Adjudication update 5

Predicting whether a court will enforce an adjudicator's decision is far harder than predicting whether England will win the World Cup. However, in both contexts, it's unwise to ignore who's refereeing.

Take eight of the most notable judgments on adjudication in recent months. They highlight the competing policies affecting the courts' decision-making. On the one hand there are those (who we will call "the Pros") who emphasise the overriding goal of the adjudication and payment regimes in the 1996 "Construction Act"; namely, to improve cash flow in the industry and to resolve disputes in a speedy, cost effective manner. On the other hand there are those ("the Cons") who seem more concerned by how adjudication has turned out in practice: the size, complexity and cost of disputes being referred to adjudication, ambush tactics, the rough and ready nature of the process and that the adjudicator's decision is often effectively treated by the parties as being final.

By chance, only four "players" put in an appearance:

• LLoyd QC (who as we will see, "scores" twice for the Cons)
• Seymour QC (two for the Pros, one for the Cons)
• Court of Appeal (one for each camp)
• Inner House of the Court of Session [a Scottish court of appeal] (one for the Pros).

It's a game of two halves -avoiding or limiting the enforcement of the adjudicator's decision

Score: Pros 1 (Judge Seymour) - Cons 1 (Judge LLoyd)

As the wealth of case law demonstrates, it's one thing to have an adjudicator's decision in your favour, quite another to enforce it successfully. A particularly important question, with far-reaching implications, which has come forward, is whether - by serving an effective section 111 (withholding) notice - monies can be withheld (e.g. LADs) against an adjudicator's decision (say, that an employer makes an interim payment to a contractor), where the set-off, counterclaim or abatement has not been adjudicated upon.

In David McLean Housing Contractors Ltd v Swansea Housing Association Ltd (27 July 2001) Judge LLoyd QC held that an adjudicator's decision has contractual -not statutory - force. The adjudicator only decides the dispute under the contract which is referred to him and the parties' other contractual rights (including to raise a set-off, counterclaim or abatement) are otherwise unaffected by his decision. Consequently, the employer could deduct LADs from the sum due under the adjudicator's decision, because a compliant section 111 notice had been given within the prescribed period before the final date for payment of the adjudicator's decision. Unless the parties agree otherwise, the prescribed period is that provided by the Scheme (namely 17 days from the date payment becomes due).

McLean is difficult to reconcile with VHE Construction plc v RBSTB Trust Ltd (13 January 2000). There, Judge Hicks QC held that an adjudicator's decision was not susceptible to a set-off defence (even if a compliant section 111 notice is given).

In Solland International Limited v Daraydan Holdings Limited (15 February 2002), Judge Seymour QC followed VHE and denied an employer's shot at setting-off LADs against an adjudicator's decision awarding the contractor monies for unpaid work. Judge Seymour distinguished McLean on the basis that the adjudicator had decided that the contractor was not entitled to an extension of time for the full delay period and consequently he had effectively decided for how much time the employer could deduct LADs. Therefore (although it had not been adjudicated upon) the deduction of LADs was implicitly supported by the adjudicator's decision.

Although an admirable attempt to explain otherwise conflicting decisions, with respect, this does not seem to address Judge LLoyd's clearly stated general view that an adjudicator's decision does not affect the parties' other contractual rights. In any event, the facts in Solland are readily distinguishable from McLean, in that in Solland the employer had given no compliant section 111 notice.

McLean offers potentially wide scope for avoiding the enforcement of adjudicators' decisions, if a section 111 notice is given not later than the prescribed period before the final date for payment of the adjudicator's decision. From a claimant's perspective, probably the best way to limit exposure to the effects of McLean - where an effective section 111 notice has been served before adjudication is commenced - is to refer to the adjudicator the whole of a dispute (including any set-off, counterclaim or abatement). Where an effective section 111 notice has not been served before an adjudication is commenced, a claimant would be well-advised to ask an adjudicator to make his decision payable from when it is delivered. However, claimants will by no means be able to rely upon this, because usually a reasonable time should be allowed for payment. Also, it offers no protection against a section 111 notice given before the adjudicator's decision is delivered. It should be noted that some adjudication rules, such as the TeCSA Adjudication Rules 1999 (version 1.3, paragraph 28), exclude the right to raise any set-off, counterclaim or abatement in connection with any enforcement proceedings and this should prevent the kind of deft move witnessed in McLean.

Open your eyes, ref! (Or, adjudicators can make mistakes)

Score: Pros 2 (Court of Appeal; Judge Seymour) - Cons 0

For a while, it seemed a line of attacking adjudicators' decisions was developing based on saying that when an adjudicator answered the wrong question, his error was so fundamental that he acted outside his jurisdiction.

The Court of Appeal in C&B Concept Design Ltd v Isobars (31 January 2002) squashed this. It confirmed that adjudication was intended to offer a speedy mechanism for the resolution of disputes and that mistakes will inevitably occur. The adjudicator in this instance was mistaken as to whether certain clauses formed part of the contract. It was held that by making an error of procedure, fact or law, the adjudicator was not necessarily acting outside his jurisdiction and, in this case, the adjudicator's error was insufficient to prevent enforcement of his decision. The Court approved some useful guidance given by Judge Thornton in addressing - as the issue is often put - whether an adjudicator has answered the wrong question or merely answered the right question wrongly.

The Court of Appeal said that a court should guard against characterising a mistaken answer to a question as an excess of jurisdiction, citing its earlier decision in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd (31 July 2000). Thus, a wrong decision by an adjudicator, who had jurisdiction, cannot normally be challenged and should be enforced.

Another recent judgment on this topic is Shimizu Europe Ltd v Automajor Ltd (4 February 2002), which concerned an adjudicator's decision in which the adjudicator said that certain variations claimed by the claimant contractor were not variations. However, he then went on to include an amount for the same variations in his award. Judge Seymour, in enforcing the decision, held that "an adjudicator has jurisdiction to make a mistake provided he asks himself the questions that have been referred to him". The proper mechanism for correcting an error was in the course of a final account negotiation or in arbitration proceedings. Notably, Judge Seymour went on to hold that, in any event, the defendant waived its right to object to the decision by inviting the adjudicator to correct his decision under the slip rule and making payment of part of the amount awarded by the adjudicator.

C&B and Shimizu both support the enforcement of adjudicators' decisions. Adjudicators' mistakes are an inevitable consequence of - and price to be paid for - the expeditious resolution of disputes. Generally, an adjudicator's decision will stand however blatant the error, unless it goes to jurisdiction or natural justice (such as the right of the parties to be heard, to which we now turn).

The ref's got a mind of his own. (Or, can adjudicators reach enforceable decisions on their own without involving the parties?)

Score: Pros 1 (Scottish Court of Session) - Cons 1 (Judge Lloyd)

The next judgment receiving our attention is Balfour Beatty Construction Ltd v Lambeth London Borough Council (12 April 2002). In it Judge LLoyd memorably observed:"This is yet another case in which adjudication has been launched after completion of the works and in which the dispute attracts a simple description but comprises a highly complex set of facts and issues relating to the performance of a contract carried out over many months. It may well be doubted whether adjudication was intended for such a situation". Judge LLoyd went on to hold that it might, in certain cases, be appropriate for an adjudicator to construct the case in question, whether or not this was the case as presented by the party or parties. However, in this instance, the adjudicator, having devised a critical path so that the case could be decided "methodically and fairly", failed to confront the defendant with this before reaching his decision. It was considered that this could lead to a serious breach of the rules of impartiality and natural justice and consequently the adjudicator's decision was set aside.

Conversely, in Karl Construction (Scotland) Limited v Sweeney Civil Engineering (Scotland) Limited (22 January 2002), the Scottish Court of Session (Inner House), held that the adjudicator's departure from the parties' agreed position in making her decision was allowed. It held:"The adjudicator is not fettered, when applying the relevant law, by the parties' representations: it is open to the adjudicator to reach a conclusion different from that agreed by the parties." The Court went on to say that the adjudicator's failure to consult the parties further, before reaching a conclusion different from their agreed position, was not necessarily a breach of the rules of natural justice. The speed with which a decision is required of an adjudicator was given as a reason for this decision.

Karl does not sit well with the finding in Balfour. However, it should be noted that, while in outcome, Balfour appears to curb their powers, the practice of an adjudicator taking the initiative in establishing the facts and the law was not ruled out, provided that this was then represented fairly to the parties. Indeed, the adjudicator's methodology was far too expert to be dubbed "rough and ready justice".

That leaves us with a mountain to climb (or, the meaning of the requirement that construction contracts must be "in writing")

Score: Pros 0 - Cons 1 (Court of Appeal)

Of course, the adjudication regime only applies to "construction contracts", which must be "in writing" (unless, as is often the case, the parties agree that it should apply anyway). In RJT Consulting Engineers Ltd v DM Engineering (Northern Ireland) Ltd (8 March 2002), two Lord Justices of the Court of Appeal held that all the contract terms, not just some of them, must be evidenced in writing, in one of the forms prescribed by section 107 of the 1996 Act. The reason given for this approach was that Parliament intended that it was inappropriate for adjudicators to have to deal with disputes which often arise as to the terms of an oral contract. Given the complexity of disputes decided by adjudicators (which often involve witness statements to supplement the documents) this is an odd limitation. It is one which will no doubt give rise to much jurisdictional wrangling, where trivial or unrelated terms are not expressly recorded or incorporated by reference (despite Lord Justice Ward's view that "it would be a pity" if this occurred). This problem may be particularly noticeable with claims for variations which are not recorded in writing. Somewhat more pragmatically, Lord Justice Auld held that only the material terms of the contract need be evidenced in writing. Unfortunately, he was alone in this view.

Have they kicked off? (Or, what is a "dispute"?)

Score: Pros 0 - Cons 1 (Judge Seymour)

Under the 1996 Act a party is only entitled to refer a "dispute" to an adjudicator. If there is no "dispute", the adjudicator does not have jurisdiction. It has been established for a relatively long time (by adjudication standards) that a "dispute" can only arise once the protagonists have had the opportunity to consider each other's position and to formulate reasoned arguments. This was considered further in Edmund Nuttall v Carter Ltd (21 March 2002), with worrying consequences.

There the claimant had served with the referral notice a report supporting its claim for an extension of time on a different basis than hitherto. The adjudicator's decision, which the claimant sought to enforce, was based on that report and the claim as formulated around it. Judge Seymour set aside the decision. He held that a "dispute" was the whole package of arguments advanced and the facts relied upon by each side. Consequently "a party cannot [as the claimant had] abandon wholesale facts previously relied upon or arguments previously advanced and contend that because the "claim" remains the same as that made previously, the "dispute" is the same". Judge Seymour was clearly concerned by the cost of the adjudication (the adjudicator's fees were £42,000). He said"the whole concept underlying adjudication is that the parties to an adjudication should first themselves have attempted to resolve their differences by open exchange of views and, if they are unable to, they should submit to an independent third party for decision the facts and arguments which they have previously rehearsed among themselves." Although, in theory, the "dispute" threshold can be lowered by the agreement of the parties, this flies in the face of the adjudication process and gives rise to serious practical dif- ficulties where one party makes adjustments to its claim or even just the basis for its claim, once the adjudication has commenced.

They think it's all over...

So, whilst we bask in the success of England's World Cup campaign, we will continue to face the difficult task of predicting how, on any given occasion, a court will approach the enforcement of an adjudicator's decision.

For further information please contact Rupert Choat at [email protected] or on +44 (0)20 7367 3573.