Practical Law

Court of Session decides that to enforce adjudicator’s decision would be a breach of Human Rights.

Whyte and Mackay v Blyth & Blyth is the second decision in a long-running dispute over a whisky bottling facility. Readers may recall Lord Malcolm’s initial, somewhat surprising decision, which I blogged about last May.

Whyte and Mackay Ltd v Blyth & Blyth parts 1 and 2

The first judgment was concerned with whether it was possible to counterclaim in adjudication enforcement proceedings. Lord Malcolm found that it was, albeit that the counterclaim was in respect of declaratory relief (which would, if granted, amount to a final determination of the issue before the adjudicator) rather than for a financial sum.

The second judgment was concerned with the more familiar question of whether the adjudicator’s decision should be enforced. However, there is nothing familiar about Lord Malcolm’s approach, which is sure to be the subject of a great deal of discussion both north and south of the border.

There was little insight into the dispute’s underlying facts from the first judgment. However, they are now set out in far greater detail and are critical to Lord Malcolm’s reasoning. In summary:

• B&B designed a new bottling facility for W&M.
• Construction finished in 2006.
• In 2009, settlement was observed in the finished plant.
• W&M intimated a claim to B&B in 2009, alleging professional negligence in the design.
• W&M occupied the facility under a lease that would run until 2035.
• Rather than close the plant (with massive and costly disruption to production), W&M proposed to carry out certain interim inspections and remedial works on a five-year rolling programme.
• The major remedial work was programmed for the end of the lease in 2035. This would require W&M to close the facility for a year.

Against this background, the adjudicator found in favour of W&M and ordered payment of almost £3 million in damages. A large part of this sum related to the costs that would not be expended until 2035.

Challenging the adjudicator’s decision

B&B argued that the adjudicator’s decision should not be enforced and it relied on two main arguments, breach of the rules of natural justice and the European Convention on Human Rights (ECHR).

B&B argued that the adjudicator had entirely disregarded a major plank of its defence (an argument based on causation). Lord Malcolm agreed. This amounted to a breach of the rules of natural justice, which was significant enough to prevent enforcement.

Article 1 of Protocol 1, ECHR

B&B also made an argument against enforcement based on the ECHR. Interestingly, it made it plain that this argument would apply even if there had been no breach of the rules of natural justice.

Human rights provisions do not feature frequently in PLC’s construction pages and so, at this point, it is worth setting out the provisions of Article 1 of Protocol 1:

(1) Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

(2) The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

B&B submitted that the court’s power to order payment engaged Article 1 on the basis that an order for payment amounted to an interference with the peaceful enjoyment of B&B’s possessions: in this case, its money. Accordingly, in order for that interference to be permissible, it must be in the public interest and as provided for by law.

Lord Malcolm agreed with B&B that usually, when a court orders payment, it is satisfied that it is doing so in accordance with the parties true legal rights and obligations. The position with adjudication was different because adjudicators’ decisions are provisional and “rough and ready.”

Lord Malcolm went on to note that the courts will usually enforce adjudicators’ decisions and that, even if faced with an ECHR challenge:

“the court will usually be able to justify enforcement of an award by reference to the well understood countervailing general interest benefits arising from adjudication.”

By this he meant cash flow during the currency of contracts.

What Lord Malcolm seems to be saying is that Article 1 is engaged in all adjudication enforcement actions and the courts operate it as a safeguard, but usually the benefits in enforcing an adjudicator’s decision (and interfering with a party’s possessions) outweigh the arguments against.

Contrasting W&M v BB with a typical case

Lord Malcolm went on to contrast what he appears to have regarded as the “typical” situation with the present case, where:

• The losses had been incurred some time after the contract works were finished.
• Some of the losses would not be incurred until 2035.
• The issues of fact and law were so complicated that it was “next to impossible” for the adjudicator to deal with them in the limited time available.

He stated that it had been “unnecessary and inappropriate” for W&M to proceed to adjudication and that enforcing the adjudicator’s decision would place an “unfair and excessive burden” on B&B. He accepted that there was an overriding interest in enforcing decisions that may be obviously wrong in law or fact, but that it would be “disproportionate and wrong” to enforce this decision where no general or public interest was served by enforcement.

The factors that appear to have been relevant to Lord Malcolm’s view were:

• There was no pressing need to have the dispute resolved quickly in the rough and ready forum of adjudication.
• The dispute arose “long after completion of the contract” and cash flow was therefore not an issue.
• The major losses would not be incurred for some time and no security was being offered in respect of what would happen to the £3 million if paid over prior to final resolution of the dispute by the courts.

Driving a coach and horses through adjudication?

W&M submitted that Parliament had not limited adjudication to disputes arising during the works involved in construction contracts. Courts should enforce adjudication decisions in respect of disputes that arise after completion. To decide otherwise would undermine the whole statutory scheme. The court should consider the advantages of adjudication as a whole, rather than to focus on this particular case.

Lord Malcolm rejected these arguments as being “exaggerated and unconvincing”, and stated that this decision turned on its own particular facts and “would not upset the now well-established statutory scheme.”

I am not so sure:

• In my experience, most adjudications take place after the contract works have concluded. This is supported by Glasgow Caledonian University’s research, which has found 90% of adjudications occur after practical completion. That may be contrary to adjudication’s original purpose, but that is the way parties tend to exercise their statutory right to adjudicate.
• The adjudicator’s approach to the future damages assessment may have been less than perfect but, in my view, it falls squarely within the type of decision that courts may not like, but will routinely enforce.
• On a more academic level, one may question whether there is ever any “public interest” in how two limited companies resolve their dispute – whether they take up arms in court or adjudication. It seems harsh to criticise a party for taking up its legal right to seek a fast and cheap means to obtain an award (albeit provisional), rather than embarking on (potentially) years of litigation in the courts. Is one approach really more in the public interest than another? Arguably, the public interest is in having laws that are applied consistently by the courts.

There is much here for both the public and construction lawyer to debate.

In practice, where does this leave us?

Unless this judgment is overturned on appeal, it appears to herald a period of uncertainty for those adjudicating in Scotland.

A further hearing has been fixed to discuss the form of order pronounced by the court. In view of the breach of the rules of natural justice, it is likely that the decision will be set aside ope exceptionis. (For a full discussion see Vaughn v Hinkins and Frewin [2003] SLT 428.)

However, imagine a case where there is no natural justice breach and the court is refusing to enforce the decision on ECHR grounds alone. In that example, there would be no basis for the decision to be set aside. Equally, there would be no basis to have it reduced in judicial review proceedings. Why? Because the decision is perfectly valid and the court is simply refusing to order payment. The adjudicator’s decision will continue to exist, but the courts will not enforce it. The potential complications caused by this situation are obvious. In addition, the “interference” which triggers the ECHR is the court ordering payment. Accordingly, purely declaratory decisions (such as those relating to extensions of time, the validity of notices and so on) may be unaffected by the court’s reasoning.

Parties resisting enforcement are now likely to argue that Article 1 of the Protocol is engaged and present arguments to the court to explain why it should exercise its discretion not to enforce. Where the adjudication has taken place after completion of the contract – a common occurrence – those arguments are likely to mirror the suggestion that as there is no cash flow issue, it would have been more appropriate to litigate. Where the dispute is a professional indemnity claim, those resisting enforcement may feel even more emboldened.

The upshot of all of this may be that with regard to professional indemnity claims, parties may choose to start proceedings in court or arbitration rather than in adjudication. Many, particularly PI insurers, will consider this is a good thing. They may have a point. However, it is settled law that such contracts are covered by the Construction Act 1996 and parties to them have a statutory right to adjudicate at any time.

And finally

It seems unlikely that the English courts will follow this decision given the extent to which they favour a presumption of enforceability, although time will tell. The argument is likely to be taken in an English case at some stage. Whatever the rights and wrongs of the decision, it will be a matter of concern for the UK construction industry if this is a further example of the Scottish and English courts taking divergent positions.

It is not yet known whether W&M will appeal but further judicial consideration of these issues would be helpful for all those who practice in the field of adjudication.