limitation, deny that Aspect is entitled to restitution and bring a counterclaim for £331,855, being the balance of sum it claimed in the adjudication and interest. Aspect contends that Higgins' causes of action on its counterclaim accrued in or around 2004 or 2005, therefore should fail as the counterclaim is brought out of time. Higgins' alternative case is that on the basis Aspect has six years from the date of payment pursuant to the adjudication decision to bring its claim, Higgins should have the same period to bring its counterclaim for the remainder of the sum claimed in the adjudication.
At first instance
Preliminary issues were ordered. In respect of the claim, Akenhead J held that: (a) there is no implied term as pleaded: Jim Ennis is distinguished on the basis that a number of relevant concessions were made that are not made in this case; para 23(2) of the Scheme did not provide a 'platform' for the implication of a term; the term sought to be implied does not meet the requirements of implication as it is not 'reasonable, equitable or necessary to make the contract work (business efficacy) and it does not go without saying' ¬it was not necessary because Aspect could have sought a declaration that it was not liable at any time after performance; (b) the cause of action for a negative declaration is in contract and tort, and the limitation period for a cause of action based on a contract not under seal is six years from the latest date when the contract was performed; and (c) there is no separate cause of action in restitution in these circumstances: Aspect could not get any money back unless and to the extent that it secured an appropriate negative declaration as to liability or quantum.
Accordingly, Akenhead J held that Aspect's claims were barred by limitation and stated that it also follows that Higgins' counterclaim for the balance of its loss is also barred by limitation and dismissed the claim and counterclaim. The parties sought and obtained leave to appeal to the Court of Appeal.
in the Court of Appeal
Three preliminary issues were argued before the Court of Appeal: (1) was it an implied term of the parties' contract that an unsuccessful party to adjudication would be entitled to seek a final determination by litigation and, if successful, recover payment made? (2) If there was such an implied term, what was the applicable limitation period? (3) What was the limitation period applying to Higgins' counterclaim?
The Court of Appeal allowed Aspect's appeal and dismissed Higgins' cross-appeal. Longmore 14 (with whom Rimer and Tomlinson LJJ agreed) held in respect of each preliminary issue that: (1) it was an implied term — it is implicit within para 23(2) of the Scheme that any overpayment is recoverable, as such the term sought to be implied 'says no more or no less' than para 23(2) of the Scheme; (2) the limitation period is six years from payment —Aspect's claim was therefore in time; and (3) the limitation period was six years from alleged breach — Higgins' counterclaim was therefore out of time. Higgins sought and obtained leave to appeal to the Supreme Court.
In the Supreme Court
In addition to the three preliminary issues argued before the Court of Appeal, the Supreme Court also considered: (4) Did Aspect have a claim in restitution?
The Supreme Court dismissed Higgins' appeal. Lord Mance (with whom Lord Wilson, Lord Sumption, Lord Reed and Lord Toulson agreed) held that: (1) there was such an implied term (arising from the Scheme (albeit one different to that pleaded); (2) the applicable limitation period was six years from the date of payment; (3) the limitation period applying to Higgins counterclaim was six years from alleged breach or
damage accordingly; and (4) Aspect did have a claim in restitution. The court also has power to order payment of interest on any overpayment found to have been made.
What is the effect of this decision?
This decision means that: (i) a party which has made payment pursuant to an adjudication decision (the payor) has a right to a final determination of the dispute referred to adjudication and to recover any such overpayment on an implied contractual or restitutionary basis; (ii) the implied term is: A paying party has a directly enforceable right to recover any overpayment to which the adjudicator's decision can be shown to have led, once there has been a final determination of the dispute'; and (iii) this right accrues on the payor making payment pursuant to the adjudication decision and the payor has six years from that date of payment to commence proceedings to do so.
The Supreme Court clarified that what the court will do on such an action is to determine the parties' rights and liabilities as they stood when they were adjudicated upon by the adjudicator by looking at the whole of the dispute referred to adjudication, not simply such points on which the payee was successful. However, in addition, Lord Mance indicated that there may be circumstances where it is appropriate to take account of circumstances which have arisen after the adjudicator's decision where they may mean that the payment ordered by the adjudicator is more than was justified in light of subsequent events. It is important to note:
· the implied term and corresponding right is limited to the net payor. This is even so where the dispute before the adjudicator included a number of claims and cross-claims upon which both parties were successful to an extent;
· if the payee wishes to pursue payment additional to that ordered in the adjudication, it must do so within the limitation period of the original causes of action;
· in order to avoid uncertainty, the payee should consider obtaining the payor's written agreement that the adjudication decision is binding or commence proceedings seeking a final determination of the dispute within the limitation period on the original causes of action; and
· in any proceedings for recovery of an overpayment, the payor should plead a true defence including any set-off or it will be left simply relying on the payee failing to prove its original claim.