Natural Justice: Adjudicator did not fail to exhaust his jurisdiction but third party advice poses problems

Adjudication provides an interim remedy which is popular within the industry to help facilitate cash flow. If you are considering adjudication or intend to challenge an adjudicator's decision, this article provides an important insight into the courts' reluctance to interfere with an adjudicator's decision without proper cause. This can be the case even if an adjudicator's decision is wrong in either fact and/or law. Parties need to be aware that adjudicators are not selected for their expertise as lawyers and are not judged to the same standard as those in the legal profession as the case of Babcock Marine (Clyde) Ltd v HS Barrier Coatings Ltd [2019] CSOH 110 (27 December 2019) illustrates.

Background

The Claimant, Babcock Marine Clyde Ltd (Babcock) contracted with the Defendant, HS Barrier Coatings Ltd (HSB) in 2014 to carry out the re-preservation of shiplift docking cradles at HM Naval Base, Clyde. The contract was for £800,000 and incorporated the NEC3 Engineering and Construction Short Contract (June 2005) with bespoke Z clause amendments. Clause Z17 provided for any dispute to be referred to adjudication in accordance with the agreement between the parties.

After works commenced on site, disputes arose between the parties over the progress of the works and payment. HSB claimed that it was entitled to additional payment under the contract for compensation events. Babcock was dissatisfied with HSB's progress and terminated the contract in June 2018.  In its termination application (Payment Notice 31 dated 25 June 2018), HSB claimed that it was owed £967,549.42 on termination. On 10 September 2019 Babcock certified £NIL in respect of that application.

Two Adjudications

HSB referred the dispute to adjudication first, in September 2018, in relation to the validity of payment and pay less notices.  HSB won and Babcock was required to pay the sums stated in HSB's payment notices, and did so during December 2018.  Babcock then referred the dispute again, in February 2019, to have the true and proper valuation of works at termination determined, including the value of work done under the base scope of works, the compensation events and termination costs. On each measure, the second adjudicator largely preferred the valuations contended for by Babcock over those contended for by HSB and its expert, Mr Cookson.  As a result, HSB would have to repay some of the money Babcock had paid under the first adjudicator's decision.    

Clause 2.3 of the NEC Adjudicator’s Contract (April 2013 edition) provided:

"After notifying the parties of his intention, the Adjudicator may obtain from others help that he considers necessary in reaching his decision. Before making his decision, the Adjudicator provides the parties with a copy of any information or advice from others and invites their comments on it."

On being appointed the adjudicator wrote to the parties by letter headed “Terms and Conditions of Appointment” (“the Terms”). Paragraph 14 of the Terms stated:

“If I require quantity surveying input during the Adjudication I will utilise the resources of Bunton Consulting Partnership. This matter is at my absolute discretion and I will not require the consent of the parties. A senior QS will be charged at £85 per hour plus expenses and a junior QS at £55 per hour plus expenses.”

The adjudicator's decision was sent to the parties on 22 March 2019 together with a Fee Account.  The entries on the Fee Account included 28 hours of QS assistance at a rate of £95.00 totalling £2,660.00. Until this point, the parties were unaware that quantity surveying assistance had been engaged, and it was not clear whether the assistance received was simply clerical, or of a more substantive nature that had a bearing on the adjudicator's findings.

HSB refused to pay.  Enforcement proceedings started in July 2019, during which HSB averred the following:

  1. the adjudicator failed to exhaust his jurisdiction, in that while it was clear that the adjudicator had preferred Babcock's valuation of the amount in dispute, he had not explained why he had preferred it, and HSB was entitled to know why;
  2. the adjudicator had not considered the valuation contained in an expert's report relied on by HSB;
  3. it was incumbent upon the adjudicator to inform the parties during the adjudication (i) that he was obtaining quantity surveying assistance; and (ii) of the nature of that assistance, and that the failure to advise of this meant there had been a breach of natural justice.

Natural Justice in Adjudication

The principle of natural justice affords every party the right to a fair hearing and the right to be heard by an impartial tribunal. If the court finds that there has been a material breach of natural justice, this will normally be enough to render the whole adjudication decision unenforceable.

However, proving a material breach is notoriously difficult and the case of Cantillon Ltd v Urvasco Ltd [2008] EWHC 282 (TCC) (27 February 2008) highlights the hurdles that a party must overcome if they are to succeed:

  1. It must be established that the Adjudicator failed to apply the rules of natural justice;
  2. Any breach of the rules must be more than peripheral - they must be material breaches;
  3. Material breaches include an adjudicator's failure to highlight to the parties a decisive point or issue of considerable importance to the outcome of the resolution (and is not peripheral or irrelevant) and invite their comments upon it.
  4. It will be for the judge to assess the degree to which an issue is decisive, important, peripheral or irrelevant.

Failure to exhaust jurisdiction

A breach of natural justice can occur if the adjudicator fails to consider all of the evidence before him, because by doing so the adjudicator has effectively limited his jurisdiction. In Scotland, this is referred to as an adjudicator's "failure to exhaust his jurisdiction". An English example includes Pilon Ltd v Breyer Group Plc [2010] EWHC 837 (TCC) (23 April 2010) where it was ruled that the adjudicator deliberately placed an erroneous restriction on his own jurisdiction by failing to take into account the defendant's defence,  which amounted to a breach of natural justice.

However, assessing whether there has been a breach of natural justice is a balancing act. In order to deliver a decision within 28 days, the courts have concluded that "it is not practicable for every aspect of the evidence to be meticulously considered, weighed up and rejected or accepted in whole or in part" (as per Mr Justice Akenhead in Jacques & Anor (t/a C&E Jacques Partnership) v Ensign Contractors Ltd [2009] EWHC 3383 (TCC) (22 December 2009)).

Given the time constraints, Lord Doherty in Babcock Marine highlighted that:

"Adjudicators’ reasons are not to be judged by the standards applied to judges or arbiters. A reasonable person informed as to the context of the dispute who reads the decision ought to be able to discern from it what the adjudicator has decided, and why he has decided it."

Lord Doherty concluded that it was clear to the reasonable reader of the decision that the adjudicator had given sufficient reasons for not accepting HSB's valuation, and that the adjudicator had demonstrably considered the expert valuation relied upon by HSB.  The courts will only interfere with an adjudicator's decision in "extreme circumstances" and the party challenging the adjudicator's reasoning would need to show that it was "absent or unintelligible and that, as a result, he had suffered substantial prejudice" as per Jackson J's observations in Carillion Construction Ltd v Devonport Royal Dockyard [2005] EWHC 778 (TCC) (26 April 2005).

Reliance on a third party's advice

When relying on the assistance of a third party, natural justice requires adjudicators to give the parties an opportunity to review and comment upon any material which forms part of their decision or which they attribute significance to in reaching their decision. This robust stance was enforced in Rsl (South West) Ltd. v Stansell Ltd. [2003] EWHC 1390 (TCC) (16 June 2003) where HHJ Seymour QC refused to enforce the decision of an adjudicator who had placed reliance in his decision upon the final report of a planning expert that had not been circulated to the parties.

In relation to the assistance of a third party QS in Babcock Marine, Lord Doherty said the question was "Can it be said at this stage, without inquiry, that this defence is bound to fail", to which the answer was "No", but he could not, without an inquiry into precisely what advice the adjudicator had received, conclude whether there had been a material breach of natural justice. He did not, therefore, enforce the adjudicator's decision at this stage.  He did caution that defendants should not assume that the court would reach the same conclusion as it did here, in similar circumstances in the future.  However, that is of little comfort to Babcock, which will have to wait to see (i) whether there was a material breach before it knows whether HSB's challenge fails; and (ii) if it will have its money returned under the second adjudicator's decision.

Timing of HSB's challenge

However, whilst Lord Doherty concluded that it was in the interests of justice that there should be an inquiry he felt it was "highly regrettable" that, after it became aware of the fact that a QS had been engaged, HSB took "six months to raise the present complaint". Agreeing with the adjudicator, Lord Doherty felt that the point ought to have been raised much earlier.

It may seem unfair on Babcock that HSB was still permitted to raise a natural justice challenge despite waiting six months to do so. However, the courts have previously been reluctant to find that silence amounts to a waiver of a party's right to bring a natural justice challenge. As Mr Justice Ramsey pointed out in Farrelly (M&E) Building Services Ltd v Byrne Brothers (Formwork) Ltd [2013] EWHC 1186 TCC:

"I do not consider that by failing to draw to the Adjudicator's attention the matters which [a Party] later contends amount to a breach of the rules of natural justice can be said to amount to a clear and unequivocal waiver of their right to rely on that contention."

Parties on the receiving end of an enforcement challenge should therefore understand that, unlike matters concerning the adjudicator's jurisdiction, a defendant's silence will not necessarily amount to a waiver of its right to bring a natural justice challenge.  However, waiver is fact-sensitive and any party which is faced with unfairness should consider carefully when to challenge that, and heed Lord Doherty's advice that courts will not always reach the same conclusion as it did in Babcock Marine.

What does the Babcock Marine judgment mean for your business?

Whilst Lord Doherty refused to enforce the adjudicator's decision against HSB without further inquiry, this is of no comfort to parties who may try to challenge an adjudicator's decision based on the procedure adopted. Challenges to adjudicators' decisions remain notoriously difficult because of the court's robust approach to enforcement. Regardless of the result of the inquiry in this case, both adjudications and the enforcement proceedings are likely to have been a costly undertaking for both parties. Better record keeping by the adjudicator and its QS would have helped address the court's concerns and resolve the natural justice issue.

If a party believes the adjudicator has breached the rules of natural justice, they can challenge the enforcement of his decision. The burden will be on the paying party to prove that the adjudicator committed the breach.  If the paying party fails to convince the court that there has been a breach of natural justice, not only will they have to pay the adjudicator decision, plus interest, but also the successful party's costs of enforcement proceedings, quite possibly on the indemnity basis (i.e. near-full reimbursement). Parties should therefore carefully weigh up (i) how likely their challenge is to succeed having regard to the tests above; and (ii) whether it is financially practical given the expense already incurred and exposure to adverse litigation costs that a challenge entails.