Separating the good from the bad: appeal court guidance on the severability of adjudication decisions

A recent decision of the Inner House – Scotland’s appeal court – has held that a successful challenge to part of an adjudication decision does not necessarily prevent enforcement of other parts of the decision even if only a single dispute was referred to adjudication. After giving detailed consideration to conflicting first instance decisions in England and Scotland, the Inner House has adopted the more liberal “core nucleus” test for severability. This pro-enforcement decision is likely to reduce challenges at the enforcement stage and is likely to be persuasive throughout the UK.

Dickie & Moore Limited v Trustees of the Lauren McLeish Discretionary Trust

Dickie & Moore Ltd (“D&M”) was engaged by the Trustees of The Lauren McLeish Discretionary Trust (the “Trust”) to construct a large house near Armadale in Scotland. The contract was a Standard Building Contract with Quantities for use in Scotland (2011 Edition) and contained provisions permitting either party to refer any “dispute or difference” under the contract to adjudication.

A dispute arose as to the sums due under the contract with the Architect and D&M exchanging different valuations. The Architect issued a Final Certificate reflecting its Final Adjustment Statement which D&M successfully challenged at adjudication and was awarded £324,492.60 plus interest across several heads of loss. The Trust refused to pay and D&M applied to the court for enforcement. Over two judgments, the court at first instance ultimately enforced only part of the award.

In the first judgment, the Trust successfully argued that part of the dispute had not crystallised. In determining whether a dispute had crystallised, the court held “a robust, practical approach…. with a commercial eye” which avoids an “over-legalistic analysis” should be adopted. Despite this, the extension of time claim and certain monetary claims were so different from those at issue prior to the service of the Notice of Adjudication that a dispute over them had not yet crystallised. Consequently, it was held that the adjudicator lacked jurisdiction over these claims.

In the second judgment, D&M successfully argued that the adjudicator’s decision was severable; the parts over which the adjudicator did have jurisdiction could be enforced. The court conducted an extensive review of conflicting case law in this area and held that “the critical question ought not to be whether there is a single dispute or difference, but whether it is clear that there is a core nucleus of the decision that can safely be enforced.”

The Inner House

The Trust appealed, arguing that the court had incorrectly held that the adjudicator’s decision could be severed and partially enforced.

In determining that severance of the award was possible, the Inner House rejected the Trust’s contention that the court at first instance was wrong to place reliance on policy considerations. The Inner House held that the identifiable policy of the Housing Grants, Construction and Regeneration Act 1996 (as amended) – to enable parties to obtain payment of sums to which they have been found due without undue delay – provides important context for determining how it is interpreted. Further, the case law relied upon by each party made repeated references to the policy considerations underlining adjudication. Finally, the references to policy aided in determining which of the inconsistent lines of case law was to be followed.

The Inner House held that the first instance court had been correct to reject the line of authority that stated severance was not possible where only a single dispute had been referred to adjudication. In determining whether an award is severable, the Inner House favoured the test applied in the English case of Willow Corp SARL v MTD Constructors Ltd:

“In my judgment, the proper question is not, however, to focus on whether there was a single dispute or difference but upon whether it is clear that there is anything left that can be safely enforced once one disregards that part of the adjudicator’s reasoning that has been found to be obviously flawed. It would … further the statutory aim of supporting the enforcement of adjudication decisions pending final resolution by litigation or arbitration if the TCC were rather more willing to order severance where one can clearly identify a core nucleus of the decision that can be safely enforced.”

The Trust’s final submission was that parties had only contracted to be bound by the adjudicator’s decision, not the adjudicator’s decision subsequently rewritten by the court. The Inner House rejected this as “misconceived”, stating that the agreement to adjudicate was inherently an agreement to submit to the to the supervisory review of the court, which was what had happened here.

Conclusions and implications

This decision is a nod to the sanctity of the adjudication process: reiterating and reinforcing the policy reasons for its inception and confirming that the court should, where realistically practicable, enforce any valid parts of an adjudicator’s award.

Both the court at first instance and the Inner House noted that a ruling determining that severance was not possible would serve to encourage parties to resist enforcement on minor grounds in the hope of then invalidating the entire decision. However, as commented on in our previous Law-Now, permitting severance of an award to be enforced may encourage parties to adopt ambush tactics in the knowledge that part of the decision may still be enforced if there is a successful jurisdictional challenge. It is also important to note the Inner House’s comment that different considerations may apply to the severability of awards depending on the grounds of challenge relied on. In particular, the Inner House noted that “[b]reach of the principles of natural justice inevitably casts an element of doubt over the whole of the adjudicator’s reasoning.”

It remains to be seen whether this decision will be applied by the English courts, although as a decision from Scotland’s appeal court it is likely to be persuasive in courts throughout the UK.

References:

Dickie & Moore Limited v the Trustees of the Lauren McLeish Discretionary Trust [2019] CSOH 71.

Dickie & Moore Limited v the Trustees of the Lauren McLeish Discretionary Trust [2020] CSIH 38.

Willow Corp SARL v MTD Constructors Ltd [2019] EWHC 1591 (TCC).