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Void or Voidable? – The consequences of procedural irregularity in construction adjudication28 September 2020

INTRODUCTION

Adjudication under the Scheme for Construction Contracts (“the Scheme”) has a reputation as a somewhat ‘rough and ready’ method of dispute resolution, enabling disputes to be resolved speedily to minimise disruptions to cash-flow in the construction sector. However, Lane End Developments Construction Limited v Kingstone Civil Engineering Limited¹, a recent decision of the Technology and Construction Court (“TCC”), is a timely reminder that there are some procedural irregularities so fundamental that they can’t be papered over.

"Even adjudication under the Scheme, which abridges or removes some of the strict procedural requirements of litigation, has basic requirements designed to ensure procedural fairness."

The TCC determined that it was essential for the notice of adjudication to be served prior to the request for the appointment of an adjudicator being lodged. To do otherwise meant that the adjudicator did not have jurisdiction to hear the dispute.

BACKGROUND

Lane End was the primary contractor on a housing development in Cheshire. Kingstone was sub-contracted to carry out enabling works for the development under a fixed price contract. The Scheme applied to the contract. Kingstone submitted an interim payment application on 2 March 2020. Lane End did not submit a Pay Less Notice or a Payment Notice prior to the purported commencement of adjudication.

On 20 March, Kingstone submitted a request to the RICS² Dispute Resolution Service for the appointment of an adjudicator. Later that day, during a meeting between the parties, Kingstone served a document headed ‘Notice of Referral’. While its validity was initially disputed by Lane End, it was eventually accepted that this was the notice of adjudication.

This sequencing was inconsistent with the Scheme. Paragraph 2(1) of the Scheme provides that a request for the appointment of an adjudicator is to be made “following the giving of a notice of adjudication” (emphasis added). Paragraph 3 further provides that the request should be accompanied by the Notice of Adjudication.

On 23 March, the adjudicator appointed by RICS advised the parties that he had accepted the appointment. At all times in the correspondence between the parties and the adjudicator following the appointment Lane End reserved its position in relation to the jurisdiction of the adjudicator. However, it did not specifically raise the issue of the timing of appointment relative to the service of the Notice of Adjudication.

The adjudicator awarded Kingstone the full amount of its interim payment application. Following this, Lane End made an application under Part 8 of the CPR for a declaration that the decision should be set aside or not enforced, and Kingstone made a cross claim for payment under Part 7 of the CPR.

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"The TCC found that while the Scheme and the Construction Act should be construed to achieve a harmonious outcome, there was no reason to ignore the clear wording of paragraph 2(1) of the Scheme."

THE DECISION

Lane End’s application to set aside the adjudication award heavily relied on an earlier decision of the TCC, Vision Homes Ltd v Lancsville Construction Ltd³. In that case, while the notice of adjudication was served prior to the request for the appointment of an adjudicator, it was subsequently revised. The TCC found that the effect of revising the notice was to commence a fresh adjudication, and that therefore the appointment request was filed before the notice of adjudication. Not without some misgiving, Mr Justice Christopher Clarke (as he then was) determined that ‘if the provisions which establish the jurisdiction of the adjudicator are not complied with it is irrelevant whether or not the other party has suffered prejudice by that non-compliance’.

Kingstone argued that Vision Homes should not be followed because a subsequent amendment to the Scheme provided that a notice of adjudication could be given ‘at any time’. However, that amendment did not affect the sequencing of the notice of adjudication and the request for appointment. Rather it was designed to clarify that there was no time limit for service of a notice. It did not mean that a notice of adjudication could be served at any time once the adjudication processes had commenced.

Kingstone also relied on an apparent anomaly between the default adjudication regime provided by the Scheme, and the requirements for a dispute resolution clause in the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) – the enabling act for the Scheme. Section 108(2) of the Construction Act provides that if a contract has a dispute resolution provision, it should provide that either party should be able to refer a dispute to adjudication and that the appointment of an adjudicator should take place ‘within 7 days of such notice’ – which means the appointment could occur before the service of the notice of adjudication. However, the TCC found that while the Scheme and the Construction Act should be construed to achieve a harmonious outcome, there was no reason to ignore the clear wording of paragraph 2(1) of the Scheme.

The TCC found no reason to depart from Vision Homes. As the adjudicator had not been validly appointed, there was no jurisdiction to award Kingstone the amount of its interim payment application.

"Procedural defects in a dispute resolution process which give rise to an opportunity to make a relevant election may be waived by the party the procedure is intended to protect."

Waiver and estoppel

Kingstone argued that, in any event, even if there was a defect in the adjudicator’s appointment, Lane End had elected to waive the defect, or alternatively should be estopped from relying on it.

Procedural defects in a dispute resolution process which give rise to an opportunity to make a relevant election may be waived by the party the procedure is intended to protect. However, the TCC found that in this instance there was no opportunity for waiver as the adjudication was a nullity. Because the appointment request had come before the Notice of Adjudication, the nomination by RICS was incapable of conferring jurisdiction on the adjudicator. As the adjudicator was never properly appointed, Lane End was never given an opportunity to make an election.

In any event, the TCC determined that even if Lane End was able to waive the defect in the adjudicator’s appointment, it had not, as a matter of fact, waived its right of election. The TCC found that Lane End was not aware of the necessary facts to make an election and had not participated in the adjudication in a manner inconsistent with the reservation of its right of election.

While the TCC noted that Lane End had not, prior to commencing its Part 8 application, specifically raised its objection to the timing of the Notice of Adjudication, its objection to jurisdiction was specifically related to the validity of the Notice of Adjudication, and the validity of the adjudicator’s appointment – it was not merely a blanket reservation of rights in relation to jurisdiction. Such a broad reservation would not be successful in an adjudication. In Bresco Electrical Services Ltd v Lonsdale⁴, the Court of Appeal made clear that the purpose of the Scheme, to facilitate the speedy resolution of disputes in the construction industry, would be ‘substantially defeated’ if a party could make a broad and non-specific reservation of rights, participate fully in the adjudication, and then challenge the validity of the adjudication on a technicality which it uncovered after the conclusion of the adjudication. This case is therefore a useful reminder that a reservation of rights in an adjudication must be ‘appropriate and clearly’ worded, with as much specificity as possible. Otherwise, it may not be effective.

Kingstone’s estoppel argument, relying on four alternative species of estoppel⁵, was also adjudged to be without foundation. Estoppel can be invoked by an aggrieved party who acts to their detriment based on: a false understanding created or encouraged by another party, or contrary to a common belief or shared assumption of the parties. However, the TCC was unable to identify any misapprehension of Lane End’s position on Kingstone’s part, or any promise, representation, acquiescence or shared understanding by Lane End which Kingstone relied on to its detriment.

"Without the strict sequencing rules provided for in the Scheme, a party seeking an adjudication could attempt to line up a particular adjudicator before filing a notice of adjudication to secure a more favourable outcome."

Other Issues

In addition, the TCC ruled on two auxiliary issues, unnecessary for the disposal of Lane End’s application, but which raise interesting questions of law:

  • The TCC excluded from evidence a covert recording of the meeting between the parties on 20 March, when Lane End was served with the Notice of Adjudication. Kingstone said that the recording proved that Lane End knew the request for the appointment of an adjudicator preceded the Notice of Adjudication. This was relevant to the question of whether Lane End had waived its right to elect to rely on the defect in the adjudicator’s appointment. Highlighting the complex balancing act involved when a party seeks to rely on a covert recording, the TCC excluded the evidence on the basis that it was of limited probative value; gave rise to procedural unfairness, having only been disclosed to Lane End late in the proceedings; and because it may have interfered with the recorded subjects’ rights under the Human Rights Act 1998 and/or the GDPR. While covert recordings are not, in all cases, inadmissible, the TCC is under an obligation to exercise its discretion to admit evidence compatibly with (or at least cognisant of) the European Convention of Human Rights, the Human Rights Act 1998 and the GDPR. If a party wishes to rely on a covert recording, this decision demonstrates that it should be disclosed as early in proceedings as possible to ensure that those issues can be fully ventilated.
  • During the adjudication, after receiving an out of office notification from Lane End, the adjudicator purported to terminate the adjudication by return email to Lane End, but not to Kingstone. The adjudicator subsequently changed his mind and resumed the adjudication. Lane End contented, as an alternative to its main argument, that the adjudicator had vacated his office, rendering any subsequent decision a nullity. The TCC noted that the Scheme provides that an adjudicator’s resignation is only valid if notice in writing is given to both parties. Therefore, the termination of the adjudication was ineffective.

KEY TAKEAWAYS

This case illustrates the importance of attention to detail when it comes to commencing any type of dispute resolution. Even adjudication under the Scheme, which abridges or removes some of the strict procedural requirements of litigation, has basic requirements designed to ensure procedural fairness. Without the strict sequencing rules provided for in the Scheme, a party seeking an adjudication could attempt to line up a particular adjudicator before filing a notice of adjudication to secure a more favourable outcome.

The line between procedural irregularities in an adjudication which can be overlooked, and those which are essential, is one that is still evolving. For example, incorrectly naming a party to an adjudication is a defect which doesn’t invalidate an adjudication (see our article on this subject here). Ultimately, whether satisfaction of a procedural requirement is necessary to confer jurisdiction will be resolved as a question of statutory construction.

[1] [2020] EWHC 2338 (TCC).

[2] Royal Institute of Chartered Surveyors.

[3] [2009] EWHC 2042 (TCC).

[4] [2019] EWCA Civ 27.

[5] Promissory estoppel, estoppel by acquiescence, estoppel by representation and estoppel by convention.

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