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Adjudication ‘scope creep’ inevitable: excluding defences will breach natural justice28 January 2021

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It is a long-established principle that the Technology and Construction Court of England and Wales (the “TCC”) will summarily enforce an adjudicator’s decision unless (1) there has been a material breach of natural justice, (2) the adjudicator has exceeded his or her jurisdiction or more rarely (3) the decision has been procured by fraud. This reflects a fundamental principle of adjudication that “the decision of an adjudicator is binding until the dispute is finally determined by legal proceedings, arbitration… or by agreement”¹. However, this has often led to an impression by some in the construction industry that the hurdles for resisting enforcement are so high that no matter how they approach their adjudications, the decision will always be enforced. Until now.

"The TCC has confirmed that it will not hesitate to find an adjudicator’s decision unenforceable where there was a clear breach of natural justice."

In Global Switch Estates Ltd v Sudlows Ltd², the TCC has confirmed that it will not hesitate to find an adjudicator’s decision unenforceable where there was a clear breach of natural justice. This decision by O’Farrell J, comes following a similar decision in the TCC last year³, where an adjudicator’s decision was found to be unenforceable because there was an arguable case that it had been procured by fraud (a case in which WFW acted for the successful party, Bester). In these two cases, the TCC has reaffirmed the position that adjudicators’ decisions will be unenforceable where there has been an irregularity, intentional or otherwise.

Case Summary

In this case, the TCC considered an application for summary judgment to enforce an adjudication decision in favour of the employer, Global Switch Estates Ltd (the “Employer”) against the Contractor, Sudlows Ltd (the “Contractor”).

The parties entered into a JCT Design & Build 2011 form of contract to fit out and upgrade the Employer’s specialist data centre in East London. The contract price was to be paid in instalments by the Employer pursuant to an interim application regime in the typical way. The contract entitled the Employer to levy liquidated damages in the event of late completion and provided a mechanism for the Contractor to be granted a “fair and reasonable extension of time for the completion date” in respect of certain events. Delays to the works and disputes between the parties led to a series of adjudications, two being ‘smash and grab’ following the Employer’s failure to issue payment and/or pay less notices and the third resulting in the Contractor being awarded a substantial extension of time for completion of the works.

The fourth adjudication (the “Adjudication”), referred by the Employer, concerned the true value of an interim application issued by the Contractor (“IA27”). Based on the Employer’s valuation of the works as at IA27 and the sums already paid to the Contractor, the Employer’s notice of adjudication (the “Notice”) sought a decision that it was entitled to be paid a little over £6.8m by the Contractor. The Notice also sought to exclude certain issues from the dispute including whether the Contractor was entitled to a further extension of time, loss and expense relating to such extension of time and the Employer’s alleged liability for the cost of remedying defective works.

The Contractor disputed the Employer’s attempt to exclude these issues on the basis that they formed part of the Contractor’s defence to the Employer’s claim as they were integral to the Contractor’s valuation of IA27. The Contractor further argued that the Employer had made an invalid, unjustified and fraudulent call on a bank guarantee and applied for a full refund.

"The court distinguished between circumstances where a responding party “is not entitled to widen the scope of the adjudication by adding further disputes arising out of the underlying contract” and where a responding party may “raise any defences it considers properly arguable to rebut the claim”."

The adjudicator rejected the Contractor’s arguments, concluding that the Employer was entitled to limit the scope of the adjudication and as such, he did not have jurisdiction to consider the Contractor’s defences based on its entitlement to an extension of time, loss and expense and sums relating to the Employer’s liability for remedying defective works. Accordingly, the adjudicator awarded the Employer a little over £5m.

The Contractor refused to pay the amount awarded and the Employer applied to the TCC for summary judgment enforcing the decision.

Judgment

O’Farrell J found that by failing to consider the Contractor’s entitlement to an extension of time, loss and expense and additional payment for rectification costs, which were all necessary elements of the value of IA27, the adjudicator had failed to consider the Contractor’s defences, breaching the rules of natural justice. The adjudicator’s decision was therefore unenforceable. O’Farrell J also noted that in attempting to limit the scope of the dispute, the Employer had misled the adjudicator.

Excluded Matters

Although the court reaffirmed that a referring party is entitled to define a dispute referred to adjudication in its notice of adjudication, the court rejected the Employer’s argument that the Contractor could not rely on the excluded matters as a defence by way of set-off, relying on the judgment of Lord Briggs in Bresco Electrical Services Ltd⁴:

however narrowly the referring party chooses to confine the reference, a claim submitted to adjudication will nonetheless confer jurisdiction to determine everything which may be advanced against it by way of defence, and this will necessarily include every cross-claim which amounts to (or is pleaded as) a set-off”.

The court distinguished between circumstances where a responding party “is not entitled to widen the scope of the adjudication by adding further disputes arising out of the underlying contract” and where a responding party may “raise any defences it considers properly arguable to rebut the claim”. Whilst the former must be the subject of separate adjudication proceedings, the latter is not to be considered as widening the scope of the adjudication but “engaging with and responding to the issues within the scope of the adjudication”. By accepting the Employer’s exclusions, the adjudicator adopted an erroneously restrictive view of his jurisdiction and failed to even consider the defences, which amounted to a material breach of the rules of natural justice.

"This decision re-emphasises the distinction between a responding party (a) seeking to widen the scope of an adjudication by introducing new issues to the dispute and (b) raising defences that engage with and respond to the issues referred."

The Previous Adjudications and the Bank Guarantee

The Contractor raised two other grounds for refusing enforcement: (1) that the adjudicator’s determination in respect of IA27 contravened an award of an extension of time in a previous adjudication; and (2) that they had failed to consider the Contractor’s case that a full refund in respect of the bank guarantee should be set off against sums owed for IA27.

The court rejected both grounds, finding that even if the adjudicator’s decisions in respect of both of these grounds were wrong, they amounted to errors of fact and/or law and therefore would not render the decision unenforceable. O’Farrell J clarified that even if those parts of the decision were severable⁵, in this case the decision would still be subject to the defences of natural justice and so unenforceable.

Lessons Learnt

This decision re-emphasises the distinction between a responding party (a) seeking to widen the scope of an adjudication by introducing new issues to the dispute and (b) raising defences that engage with and respond to the issues referred. The latter is allowed, whereas the former is not.

Most importantly, this case demonstrates that notices of adjudication must be prepared carefully. Although a carefully drafted notice, which incorporates a narrowly crafted dispute seeking a specific declaration, can be effective in preventing ‘scope creep’, if not done properly it may be found to mislead the adjudicator, particularly where it purports, erroneously, to limit the responding party’s available defences. As this decision demonstrates, that will result in an unenforceable, and therefore worthless, adjudicator’s decision.

In addition, it is now clear, following this decision, that adjudication ‘scope creep’ is inevitable where a dispute referred to adjudication concerns payment in respect of the true valuation of an interim payment or the works.

How can WFW help?

Given that ill-conceived and poorly drafted notices of adjudication can lead to jurisdictional disputes and problems with enforcement, it is crucial that specialist advice is sought when preparing such documents. The distinction between validly limiting the scope of a dispute and inadvertently excluding defences available to the responding party is more of an art than a science and therefore appropriate drafting of notices and submissions is now more important than ever. WFW is eminently experienced in assisting with adjudication proceedings, including the investigation, preparation and defence of claims and has the depth of experience required to ensure a successful outcome is achieved.

This article was authored by London Disputes Resolution Partner Ryland Ash, Senior Associate Alexander Creswick, Associate Simon Jennings and Alexander Kyriacou, a trainee in our London office.

[1] Section 108(3) Construction Act 1996 (as amended) requires that a contract to which the Act applies must include a term to this effect.

[2] [2020] EWHC 3314 (TCC).

[3] PBS Energo AS v Bester Generacion UK Ltd & Anor [2020] EWHC 223 (TCC) https://www.wfw.com/articles/landmark-decision-on-resisting-enforcement-of-adjudication-decision-on-grounds-of-fraud/.

[4] Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC25, Lord Briggs JSC

[5] O’Farrell J did not expressly state whether she considered the adjudicator’s decision in this case to be severable but intimated that it was not, without explanation.

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