Practical Law

Compared to the restrictions we faced a couple of months ago with the emergence of the Omicron variant of COVID-19, it really does feel as if we are starting to return to some normality, and it was wonderful to see so many construction law professionals at the Society of Construction Law lunch in London last Friday. I had intended to read Morris J’s interesting judgment in John Graham Construction Ltd v Tecnicas Reunidas UK Ltd on the train home, but I sensibly put that off until the weekend, otherwise I fear my ramblings might have been somewhat difficult to discern.

John Graham v Tecnicas Reunidas is an interesting case because of the issues that have arisen from multiple adjudications and two arbitrations (one of which we’re told in the judgment is ongoing), and the impact of an adjudicator’s decision being overturned.

John Graham Construction Ltd v Technicas Reunidas UK Ltd 

The disputes have arisen in respect of works carried out by John Graham Construction (the sub-contractor) at the Tees renewable energy plant biomass power station under a sub-contract with Technicas Reunidas UK Ltd (the contractor).

Although I’m primarily interested in the application to enforce the fourth adjudicator’s decision, I also need to look at the findings the first adjudicator made and the subsequent arbitral award.

First adjudication

The first adjudication took place in 2019. The adjudicator decided the scope of the sub-contract works was limited to works necessary to achieve certain milestones, which is what the sub-contractor had argued. Thereafter, the sub-contractor refused to carry out works it considered went beyond those milestones, or refused to carry them out at the rates set out in the sub-contract.

First arbitration

That dispute was referred to arbitration and, in June 2020, the tribunal issued a partial award with a later partial award issued in February 2021. The outcome of the arbitration was that the first adjudicator’s decision on scope was found to be wrong; the scope was not limited to milestones as the sub-contractor had argued. By the time the tribunal’s award was issued, the contractor had already arranged for other contractors to undertake various works.

Fourth adjudication

In the meantime, in December 2020, a dispute arose over the sub-contractor’s interim application for payment 47 (IA 47), to which the contractor had applied a contra-charge to cover the costs of other contractors undertaking some of the work the first adjudicator found was outside the scope of the sub-contract. The contractor said the sub-contractor was in breach of contract for failing or refusing to carry out the works the arbitrator had subsequently found to be included in the sub-contractor’s scope.

That dispute was referred to adjudication, with the fourth adjudicator asked to determine the true value of IA 47. The sum awarded to the sub-contractor included £355,000-odd that the contractor disputed was due. The contractor maintained it could contra-charge for the cost of employing other contractors to complete the sub-contract works and so it paid only part of the sum awarded in the fourth adjudicator’s decision.

Enforcing fourth adjudicator’s decision

In the enforcement proceedings that followed the adjudication to enforce the balance of the sum awarded to the sub-contractor, the contractor argued that the fourth adjudicator had acted in excess of or outside his jurisdiction. It said the jurisdictional error arose because the fourth adjudicator agreed that the parties were required to comply with the first adjudicator’s decision until June 2020, and that legitimised the sub-contractor’s refusal to carry out works. It also meant the contractor could not levy the contra-charge.

The contractor said this showed the fourth adjudicator refused to give effect to the arbitration award and gave continuing effect to the first adjudicator’s decision.

The contractor also argued that it had not waived its right to raise this jurisdictional challenge. It said it was a fundamental jurisdictional error and was not capable of being waived, and it did not have actual or constructive knowledge of the error until the adjudicator’s decision was issued.

Morris J disagreed with the contractor and enforced the balance of the fourth adjudicator’s decision. He held the fourth adjudicator:

• Expressly acknowledged that he was bound by the arbitration award.
• Did not answer the wrong question. He decided the contractor could not levy the contra-charge because the loss flowed from complying with the first adjudicator’s decision, not the sub-contractor’s breach of contract. The fourth adjudicator therefore decided the point on a causation basis, and it was immaterial whether that was right or wrong.

Obiter, he also held that the contractor did not have actual or constructive knowledge of the jurisdictional challenge prior to receiving the fourth adjudicator’s decision, so it had not waived its rights to challenge on this basis.

My thoughts

I think there are some important points we can take from Morris J’s findings on both the excess of jurisdiction and waiver points.

The contractor’s contention that the fourth adjudicator exceeded his jurisdiction does rather turn on its facts, but the judge’s findings are nevertheless a useful reminder of the distinction between a subsequent adjudicator overriding the findings of a previous adjudicator or arbitrator, as opposed to applying the earlier decision or award. As Morris J put it:

“Where the first decision is a decision on a dispute as to the construction of contractual terms, then that dispute is to be distinguished from a dispute as to the application or consequences of a particular construction. Thus the decision in the latter case, whatever that decision is, does not override, undermine or re-decide the first decision. That is so, even if the second decision is wrong as a matter of law or fact. The second decision is not ‘in excess of jurisdiction’.”

Parties need to be alive to that distinction when determining whether a subsequent adjudicator has trespassed on an earlier decision.

Turning to the waiver point, this case evidently settles the question of whether there is a distinct class of jurisdictional objection that is so fundamental that it cannot be waived, with Morris J finding that there is no such distinct class. However, I think it’s Morris J’s finding that, if contrary to his conclusion, the fourth adjudicator had acted in excess of jurisdiction by undermining the first arbitration award, then the contractor did not waive its jurisdictional objection. I think the following extracts of the judgment are relevant:

“The Claimant argued that there was no breach of contract. If the Adjudicator had accepted that argument, with the result that he had acted in excess of jurisdiction, then in my judgment the Defendant should have raised its objection in the course of the adjudication. It was on notice as to the very issue which would have resulted in the excess of jurisdiction.

However, where, as here, the Adjudicator reached a decision (in excess of jurisdiction) on a basis different from that contended for by the other party, the position is less clear. On the one hand, the Defendant was on notice that the Claimant’s argument of ‘no breach’ if accepted would involve excess of jurisdiction and was therefore on notice of a potential excess of jurisdiction at that time. Furthermore, the fact that that party was represented in the adjudication by experienced and expert lawyers militates in favour of a finding of at least constructive knowledge. However, I conclude that in this case, given the course of the detailed argument by the parties, the Defendant could not have anticipated that the Adjudicator would have reached his conclusion on the basis of a different, causation, analysis. The Claimant’s argument in its Reply was based firmly on ‘no breach of contract’…

Where an adjudicator decides the case on a different basis from that put forward by one party, and one which the other party could not have anticipated, and that basis of decision leads to an excess of jurisdiction, then the latter party did not know or could not reasonably have known of the basis of the excess of jurisdiction, and a failure to raise an objection to jurisdiction prior to the adjudicator’s decision would not amount to a waiver.

I conclude that, if and in so far as I had held that, by deciding on the causation basis, the Adjudicator had undermined Award 1 and had thus exceeded his jurisdiction, then I would have found that the Defendant did not have actual or constructive knowledge of the jurisdiction objection and thus its failure to raise such an objection prior to the Decision did not amount to a waiver of the objection.”

I may well be missing something but, if an adjudicator decides a fundamental issue on a basis not argued for by the parties then, regardless of whether that amounts to an excess of jurisdiction, could it not amount to a material breach of the rules of natural justice? Therefore, I was quite surprised that the contractor did not run a natural justice argument. However, perhaps it is keeping its powder dry for another day?