Adjudication And The Construction Act - Avoiding The Pitfalls

The early cases of Macob -v- Morrison Construction and Outwing -v- H Randell robustly asserted the basic principle that adjudicators’ decisions were binding and would be enforced summarily by the courts whether or not the merits or validity of the decision were challenged.

These decisions were of interest to many within the construction industry due to concerns about the fairness of adjudication given the timescales involved and the advantages in case preparation that these timescales gave the Claimant.

Whilst these decisions undeniably give effect to the Act as drafted, concern within the construction industry about the fairness of adjudication in principle and in practice existed. The Courts were treating adjudication very much as the first stage of dispute resolution whereas those within the industry were perceiving it as more final. Indeed in many cases the parties have agreed in advance that the decision will be binding. An enforceable decision, even if obviously erroneous, gives the holder of it a much stronger position when negotiating a settlement.

Case law over the last ten months has however seen clarification of the Courts interpretation of the Act with qualifications to the general principles established when the Courts were first addressing issues of adjudication beginning to emerge.

Challenges to the general principle established by Macob can be divided generally into three categories:

In the cases of Discain Project Services Limited -v- Opecprime Developments Limited and, most recently, Woods Hardwick Limited -v- Chiltern Air Conditioning the Courts have prevented enforcement due to a breach of the rules of natural justice (i.e., a fair trial for both parties) and/or a breach of the terms of the adjudicator’s appointment.

In both cases the Judges concerned considered the behavior of the adjudicator carefully and found that they had failed in a material degree to comply with the rules governing the conduct of the adjudications. The rules of natural justice will be implied terms of the adjudicator’s appointment. It is suggested that an insignificant failure would not allow successful attempts to stay enforcement.

This matter will no doubt be subject to further developments in case law.

In the case of Herschel Engineering Limited -v- Breen Property Limited, whilst no stay of enforcement was granted where proceedings had been commenced in the County Court in connection with matters subject to the adjudication, the Judge made an obiter statement that if there had been a real doubt as to the Claimant’s ability to repay such sums following a reversal in the County Court a stay of enforcement might have been granted.

In Bouyges UK Limited -v- Dahl-Jensen UK Limited the Court of Appeal prevented enforcement where the Insolvency Rules 1986 provided an alternative mechanism to allow the reckoning up of sums owed between the parties.

The very recent case of Rainford House Limited (in administrative receivership) -v- Cadogan Limited confirmed that the Court would stay summary judgement where there was serious doubt of the ability of a Claimant to repay monies awarded once a matter had been finally determined.

The question of whether or not an adjudicator's decision containing an obvious and material error would be enforced by the courts was considered in Bouygues UK Ltd -v- Dahl-Jensen UK Ltd. In this case the adjudicator had clearly made an error in his calculations in arriving at his decision. As a result of the error retention monies were to be paid to the referring party. Both parties accepted that the retention was not due and did not form part of the adjudication. The court decided that the decision was not open to challenge as the manifest error was one of calculation during the process of answering an issue properly referred to the adjudicator. This finding was subsequently upheld in the Court of Appeal.

Thus, provided an adjudicator has jurisdiction and answers the questions referred to him a decision will be binding, notwithstanding that it contains material error of either law or of fact which could have disastrous consequences for its victims. This will be particularly serious where the victim of the mistake is unable to recoup its losses by subsequent arbitration or litigation due to an intervening insolvency of the beneficiary of the mistake.

This approach was qualified slightly in the case of Bloor Construction (UK) Limited and Bowmer & Kirkland (London) Limited. Here the Court held that if an adjudicator made a slip in his award then there was to be implied into the adjudication agreement a power for the adjudicator to correct any accidental error or omission or to clarify or remove any ambiguity in the decision, provided that this is done within a reasonable time and without prejudicing the other party. Whilst it is difficult to understand exactly how such a correction will not prejudice one party, at least in the short term, the decision adds a greater degree of flexibility to the general rule set down by the Court in connection with errors. The decision does, however, require the adjudicator to accept that an error has been made.

One of the main lines of challenge to an adjudicator's decision has been whether the adjudicator has jurisdiction under the Act to determine the dispute.

The question of whether or not a Court can set aside an adjudicator’s error as to the scope of his jurisdiction was considered by the court in the case of Homer Burgess -v- Chirex (Annan) Ltd. It concerned the adjudicator's decision to award payment for work undertaken by Homer. Chirex argued that the primary activity on their site concerned the processing and production of pharmaceuticals and a very high proportion of the work carried out by Homer on the site related to "plant" which was excluded by the Act. The Court decided that the installation of pipework by Homer was "plant" and the work therefore fell outside the scope of the Act and the adjudicator had no jurisdiction to make a decision.

Under the Act, the adjudication provisions only apply to agreements in writing. The case of Grovedeck Ltd -v- Capital Demolition Ltd involved disputes under two oral contracts. An adjudicator wrongly decided that the Notice to Refer the disputes alleging the oral contract and the defendant's response in which the oral contracts was not denied were an exchange of written submissions constituting an agreement in writing under the Act. The Court decided that the contracts were oral and therefore outside the Act. Jurisdiction could not be confirmed by communications between the parties after the adjudicator's appointment.

In The Project Consultancy Group -v- the Trustees of the Gray Trust the argument was whether the contract was formed before 1 May 1998 when the Act came in force. The Court decided that it was unable upon the evidence to decide on when the contract had been made if at all. It did however decide that an adjudicator's decision made under a contract entered into before the Act came into force is not a decision within the meaning of the Act.

The recent case of Mymac Environmental Services Limited -v- Faraday Building Services Limited illustrates the established case law that if a party wishes to object to jurisdiction they must state at the beginning of proceedings that jurisdiction is invalid and they must continue to dispute jurisdiction throughout the proceedings and in all communications. Failure to do so may impliedly confer jurisdiction upon the adjudicator.

A crucial question in the light of the payment provisions of the Act is whether or not a paying party under a construction contract can set-off in adjudication proceedings amounts that they have not included in a notice of intention to withhold payment (compulsory on all sums that are due for payment under the contract). This issue was considered in the three cases of VHE Construction Plc -v- RBSTB Trust Co Ltd, Northern Developments (Cumbria) Ltd -v- J & J Nichol and Palmers Ltd -v- ABB Power Construction Ltd.

Section III of the Act imposes on the parties to a construction contract a direct requirement that the paying party may not withhold a payment after the date a payment is due unless he has given an effective notice of intention to withhold payment. In all three cases the courts decided that:

1. Section III excludes the right to deduct money in the exercise of a claim to set-off in the absence of a valid notice to withhold payment, and
2. The Notice must precede the referral to adjudication and that the "matter" referred to adjudication must include the effect of that notice and the validity of the grounds for withholding payment which it asserts.

Thus if a paying party omits claims of set-off in a notice under Section III it cannot validly raise such claims in a subsequent adjudication concerned with that notice. The paying party in those circumstances would have to raise such claims in a second adjudication and endeavor to ensure that the decision in the second adjudication coincided in time with the decision in the first adjudication or at least before enforcement proceedings could be heard for that first decision. In Northern Developments (Cumbria) Limited the Court confirmed that if there are two conflicting adjudication decisions it may be appropriate to set one off against another in enforcement proceedings, but not within adjudication proceedings.

Obiter statements in the more recent case of KNS Industrial Services (Bimingham) Limited -v- Sindall Limited do suggest that the Courts may allow other contractual rights to operate to prevent contractual terms being construed in such a manner to give decisions that make no commercial sense. There is little doubt that there will be increasing efforts by defendants to avoid the detrimental effect of enforcement through utilisation of other contractual entitlements.

The adjudication clause on termination

An adjudication clause survives the termination of a contract. In A & D Maintenance & Construction Ltd -v- Pagehurst Construction Services Ltd the Courts decided that where there was a contract to which the Act applied and there were disputes arising under the contract the subsequent determination of that contract did not prevent adjudication of those disputes after that determination. This is consistent with the Court’s treatment of arbitration clauses.

The issue of the adjudicator’s power to award costs has been considered in John Cothlif Ltd -v- Allen Build (Northwest) Ltd and the Northern Development case referred to above. Although there is some conflict between the decisions in these cases the position is:-

1. There is no express or implied statutory power granted to an adjudicator to award costs;
2. There can be an implied agreement of the parties that the adjudicator has such power where the parties ask for their costs in the adjudication proceedings; and
3. Power to award costs may be expressly stated in the contract or the rules of adjudication.

Some guiding principles have emerged from the cases:

1. The validity of an adjudicator’s decision, if challenged as to its factual or legal conclusions, remains enforceable;
2. A decision that is erroneous, even if the error is disclosed by the reasons will, ordinarily, still be enforced. An adjudicator does however have freedom to correct the error;
3. A decision may be challenged on jurisdictional and/or procedural grounds in which case a successful challenge will prevent enforcement; and
4. Adjudication is intended to be a speedy process in which mistakes will inevitably occur. Thus, the court will guard against characterising a mistaken answer to an issue, which is within an adjudicator's jurisdiction, as being in excess of jurisdiction or breach of procedure.

It is a question of fact as to whether or not a dispute has arisen (Fastrack Contractors Limited -v- Morrison Construction Limited) but as a guiding principle an issue should not be referred to adjudication until the opposing party has been notified of a claim and has refused to admit or has not paid.

The jurisdiction of the adjudicator to award costs should be challenged by the defending party at the beginning of the adjudication unless such a power is contained in the contract or in the adjudication rules (or the defendant is confident of victory).

Any objection to an adjudicator's jurisdiction must be made at the beginning and throughout the adjudication proceedings.

A paying party who has failed to include a set-off in a notice of intention to withhold payment cannot seek to deduct that set-off in adjudication proceedings relating to that notice and should consider seeking recovery in a separate adjudication.

It is now becoming common for professional indemnity policies to require adjudicators in disputes covered by the policy to give reasoned decisions. Care should therefore be taken to ensure that the adjudication provisions in contracts require reasoned decisions otherwise insurance cover may not be effective.

A party proposing to commence adjudication should initially check that:

• the contract complies with the Act or expressly contains adjudication provisions,
• there is a dispute which can be adjudicated,
• the opponent is not likely to become insolvent and be unable to pay the adjudicator's fees if they lose.

© Gouldens October 2001

This briefing note is intended to raise your awareness of certain issues (as at March 2001) under the laws of England and Wales, and is not intended to be comprehensive or a substitute for proper advice which should always be taken for particular queries.