UK: Adjudication: Jurisdiction and Severability

Last Updated: 2 September 2010
Article by Christopher Hill, Steve Abraham and Donald Warnock

In the following case, the court refused to enforce a decision of the adjudicator on the grounds that the adjudicator made a material jurisdictional error in deliberately declining to consider the employer's set -off defence; and that the deliberate decision amounted to a breach of natural justice.

Pilon Limited v Breyer Group plc [2010] EWHC 837 (TCC)

The employer engaged a contractor to carry out refurbishment work on a redevelopment project in Ealing. The work was divided into two separate sections, batches 1-25 and batches 26-62.

Disputes arose between the parties and the contractor left the site in October 2008. In January 2009 the contractor entered into a company voluntary arrangement. Nine months later in September 2009 the contractor issued a payment application in respect of batches 26-62. Adjudication proceedings followed with the adjudication notice expressly limiting the claim to batches 26-62.

The contractor argued that in the absence of a payment or withholding notice it was entitled to £337,000. The employer argued that the contract did not oblige it to serve such notices; and that it was entitled to set-off a sum of approximately £47,000 which it had over-paid in relation to batches 1-25 (the Over-payment).

The adjudicator found that the absence of payment notices or withholding notices did not mean that the detailed valuation exercise should not be carried out. However, the adjudicator accepted the contractor's submission that he should not consider the set-off for the Over-payment because the notice of adjudication was limited to batches 26-62. After the valuation exercise the adjudicator awarded approximately £207,000 to the contractor.

The employer failed to pay and the contractor issued enforcement proceedings. The employer submitted that:

  • the decision was unenforceable because the adjudicator had committed a breach of natural justice in failing to consider the Over-payment;
  • in the alternative, that enforcement of the adjudicator's decision should be stayed due to the financial position of the contractor.

Did the adjudicator take an overly restrictive view on his own jurisdiction?

The judge summarised the principles as follows:

  • The adjudicator should attempt to answer the question in front of him. If he has endeavoured to do this then, whether right or wrong, his decision will be enforceable.
  • If the adjudicator took an erroneously restrictive view of his jurisdiction and failed to address the question referred to him, or to consider the defence or a fundamental element of the defence, then his decision might be unenforceable.
  • For the decision to be unenforceable the adjudicator's failure must be deliberate. An inadvertent failure to consider one of a number of issues covered by the single dispute will not ordinarily make the decision unenforceable.
  • The failure should be material and be shown to have had a potentially significant effect on the overall result of the decision.
  • A factor that may be material to the court is whether of not the claiming party has brought about the adjudicator's error by a misguided attempt to seek a tactical advantage.

The court's view was that it was clear that the adjudicator had erred in failing to take into account the defence of Over-payment.

The notice of adjudication gave the adjudicator the jurisdiction to consider what, if any, further sum should be paid by way of interim payment. That issue involved a consideration of the employer's defence in respect of the Over-payment. The adjudicator failed to appreciate that the contractor was seeking not only an interim valuation of batches 26 - 62 but also interim payment of any sum considered owing to them. The valuation required the adjudicator to have regard to batches 26-62 only, but the claim for payment meant that the adjudicator also had to consider the Overpayment.

The court also considered that the contractor deliberately sought a tactical advantage by limiting the scope of the adjudication notice to batches 26 - 62 so that the adjudicator would not have regard to batches 1-25.

As a result the court held that the adjudicator did deliberately place an erroneous restriction on this jurisdiction which amounted to a breach of natural justice.

Was the error material?

The adjudicator's failure was highly material for the following reasons:

  • The Overpayment defence was worth about £147,000 or 71% of the sum eventually awarded to the contractor. On any view, it was of fundamental importance to the dispute as a whole.
  • The adjudicator's decision to refuse to consider the defence of Overpayment may well have affected his approach to some other issues where there were disputes of fact. For example, if the adjudicator had appreciated that the contractor was seeking to make a jurisdictional point for their own ends in relation to the Over-payment he might have reached a different conclusion in relation to other parts of the defence.

The court therefore held that the adjudicator made a material jurisdictional error in deliberately declining to consider the defence of Over-payment; and that the deliberate decision amounted to a breach of natural justice. The adjudicator's decision was therefore unenforceable.

Was the decision severable?

The next issue was whether the decision was severable so that the decision could be enforced for part of the award.

Given that the adjudicator's decision related to one dispute, the court was of the view that the decision was not severable (adopting the principles outlined by Akenhead J in Cantillon v Urvasco [2008] EWHC 282 (TCC) (March 2008 Updater).

Mr Justice Coulson acknowledged that it might be appropriate for the TCC to review whether, where there is a single dispute, severance could be considered in circumstances where a jurisdiction/natural justice point was worth a fixed amount which was significantly less that the overall sum awarded. However, in this case, even if the decision had been capable in principle of severance, the risk that the decision as a whole was tainted due to the failure to address the Over-payment point was a reason not to sever the decision in practice.

Was a stay of execution appropriate?

On the basis that the decision (contrary to the finding of the judge) was enforceable, the court next addressed the question of whether a stay should be granted.

The judge confirmed that principles to be applied when considering a stay are those set out in Wimbledon Construction Company 2000 Limited v Derek Vago [2005] BLR 374. The fact that the contractor was the subject of a CVA was also a relevant factor to take into account (Mead General Building v Dartmoor Properties [2009] EWHC 200 (TCC) (see May 2009 Updater).

The court concluded that a stay of execution would have been granted for the following reasons:

  • At the time the contract was made the contractor's financial position was good. Its financial plight was not due to the employer's failure to pay sums found due by the adjudicator since by the time the CVA was agreed the total owed to the contractor's creditors was in excess of £2.7 million.
  • On the evidence the contractor would be unlikely to repay any judgment debt.

Editors' comments

As the court noted, a notice of adjudication will usually be confined to the claim being advanced (it rarely refers to the points that might be raised by way of a defence to the claim). But an adjudicator should think very carefully before ruling out a defence merely because there was no mention of it in the referring party's notice of adjudication. A responding party is entitled to raise any legitimate defence (including set-off) and such defences will ordinarily be encompassed within the notice of adjudication.

Parties should take note of the judge's comments on challenging the adjudicator's jurisdiction. Mr Justice Coulson observed that the case of Quartzelec Limited v Honeywell Systems Limited [2008] EWHC 3315 (TCC) (see February 2009 Updater) (a decision with which he was a "little uneasy") had encouraged numerous defendants to enforcement proceedings to raise spurious complaints that the adjudicator had failed to consider some aspect of the dispute referred to him. In his view it was wholly "illegitimate" for defendants to comb through adjudication decisions trying to find some aspect of the dispute which the adjudicator had not expressly addressed and then to argue on jurisdictional or natural justice grounds that it should not be enforced.

View: Pilon Limited v Breyer Group plc [2010] EWHC 837 (TCC)

This article was first published in the Norton Rose Construction and infrastructure updater July 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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