Update on natural justice in adjudication
Construction practitioners will be well aware that there are two main grounds upon which it is possible to resist the enforcement of an adjudicator’s decision: a jurisdictional challenge and a breach of the rules of natural justice. Indeed, it is rare for an adjudication to proceed without submissions being made on one or both of these issues. Most of the time, such arguments are speculative and unsuccessful as the courts have taken a robust approach to the enforcement of the decisions since adjudication was introduced. However, as George Boddy explains, in one of the first reported cases in the TCC of 2021, Global Switch Estates 1 Ltd v Sudlows Ltd1, the Court refused to enforce the decision of an adjudicator because he breached the rules of natural justice, demonstrating that it is still worth running these arguments.
Recap on natural justice
There are two key underlying principles from which the case law on natural justice in the context of adjudication has developed:
(i) A party should be informed of the allegations that have been made against it and be given an opportunity to answer those allegations.
(ii) A party is entitled to have its case heard by an unbiased and impartial tribunal.
The Court of Appeal confirmed in the cases of Construction v Devonport Royal Dockyard2 and Amec v Whitefriars3 that the rules of natural justice do apply to adjudicators and made a number of observations regarding natural justice in the context of adjudication. The Court of Appeal commented that there should be a limit to the requirements of natural justice in adjudication given that the procedure was designed to be speedy and that there is, therefore, an inbuilt unfairness in it. The fact that it is open to an unsuccessful party to attempt to overturn an adjudicator’s decision by litigation or arbitration also justified imposing such limits. It would, therefore, only be in the case of serious breaches that the Court would intervene and refuse to enforce the decision of an Adjudicator.
The Court of Appeal’s statements were later developed in the Technology and Construction Court in the case of Cantillon v Urvasco.4 In that case, Akenhead J set out the approach the Court should take when considering alleged breaches of natural justice in the context of challenges to the enforcement of adjudicators’ decisions:
(i) The Court should not take an over-analytical approach to questions of natural justice in adjudications;
(ii) The challenge must be plain, clear and comprehensible; and
(iii) The Court should adopt a two-stage test: (1) has the adjudicator failed to apply the rules of natural justice; and (2) the breach must be serious and more than peripheral.
Global Switch Estates 1 Ltd v Sudlows Ltd
In Global Switch v Sudlows, the TCC refused to enforce the Adjudicator’s decision on the basis that he had materially breached the rules of natural justice by failing to consider a claim for loss and expense that Sudlows had raised as a defence to Global Switch’s claim for payment.
The facts
Sudlows was appointed pursuant to a JCT Design and Build 2011 with amendments to undertake the fit out and upgrade of Global Switch’s specialist data centre at East India Dock in London. Various disputes arose between the parties and four adjudications followed, the fourth of which was the subject of the enforcement decision.
In the fourth adjudication, Global Switch sought a decision as to the true value of parts of Interim Application 27 and an order that Sudlows should pay the sum of £6.8 million to Global Switch. In the Notice of Adjudication, Global Switch sought to expressly exclude certain matters from the scope of the adjudication. These matters included Sudlows’ entitlement to further extensions of time and further loss and expense in connection with the question of liability for two alleged defects in Sudlows’ works: (i) the high voltage cables installation; and (ii) potential overloading of the roof.
Sudlows disputed Global Switch’s attempt to restrict the scope of the adjudication in the Notice. Its position on the true value of Interim Application 27 included claims arising from the matters that Global Switch had tried to exclude. It argued that it was entitled to raise any defence open to it to defend its position in respect of Interim Application 27 and to defend Global Switch’s claim for payment. Sudlows proceeded to defend Global Switch’s claim for payment by seeking a determination from the Adjudicator as to its entitlement to further extensions of time and loss and expense arising from the alleged defects.
The Adjudicator decided that Global Switch was entitled to limit the scope of his jurisdiction to the specified parts of Interim Application 27. He decided that he did not have jurisdiction to consider or award further extensions of time and loss and expense to Sudlows that Sudlows had raised to defend the true valuation case and the claim for payment.
The Adjudicator reached a decision on the true value of the elements of the account referred to adjudication and awarded the sum of £5 million to Global Switch.
The law
Mrs Justice O’Farrell emphasised that the Courts take a robust approach to adjudication enforcement and made the following observations:
“i) A referring party is entitled to define the dispute to be referred to adjudication by its notice of adjudication. In so defining it, the referring party is entitled to confine the dispute referred to specific parts of a wider dispute, such as the valuation of particular elements of work forming part of an application for interim payment.
ii) A responding party is not entitled to widen the scope of the adjudication by adding further disputes arising out of the underlying contract (without the consent of the other party). It is, of course, open to a responding party to commence separate adjudication proceedings in respect of other disputed matters.
iii) A responding party is entitled to raise any defences it considers properly arguable to rebut the claim made by the referring party. By so doing, the responding party is not widening the scope of the adjudication; it is engaging with and responding to the issues within the scope of the adjudication.
iv) Where the referring party seeks a declaration as to the valuation of specific elements of the works, it is not open to the responding party to seek a declaration as to the valuation of other elements of the works.
v) However, where the referring party seeks payment in respect of specific elements of the works, the responding party is entitled to rely on all available defences, including the valuation of other elements of the works, to establish that the referring party is not entitled to the payment claimed.
vi) It is a matter for the adjudicator to decide whether any defences put forward amount to a valid defence to the claim in law and on the facts.
vii) If the adjudicator asks the relevant question, it is irrelevant whether the answer arrived at is right or wrong. The decision will be enforced.
viii) If the adjudicator fails to consider whether the matters relied on by the responding party amount to a valid defence to the claim in law and on the facts, that may amount to a breach of the rules of natural justice.
ix) Not every failure to consider relevant points will amount to a breach of natural justice. The breach must be material and a finding of breach will only be made in plain and obvious cases.
x) If there is a breach of the rules of natural justice and such breach is material, the decision will not be enforced.”
The decision
In the adjudication, Global Switch had sought a declaration as to the true value of Interim Application 27 and an order for payment that followed. In defence to that claim for payment, Sudlows had relied on its own claims for loss and expense arising from extensions of time. Sudlows’ claims involved the high voltage cables works and the overloading of the roof that Global Switch had attempted to exclude from the adjudication by submitting that the Adjudicator could proceed on the assumption, in Sudlows’ favour, that they were not defective.
However, while the Judge agreed that this exclusion addressed Global Switch’s defects claims against Sudlows, it did not address Sudlows’ claims for additional payment for rectification costs and the consequential loss and expense. These claims were clearly relevant to the valuation of Interim Application 27 for the purposes of any claim for payment as they were potential valid defences to it.
Therefore, the Adjudicator ought to have considered whether the rectification costs and loss and expense claims were valid. However, the Adjudicator wrongly assumed that he did not have jurisdiction to do so.
As Global Switch sought not only a true valuation of specific parts of the account, but also an award of payment, the Adjudicator should have considered Sudlows’ potential defence to the claim for payment. The determination of the claim for payment required the Adjudicator to consider all of the matters raised by Sudlows in support of its case that it was entitled to additional sums as part of the valuation. The Adjudicator’s failure to take into account Sudlows’ defence based on its additional claims for loss and expense amounted to a breach of the rules of natural justice.
The Adjudicator’s failure to exhaust his jurisdiction meant that he failed to consider a very large part of Sudlows’ defence to Global Switch’s claim for payment. This amounted to a serious and material breach of the rules of natural justice and rendered the decision unenforceable.
Conclusion
Referring parties often seek to carefully define the scope of the dispute to be referred to adjudication, and there are very good reasons for doing so. However, great care must be taken when drafting the Notice of Adjudication and the relief sought.
This case confirms that where the referring party has sought an order for payment in addition to a declaration as to the value of an account or certain items within it, then it must be aware that the responding party will be entitled to bring in any other valid claims it may have as a defence to the claim for payment.
The responding party’s claims must be considered by the Adjudicator as a defence to the referring party’s claim for payment. If the Adjudicator fails to do so, then the decision will not be enforceable on the grounds of a breach of natural justice.