Claiming Interest under the Scheme

If you have ever found yourself in an adjudication the chances are that either you or your opposing party will have asked the Adjudicator to decide that interest is paid on overdue payments.
 
 

If you have ever found yourself in an adjudication the chances are that either you or your opposing party will have asked the Adjudicator to decide that interest is paid on overdue payments.

 
Now let’s say that the Scheme for Construction Contracts (England and Wales) Regulations 1998 (“the Scheme”) apply in your adjudication.  Does the Adjudicator have the right to award interest?
 
Before delving a little further into this issue it is probably a good idea to have a look at what the Scheme actually says.
 

"20. The adjudicator shall decide the matters in dispute. He may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication or which are matters under the contract which he considers are necessarily connected with the dispute. In particular, he may -

c. having regard to any term of the contract relating to the payment of interest, decide the circumstances in which, and the rates at which, and the periods for which simple or compound rates of interest shall be paid."
 

 
Many people believed that this provision conferred a power on the Adjudicator to award interest per se and in April 2005 Mr Justice Jackson in the case of Carillion Construction Ltd v Devonport Royal Dockyard [2005] confirmed this view by deciding that paragraph 20(c) of the Scheme created a freestanding right for Adjudicators to award interest.  In doing so he listed 5 reasons for coming to this conclusion.
 
  1. As a matter of impression, this seems to me to be the more natural meaning of subparagraph (c), when read in the context of the whole of paragraph 20 of the Scheme.
  2. In my view it is reading too much into the second and third sentences of paragraph 20 to hold that everything in subparagraphs (a), (b) and (c) must arise from some other express term of the contract.
  3. It makes obvious commercial sense for an adjudicator to have the power to award interest. The Scheme takes effect as a set of implied terms in many construction contracts pursuant to section 114(4) of the 1996 Act. I would certainly expect the Scheme to include a power to award interest.
  4. In my view, the phrase in paragraph 20(c) "having regard to any term of the contract relating to the payment of interest ..." means that if there is any such term, the adjudicator must have regard to it. In other words, the freestanding right conferred by paragraph 20(c) does not override any express term of the contract dealing with interest.
  5. If paragraph 20(c) had the meaning for which [DML] contends, it would be unnecessary. The clause would be saying that which was self-evident."
 

The judgment of Mr Justice Jackson was reviewed in the Court of Appeal in November 2005 and the Court disagreed with that part of the decision relating to interest.

 
Lord Justice Chadwick concluded that no ‘free standing’ power to award interest existed under the Scheme and at paragraph 20(c), finding that:
 
"the adjudicator may decide questions as to interest if, but only if,
 
  1. those questions are “matters in dispute” which have been properly referred to him, or
  2. those are questions which the parties to the dispute have agreed should be within the scope of the adjudication, or
  3. those are questions which the adjudicator considers to be “necessarily connected with the dispute”.
 

Questions which do not fall within one or other of those categories are not within the scope of paragraph 20(c) of the Scheme. There is no freestanding power to award interest.”

 
Pulling the threads together and in conclusion, the current position is that where a contract has no provisions allowing for the payment of interest, an Adjudicator has no “freestanding power” to award it.
 
Peter Vinden is a practising adjudicator, mediator, expert and conciliator. He is Managing Director of Vinden and can be contacted by email at pvinden@vinden.co.uk  
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