Practical Law

At the moment, we seem to have more Scottish than English adjudication enforcement judgments to talk about. I’m not entirely sure why that is, although I’ve heard the TCC is re-directing some adjudication enforcements to the County Court in the Central London Centre. That may be better for the parties if they get an earlier hearing date, but it means fewer published judgments, which isn’t so great for those of us who regularly blog about these things!

So, I turn to Lord Clark’s judgment in Field Systems Designs Ltd v MW High Tech Projects UK Ltd, where the issues were whether the adjudicator had failed to exhaust his jurisdiction and/or give adequate reasons and, if he had, was it a material breach of the rules of natural justice.  You may recall these issues also popped up in another Scottish judgment (Babcock Marine (Clyde) Ltd v HS Barrier Coatings Ltd), which Matt looked at earlier this year.

Field Systems Designs Ltd v MW High Tech Projects UK Ltd

This was a payment dispute arising out of works at a waste plant. The pursuer’s (Field) interim request for payment valued its works at just under £15.1 million. When the defender (MW) valued those at just over £14 million in its payment notice, Field referred the dispute over the shortfall (some £1.075 million) to adjudication.

The referral identified 25 issues in dispute, including two sums related to two sub-contractors:

• Issue 6, which was a deduction for “Cepha support” in the sum of £25,498.35.
• issue 7, which was a deduction for “Anord panel modifications” in the sum of £972.

For such small sums (equating to just over 2% of the total amount in dispute), there are a lot of paragraphs in the judgment devoted to these issues.

First, the judgment explains that the issue was how these works ought to be valued. MW called this issue the sub-contract/JV point and described it as a “new” issue when the parties debated the matter at a hearing before the adjudicator in September 2019. They subsequently exchanged further submissions on the subject before the adjudicator reached his decision on 4 October 2019. He was not persuaded by MW’s arguments that these sums should be deducted from the money due to Field, nor was he persuaded that the value of this issue was really £890,000, as MW alleged.

Secondly, the judgment goes through MW’s challenge to the adjudicator’s decision, arguing that the decision should not be enforced because the adjudicator failed to address a material line of defence (the sub-contract/JV point), so failed to exhaust his jurisdiction. Alternatively, if he did deal with the defence, he failed to provide any or any adequate reasons for his decision, which was a material breach of the rules of natural justice.

Failure to exhaust jurisdiction and/or give adequate reasons

Lord Clark’s judgment contains a useful summary of both Scottish and English authorities on the relevance of whether an adjudicator’s failure to deal with a key issue is a deliberate or inadvertent one. I think it is worth setting that out.

Lord Clark starts by looking at the judgment in Pilon Ltd v Breyer Group plc, where Coulson J (as he then was) concluded that the “adjudicator’s erroneously restrictive view of his jurisdiction” must be deliberate, not inadvertent, and must be material:

“… the error must be shown to have had a potentially significant effect on the overall result of the adjudication.”

Coulson J did qualify that by saying that an inadvertent failure would not “ordinarily” render a decision unenforceable. He then elaborated on this in his practitioner’s text:

• At paragraph 13.51 he noted that it is easy to see why deliberately not dealing with an issue, particularly a defence, may amount to a breach of the rules of natural justice. He referred to Lord Malcolm’s judgment in Whyte and Mackay Ltd v Blyth & Blyth Consulting Engineers Ltd, which concerned an inadvertent failure. Coulson J described this case as making “something of an inroad into the general principle that an adjudicator can make errors of law and fact without affecting the validity of his decision”. Coulson J suggested that Whyte and Mackay should be distinguished on its facts because the adjudicator’s error “was so complete”.
• In the ordinary case, a search for points not addressed should be unsuccessful because, as Lord Glennie said in Atholl Developments (Slackbuie) Ltd, the court should not allow any inference to be drawn that the adjudicator “consciously or unconsciously disregarded one party’s submissions or a document which they put before him”.
• Dawnus Construction v Marsh Life is a clear example of the court’s approach. It will not put a fine tooth comb through the adjudicator’s decision. It takes a broad-based approach, looking at the dispute referred and then what the result was. It is not a breach of the rules of natural justice if one particular sub-issue is not specifically referred to in the adjudicator’s decision.

Lord Clark then looked at RGB P&C Ltd v Victory House General Partner Ltd, where Jefford J had noted the “rarity” of cases dealing with inadvertent failure and whether it rendered the adjudicator’s decision unenforceable. Jefford J said she thought this was for two reasons:

• An inadvertent failure to address a particular issue is in the nature of an error within the adjudicator’s jurisdiction, rather than a breach of the rules of natural justice.
• It would be an unusual case where a court would draw an inference that an issue had not been addressed and would conclude the failure was so significant that the adjudicator had not decided the dispute referred and/or that the conduct of the adjudication was so unfair that the decision should not be enforced:

“The more significant the issue, the less likely it is to be inadvertently overlooked; the less significant it is, the more likely it is that is has been take account of in the round.”

Interestingly, at paragraph 34, Lord Clark recognised that there are no English cases where a challenge has succeeded on the ground of an inadvertent failure. He referred to KNN Colburn LLP v GD City Holdings Ltd, where Stuart-Smith J set out the relevant test for an inadvertent failure, namely that in order to make the decision unenforceable, the adjudicator must have failed to effectively address the major issues raised on either side, and this failure must be material in the sense of having had a potentially significant effect on the overall result of the adjudication.

Applying the law to the facts

I think the question of whether the adjudicator failed to consider the sub-contract/JV point is fact-specific. Ultimately, Lord Clark decided that the adjudicator did deal with the issue, although he recognised it was “very finely balanced”. This was not a plain case where the adjudicator had failed to exhaust his jurisdiction.

However, having concluded the adjudicator had dealt with the issue, Lord Clark then decided the adjudicator did not give adequate reasons. This led him to deal with what I think is the really interesting point: was this a material line of defence?

Lord Clark concluded it wasn’t.

He said it could only affect the agreed difference between the parties on their valuations of issues 6 and 7, namely £12,000, rather than the deduction of over £890,000 MW argued for. Lord Clark found that the adjudicator could not have concluded a deduction of £890,000 because that would result in:

“… a radical alteration to the whole nature and previously agreed terms of the dispute referred to the adjudicator.”

Lord Clark was concerned that the adjudicator would have to have disregarded the already certified value by MW, and that:

“No basis was suggested as to how the adjudicator could set aside that certified valuation.”

It is at least arguable that Lord Clark’s finding as to the scope of the adjudication is not consistent with the English authorities on this point and, in particular, Pilon v Breyer where Coulson J stated (at paragraph 25):

“It is not uncommon for adjudicators to decide the scope of their jurisdiction solely by reference to the words used in the notice of adjudication, without having regard to the necessary implications of those words: that was, for example, what went wrong in Broadwell. Adjudicators should be aware that the notice of adjudication will ordinarily be confined to the claim being advanced; it will rarely refer to the points that might be raised by way of a defence to that claim. But, subject to questions of withholding notices and the like, a responding party is entitled to defend himself against a claim for money due by reference to any legitimate available defence (including set-off), and thus such defences will ordinarily be encompassed within the notice of adjudication.”

In the adjudication, Field was claiming the shortfall between the parties’ valuations (namely, £1.075 million). That was a claim for money due. Therefore, some might argue that MW’s defence concerning the sub-contract/JV point should have been allowable despite the fact that it was not encompassed in the notice of adjudication.

Beyond that point it is difficult to comment, but I would just add that if this was a Scheme adjudication then the adjudicator could have opened-up, revised and reviewed the certificate, which could at least in part addressed Lord Clark’s concern about setting aside the “certified valuation”.

The counter position arises from the fact that, as Coulson J stressed in Pilon v Breyer, the legitimate defence point is “subject to questions of withholding notices and the like”. Therefore, others might argue that MW could not have relied on its £890,000 reduction as it was not included in its payment notice. This would certainly provide further justification for Lord Clark’s conclusion.

Severability

Finally, I think it’s worth mentioning that Lord Clark endorsed what Lord Doherty said in Dickie & Moore Ltd v McLeish and others regarding severing adjudicators’ decisions, which was to adopt:

“… a flexible and pragmatic approach [that] accords with the whole nature and purposes of adjudication and interests of justice.”

On that basis, Lord Clarke said that if the point had arisen, he would have severed the adjudicator’s decision on issues 6 and 7, and enforced the rest, being the core nucleus of the decision. Interestingly, he mentions that Lord Doherty’s case is being appealed (I think that is the effect of a reclaiming motion).

My take aways

Although Lord Clark was satisfied that the adjudicator had dealt with the sub-contract/JV point, he made it clear that the point was very finely balanced. All of this could have been avoided if the adjudicator had expressly dealt with the issue, and I suspect that it needed no more than a paragraph to do so. Adjudicators need to ensure that they address key submissions and remember that, if they don’t, there is the potential for that failure leading to their decision being unenforceable even if it is inadvertent.

Addressing the question posed in the title of this blog, I’m not sure if this case is authority for the proposition that parties to adjudication in Scotland cannot raise any legitimate defence to a money claim, such that the position in Scotland is more restrictive than in England. I think the case is probably too fact specific. However, parties in Scotland should certainly take heed of this judgment, and any subsequent appeal, when deciding on the defences they run.