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Mon October 26 2020

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Irish court rejects insolvency fears as an excuse for abandoning the works:

9 Apr 10 The Irish Supreme Court has rejected a contractor's contention that it was justified in abandoning the works because, if it continued, it risked insolvency

“The Irish Supreme Court has rejected a contractor's contention that it was justified in abandoning the works because, if it continued, it risked insolvency. The court also found that the arbitrator hearing the partie's dispute had made errors of law in failing to consider the expert evidence provided and in his conclusions on the law of repudiation.”

Galway City Council, (GCC), and Samuel Kingston Construction (SKC), entered into a contract for the redevelopment of Galway’s Eyre Square for €6.326 million. The contract form was an amended Institute of Engineers of Ireland (IEI) conditions. Work began in February 2004, and was to be completed in August 2005, but it became obvious that there were going to be delays. GCC wanted to avoid disruption to businesses and the public for another Christmas. SKC suffered financial problems throughout the contract period.

The parties discussed the problems and came to an agreement that the contract would be accelerated, the extension of times previously granted to SKC would be rescinded and, in return, SKC would be paid more. However, that agreement was never recorded in writing so that when further disputes arose, there was also disagreement about the terms of the settlement and whether it was a separate, freestanding agreement or a variation of the original contract.

It was common ground that the acceleration agreement provided for SKC to be paid a lump sum of €130,000 and a further sum of €6,802.69 per week to be paid monthly, although the exact basis for these payments was at issue. The parties also disputed whether, in exchange, SKC had been obliged to provide additional resources and if so how many and of what kind. Despite all this, there were further delays, and at a site meeting on 17 May 2005, the parties appeared to have agreed that the original acceleration agreement was no longer achievable. Attempts to re-negotiate it were unsuccessful, and on 4 June, GCC issued certificate no. 16 which withdrew all the sums which had been paid to SKC. On 27 June, SKC stopped work and gave the site keys back to the engineer. The engineer issued a notice under clause 63 of the IEI contract which permitted entry onto the site and expulsion of the contractor in certain circumstances such as bankruptcy or abandonment. Clause 63(6) of the contract states that termination rights under clause 63 should not be exercised unreasonably.

An arbitrator, the second defendant in the current proceedings, was appointed to hear the parties’ dispute. He concluded that there had been a separate acceleration agreement, but it had not required SKC to provide additional resources. GCC had repudiated that agreement and had also invalidly invoked clause 63(1) because, at the time SKC had not been insolvent. The arbitrator also held that GCC had acted unreasonably in purporting to exercise its rights under clause 63, and was, therefore, in breach of clause 63(6).

The parties then engaged in a process under Rule 21(3) of the IEI Procedures where they sought to correct what they contended were “errors” in the award. Section 27 of the Arbitration Act 1954 provides that arbitration awards are final, subject only to certain limited exceptions. . The question of the scope of the arbitrator’s powers under Rule 21(3) was debated in the High Court because the Council challenged the legality of the alteration to the award made by the arbitrator at SKC’s request. The judge ruled that the meaning of “error” in rule 21(3) was broad enough to include any error in the award. This aspect was not appealed.

In his amended award, the arbitrator included some explanatory notes. The award’s findings were essentially the same, but he now accepted that there had been an abandonment by SKC, which whilst it entitled GCC to invoke clause 63(1), he found that GCC’s behaviour had still been “unreasonable” within the meaning of clause 63(6). GCC commenced proceedings seeking to set aside the award, arguing that there were defects in the award which amounted to misconduct or errors of law. GCC argued that, in any event, the award should not be remitted to the second defendant but to a new arbitrator. The High Court rejected GCC’s claim, and it appealed, limiting itself to just four grounds: alleged misconduct, deciding the issue of delay without hearing the evidence of GCC’s expert programmer, concluding that SKC’s withdrawal from the site had not been a repudiatory breach, his decision on the relationship between clause 63 and the common law right to terminate, and, finally, his conclusion that GCC had been in breach of contract when it deducted the sums already certified in accordance with the engineer’s certificate.

DECIDING THE ISSUE OF DELAY WITHOUT HEARING EVIDENCE OF GCC’s EXPERT PROGRAMMER

GCC had retained an expert, Mr. Johnson, who had prepared an 80-page report on the delays to the project. This had been delivered just before the hearing and there had been disputes about its admissibility and whether the issues it referred to had been pleaded. On day 7 of the hearing, GCC had acquiesced to SKC’s request to postpone Mr. Johnson’s evidence. SKC told the arbitrator that it would be making closing submissions in which it would say that there was nothing in the report which should affect the arbitrator’s decision on liability. As GCC’s counsel would be contending that there was, SKC’s counsel suggested that Mr. Johnson’s report and evidence should be left until the arbitrator had made his decision. If the arbitrator were to agree with GCC’s counsel on the question of liability, they would deal with the report and evidence then. The arbitrator had said “yes, I see”, which the court took as a lack of comprehension on his part as to what had been agreed. In the event, when he made his award, the arbitrator referred neither to the report or the agreement as to how it was to be treated. Essentially, it had been left to the arbitrator to decide on whether or not Mr. Johnson would be called.

Although clearly troubled by this point, the trial judge had observed that whilst the explanation given by the arbitrator was “misconceived and even erroneous”, he pointed out that arbitrators have considerable latitude in determining issues of admissibility and were not bound by the strict rules of evidence. On that basis, and because he considered that there was an element of what he described as “backtracking” in the GCC’s approach when it appeared to have left the issue to the arbitrator, the judge considered that although the arbitrator had been in error, the error had not been “so fundamental” as to justify the setting aside of the award thus raising acutely the issue discussed earlier in this judgment.

The Appeal Court disagreed. This had been an issue about misconduct which was a fundamental component of a fair hearing. The parties should have an equal opportunity and facility to present their case. The arbitrator’s approach could not be excused on the basis that arbitrators enjoy latitude on the rules of evidence. If the arbitrator were to make a finding on the delays, then Mr. Johnson’s evidence was clearly relevant. The exclusion of a relevant witness, without addressing the admissibility of that evidence, and maintaining that position on a basis which did not even address the substance of the complaint, is so far removed from the basic procedural fairness that a party is entitled to expect that the decision must be set aside. Although this finding essentially resolved the proceedings, the court went on to consider the other allegations.

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WAS SKC IN REPUDIATORY BREACH

The arbitrator had concluded that SKC had not been in repudiatory breach by leaving the site because, whilst it had been prepared to continue with the original contract, it had been compelled to withdraw from the site because if it continued with the works it ran the risk of becoming insolvent due to GCC’s actions in withdrawing the sums already paid by virtue of certificate no. 16. GCC argued that, even if this were correct, it did not justify the arbitrator’s finding that circumstances can reduce a fundamental repudiatory breach to a mere breach sounding in damages only.

The court agreed. The matters which SKC relied upon did not justify the breach or non-repudiatory breach. The arbitrator had confused motivation with intention and one party’s subjective views with the other’s objective views. The fact that SKC feared insolvency was irrelevant, and was no different from an intention not to perform the contract. The arbitrator’s finding had been an error of law.

THE RELATIONSHIP BETWEEN CLAUSE 63 AND THE COMMON LAW RIGHT TO TERMINATE

GCC submitted that the arbitrator had made another error of law by concluding that he did not need to consider the general law of repudiation because clause 63 of the contract provided a procedure for dealing with the matter. GCC argued that whilst the clause provided a machinery for managing a situation, it did not supersede or exclude common law.

The IEI conditions are commonly used in the construction industry in Ireland, and the court remarked upon the lack of consistency in its terminology. However, the court declined to interpret it as excluding the right to treat conduct falling within it as constituting, where appropriate, a repudiatory breach of the contract. In coming to his conclusion, the arbitrator had had no recourse to the law or the content of the contract. He had somewhat dismissively held that he did not need to consider the law of repudiation because the contract covered it. His analysis of the issue had been inadequate and flawed.

HAD GCC BEEN IN BREACH IN ACTING IN ACCORDANCE WITH THE ENGINEER’S CERTIFICATE

The arbitrator had taken a poor view of the engineer’s actions in certifying the deduction of sums already certified and paid under the acceleration agreement. He had found that withdrawing the payments amounted to a repudiation of the contract. GCC argued that this was an error because under the IEI contract, an employer can only be liable for the acts of an engineer if there has been fraud, collusion or undue influence.

The arbitrator had found that there was an implied warranty by the employer to the contractor that the engineer would perform his contractual duties consciously and independently, so that there was a vicarious liability to the contractor for the engineer’s mistakes. Whilst the High Court had held that this was a non-sequitur, wrong and confused in law, it did not remit the issue because it concluded that GCC had ratified the engineer’s action when it had acted on the certificate. The Supreme Court rejected this analysis. Ratification normally only arises when an agent has acted outside the scope of his authority, and could not be used to impose liability on an employer for acting upon a certificate which had been issued within the engineer’s authority. SKC then proposed that because the acceleration agreement did not contain provision for an engineer, the engineer had been acting under the main contract so that the law relating to the independence of the engineer and the limitation on the client’s liability did not apply. But, said the Supreme Court, the parties clearly acted on the assumption that an engineer’s certificate was required for payments under the acceleration agreement. Besides it appeared that certificate number 16, was in fact issued at least partly under the main contract since it was designed to permit the deduction of the sums previously certified from amounts otherwise payable under that contract. So even this argument did not support the arbitrator’s conclusion, and the issue would be remitted.

THE REMOVAL OF THE ARBITRATOR

The misconduct by the arbitrator alone justified his removal, but the court also took into account the parties’ loss of confidence in him. If the parties were unable to resolve their dispute themselves, it would have to go before a new arbitrator.

Galway City Council v Samuel Kingston Construction Ltd., [2010] IESC 18

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