Practical Law

I haven’t blogged about alleged breaches of natural justice for a while, so here goes with the first reported judgment from Joanna Smith QC, who was sitting as a deputy High Court judge in the TCC. In my view, the judgment in Victory House General Partner Ltd v RGB P&C Ltd is very well written: it is clear, concise and very readable.

Before diving into the natural justice issues, I should just mention the warning about using Part 8, a warning that Jefford J first gave last year in Merit Holdings Ltd v Michael J Lonsdale Ltd. I looked at that judgment at the time and note Victory House is another example of a case where the TCC is trying to crack down on what the judges perceive to be an abuse of the Part 8 process.

Victory House v RGB

This was a dispute all about the the refurbishment project at Victory House, Leicester Square, London, and specifically the installation of a transformer. The project suffered from delays and, in March 2017, the parties entered into a memorandum of understanding (MOU), which was executed as a deed. The MOU provided for three stage payments to the contractor (RGB) and the first two payments were made.

The transformer was installed and operational by 24 June 2017 and, in July 2017, RGB issued its interim application for payment 30 (IA 30) under the terms of the parties’ contract (and not under the MOU). A dispute then followed regarding whether the contract had been superseded by the MOU and whether, if not, the employer (Victory House) had served valid payment and pay less notices. The dispute was referred to adjudication and Dr Franco Mastrandres was appointed as the adjudicator.

From the judgment, it seems that both parties presented the adjudicator with several submissions and that the adjudicator arranged a meeting with the parties because he wanted to know more about the terms and effect of the MOU. After the meeting, he sent a set of questions, which included the following:

• In Recital D what is the purpose/scope/effect of the words, “The Employer is wary of making further payments until the transformer is installed and operational so that meaningful progress can be made to completion”?
• How, if at all, was that purpose/scope/effect affected/discharged by the transformer being installed and operational by 24 June 2017?

Both parties responded to these questions in their own way, which led the adjudicator to issue his decision on 7 November 2017. In that decision, the adjudicator:

• Rejected the contractor’s primary case that the MOU was not legally binding and rejected the employer’s case that the MOU superseded the contract and effectively governed what payments were to be made to the contractor to the date of practical completion.
• Held that the true effect of the MOU was to suspend the employer’s obligation to make interim payments under the contract until such time as the transformer was installed and operational. However, it did not extinguish those obligations.
• Found that IA 30 was properly made and was not precluded by the provisions of the MOU. The employer had not issued either a valid payment or pay less notice, so the contractor was entitled to the sums set out in IA 30 (some £683,000).

The employer did not comply with the adjudicator’s decision, which ultimately led to its Part 8 application. Interestingly, prior to those proceedings being issued, the contractor had issued a winding up petition against the employer, based on its failure to honour the adjudicator’s decision. It seems those proceedings were not pursued.

Part of the declaratory relief the employer sought related to an alleged breach of the rules of natural justice, since:

“… the Adjudicator’s decision as to the true construction of the MOU did not reflect an argument that had been advanced by either party and that this was therefore a case in which a central finding by the Adjudicator involved him in ‘going off on a frolic of his own’.”

Adjudicator decided point of importance

Although the judge decided that the adjudicator had made his decision against the backdrop of the specific questions he asked about Recital D, which both parties had the opportunity to answer, and not on a basis for which neither party had contended, she made it clear that even if she was wrong about that, the adjudicator was:

“… entitled to arrive at a conclusion that did not necessarily reflect the submissions made by the parties…”

She relied on the reasons stated by Fraser J in AECOM Design Build Ltd v Staptina Engineering Services Ltd, who had, in turn, referred to Edwards-Stuart J’s judgment in Roe Brickwork Ltd v Wates Construction Ltd:

“43. Edwards-Stuart J also stated in Roe Brickwork Ltd v Wates Construction Ltd at [24] that ‘there is no rule that a judge, arbitrator or adjudicator must decide a case only by accepting the submissions of one party or the other. An adjudicator can reach a decision on a point of importance on the material before him on a basis for which neither party has contended, provided that the parties were aware of the relevant material and the issues to which it gave rise had been fairly canvassed before the adjudicator’.

44. In my judgment the latter passage of Edwards-Stuart J aptly summarises the position here. The adjudicator decided a point of importance on the basis of the material before her, and on a basis for which neither party had contended and she was entitled to do so. …She was not bound to accept only one of the two alternatives put to her by the parties. Questions of contractual interpretation in particular will often (if not usually) be capable of more than two possible answers, and so the correct answer (as the adjudicator may see it) may not have been expressly proposed by either one of the parties. That does not mean that by choosing a different answer, the adjudicator is breaching natural justice by failing to notify the parties of this and inviting further submissions.”

Therefore, Victory House provides further evidence that the TCC will enforce an adjudicator’s decision even where the adjudicator has reached a conclusion that may not have been expressly proposed by either one of the parties.

Will more adjudicators “frolic” as a result of Victory House?

This raises the question of whether it extends the “rough justice” principle of adjudication too far, and whether it will result in more adjudicators going off on a frolic of their own.

In my view, the answer to both of these questions is no because:

• All three cases (Roe Brickwork, AECOM and Victory House) stress that the adjudicator must reach the decision on the material before him. As was made clear in Roe Brickwork:
  

  “If an adjudicator has it in mind to determine a point wholly or partly on the basis of material that has not been put before him by the parties, he must give them an opportunity to make submissions on it. For example, he should not arrive at a rate for particular work using a pricing guide to which no reference had been made during the course of the referral without giving the parties an opportunity to comment on it.”

  This could clearly be extended to an adjudicator making a decision on the basis of a case not put before him, and not giving the parties the opportunity to make submissions on that case.

• In Roe Brickwork the court also made it clear that the parties must be aware of the relevant material and the issues to which it gave rise must had been fairly canvassed before the adjudicator.
• The alleged breaches of natural justice in both AECOM and Victory House concerned the interpretation of contracts. Therefore, it is arguable that the TCC will only give adjudicators this degree of leeway where the natural justice point arises in matters of contractual interpretation.

Therefore, in my view, the TCC has clearly restricted the circumstances in which adjudicators can reach a decision on a basis for which neither party has contended, and I don’t think adjudicators will consider cases such as AECOM and Victory House as authority for them to go off on a frolic of their own. There are plenty of authorities where the TCC has found that the adjudicator committed a material breach of the rules of natural justice because he made his decision on a basis not put before him, and did not allow the parties to make submissions on that basis, for example see Herbosh-Kiere Marine Contractors v Dover Harbour Board.

However, I would recommend that adjudicators err on the side of caution, if in doubt. I can do no more than refer you to the guidance provided in the RICS Guidance Note, Surveyors Acting as Adjudicators, 4th edition (at paragraph 3.4.5):

“The adjudicator may be appointed due to their knowledge of the technical and/or contractual matters relating to the dispute between the parties, and the adjudicator can be expected to use this knowledge. However, the adjudicator should be careful to ensure that they give the parties the opportunity to comment upon any matters within the adjudicator’s own knowledge which have not been canvassed by the parties and which the adjudicator proposes to take into account in reaching the decision. For example, the adjudicator may wish to draw the parties’ attention to a particular clause of the contract or case not relied on by the parties in their submissions, and invite comment on it. Failure to provide the parties with an opportunity to comment on such a matter may result in a decision being challenged on the grounds of a breach of the rules of natural justice.”