Happy New Year to you all.
Although we are only in January, the beginning of December seems a long time ago, not least because much of the country was still in Tier 2 at the time. Restaurants and bars remained open and 1,000 lucky spectators attended Anthony Joshua’s latest defence of his heavyweight belts at Wembley Arena in London. Meanwhile, at the Rolls Building in London, judgment in another heavyweight clash was handed-down, namely the adjudication enforcement case of Global Switch Estates 1 Ltd v Sudlows Ltd. I say “heavyweight clash” because both sides had top solicitors and prize fighting silks, there was over £5 million in dispute and the matter was in front of the Judge-in-Charge of the TCC, Mrs Justice O’Farrell.
Global Switch Estates 1 Ltd v Sudlows Ltd
This was a dispute over interim applications 27 (IA 27), which Sudlows submitted in March 2020, and which claimed just under £8.8 million. That sum included claims for structural works (including preliminaries), loss and expense for a 209-day delay to the main fit-out works, further extensions of time and loss and expense for delays to the chiller replacement works and a refund for the demand made on a bank guarantee. Payment notices were served and no payment was made to Sudlows.
A couple of months later, Global started the parties’ fourth adjudication, seeking a decision as to the true value of parts of IA 27, and claiming some £6.8 million back from Sudlows. The adjudicator was asked to open up, review and revise, but was also provided with a list of “excluded matters” that Global said did not form part of the dispute being referred to adjudication. In its response, Sudlows disputed Global’s attempt to confine the scope of the dispute, arguing that it could raise any defence open to it.
However, when the adjudicator’s decision was issued, it was clear that he had accepted Global’s argument, finding he did not have jurisdiction to deal with Sudlows’ extensions of time and loss and expense claims:
“With regards to the jurisdictional challenge as to the scope of my jurisdiction I conclude that Global could and did limit the scope of the adjudication and my jurisdiction as specified in the Notice.”
The adjudicator awarded Global some £5.1 million.
Enforcement proceedings and O’Farrell J’s observations
Global issued proceedings to enforce the adjudicator’s decision when Sudlows failed to pay the sums awarded to it. Sudlows argued that the adjudicator had wrongly concluded that he lacked jurisdiction to deal with the “excluded matters”.
Before turning to consider the facts, O’Farrell J ran through the applicable case law (including the judgments in Carillion v Devonport Royal Dockyard, Cantillon Ltd v Urvasco Ltd, Pilon v Breyer and Lord Brigg’s judgment in Bresco v Michael J Lonsdale). She then set out a list of observations she had derived from those cases (at paragraph 50 of her judgment).
I think it is worth setting them out, as they neatly sum up the current position:
- A referring party is entitled to define the dispute being referred to adjudication by its notice of adjudication and it is entitled to confine the dispute to specific parts of a wider dispute, such as the valuation of particular elements of work forming part of an application for interim payment (paragraph 50(i)).
- A responding party is not entitled to widen the scope of the adjudication by adding further disputes arising out of the underlying contract (without the consent of the other party). A responding party can commence separate adjudication proceedings in respect of other disputed matters (paragraph 50(ii)).
- A responding party is entitled to raise any defences it considers properly arguable to rebut the referring party’s claim. By so doing, the responding party is not widening the scope of the adjudication; it is engaging with and responding to the issues within the scope of the adjudication (paragraph 50(iii)).
- Where the referring party seeks a declaration as to the valuation of specific elements of the works, it is not open to the responding party to seek a declaration as to the valuation of other elements of the works (paragraph 50(iv)).
- However, where the referring party seeks payment in respect of specific elements of the works, the responding party is entitled to rely on all available defences (including the valuation of other elements of the works), to establish that the referring party is not entitled to the payment claimed (paragraph 50(v)).
- It is a matter for the adjudicator to decide whether any defences put forward amount to a valid defence to the claim in law and on the facts (paragraph 50(vi)).
- If the adjudicator asks the relevant question, it is irrelevant whether the answer arrived at is right or wrong. The decision will be enforced (paragraph 50(vii)).
- If the adjudicator fails to consider whether the matters relied on by the responding party amount to a valid defence to the claim in law and on the facts, that may amount to a breach of the rules of natural justice (paragraph 50(viii)).
- Not every failure to consider relevant points will amount to a breach of natural justice. The breach must be material and a finding of breach will only be made in plain and obvious cases (paragraph 50(ix)).
- If there is a material breach of the rules of natural justice, the adjudicator’s decision will not be enforced (paragraph 50(x)).
Applying those observations to the facts, O’Farrell J held the adjudicator was wrong to restrict his jurisdiction in the way he had. He had been misled by Global. This was a “plain and obvious” breach of the rules of natural justice that “precluded any consideration of a very substantial part of the defence”. It rendered his decision unenforceable.
The judge also rejected two other issues that had been raised (one concerned a call on a bank guarantee, the other whether the adjudicator had “trespassed on an earlier decision”). In fairness to the adjudicator, she did not think that he erred regarding these other two matters.
Contrary to what those less experienced in adjudication might believe from reading this case, referring isolated parts of an interim or final account is actually quite common, and indeed as Coulson J (as he was then) said in St Austell Printing Company Ltd v Dawnus Construction Holdings Ltd, it is to be encouraged.
Referring the entirety of an account in one adjudication can result in considerable work for the parties and adjudicator, particularly in cases where measured works, variations, time and loss and expense are all in dispute. It can therefore be sensible to break such disputes down into more manageable parts.
It also isn’t always the case that a responding party will try and introduce other elements of an account as a defence to a claim for payment. My impression is that responding parties and their representatives are often more than happy to restrict an adjudication to an isolated part of an account: it saves time and money, and the adjudicator’s decision might lead to the parties being able to settle other aspects of the account.
However, where a responding party does rely on such defences and there is an argument as to whether the adjudicator has jurisdiction to address them, cases such as Global Switch Estates v Sudlows and Pilon v Breyer it make it clear that the consequences of an adjudicator reaching the wrong conclusion as to their jurisdiction can constitute a material breach of the rules of natural justice and result in a decision being unenforceable. Therefore, it is vital that party representatives and adjudicators give careful consideration to such matters.
My tips to avoid this jurisdictional issue
My tips to parties and their representatives on how to avoid similar issues arising are as follows:
- The easiest way for a referring party to avoid such problems occurring altogether is not to claim payment, and just seek a declaration concerning the value of specific elements of the works. As O’Farrell J made clear at paragraph 50 iv) of her judgment, in those circumstances, “it is not open to the responding party to seek a declaration as to the valuation of other elements of the works”. Payment can then be claimed in a later adjudication, if necessary.
- If the referring party does seek payment in respect of specific elements of the works, then the referring party and adjudicator must appreciate that the responding party is entitled to rely on all available defences (including the valuation of other elements of the works), to establish that the referring party is not entitled to payment. O’Farrell J makes this clear at paragraph 50 v) of her judgment, and it is consistent with Coulson J said over 10 years ago in Pilon v Bryer.
“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.”
- If a jurisdictional issue does arise as to whether a responding party can rely on its valuation of other parts of the works not included in the notice of adjudication, I consider that an adjudicator should address this issue during the course of the adjudication where at all possible. Not only does this allow a party to apply to the court for a declaration concerning the jurisdictional issue before a potentially unenforceable decision is reached, but the parties also know whether they have to spend time addressing these other matters in their submissions.
It is worth remembering that findings by the TCC of material breaches of the rules of natural justice by adjudicators are rare, but this case is a salutary lesson in how costly an incorrect conclusion on jurisdiction can be.