Practical Law

As last year drew to a close, Lord Doherty handed down an adjudication enforcement judgment in Babcock Marine (Clyde) Ltd v HS Barrier Coatings Ltd, which was concerned with whether the adjudicator had failed to give reasons or failed to exhaust his jurisdiction. There was also an issue over whether there had been a material breach of the rules of natural justice and it is this latter point I’m going to look at today.

Babcock Marine (Clyde) Ltd v HS Barrier Coatings Ltd

This was a dispute arising out of works carried out by HS Barrier Coatings (HSBC) at HM naval base in Clyde. The works were to docking cradles and the contract sum was some £800,000.

The parties had contracted on the NEC3 Engineering and Construction Short Contract (June 2005), with bespoke Z clause amendments. One of the Z clauses required disputes to be referred to adjudication as part of a tiered dispute resolution process. An adjudicator would be appointed on the NEC Adjudicator’s Contract (and the April 2013 edition applied in this case).

By December 2016, a number of “disagreements” had arisen between the parties and they had entered into a settlement agreement, which drew a line under matters up to that date. It also revised the contract sum to £1.07 million. That didn’t end matters though and, in June 2018, Babcock terminated the contract. Consequently, HSBC prepared a termination application seeking a payment of just under £970,000 plus VAT.

There was a dispute over whether HSBC’s termination application was a valid payment notice, and whether a valid pay less notice had been issued in return. An adjudication followed, with the adjudicator finding in HSBC’s favour. Babcock paid the sum the adjudicator had awarded and issued a notice of dissatisfaction, as required by the contract. HSBC also issued a notice of dissatisfaction.

In February 2019, Babcock referred the value of the works at the date of termination to adjudication (the second adjudication). Three elements of the valuation were in dispute (base scope works, certain compensation events and termination costs). The second adjudicator reached his decision on 22 March 2019 and decided that the gross valuation of the works at termination was some £1.5 million. He directed that HSBC should pay Babcock just over £610,000 (inclusive of VAT) plus interest and fees. Both parties served notices of dissatisfaction in relation to this decision.

Enforcement proceedings

Babcock initially tried to enforce the adjudicator’s decision in England but O’Farrell J decided that, while the courts in Scotland, England and Wales all had jurisdiction, Scotland was the more appropriate forum and granted a stay of the English enforcement proceedings. Therefore, in July 2019, Babcock started proceedings in Scotland.

HSBC resisted enforcement on two grounds: that the adjudicator had failed to exhaust his jurisdiction and that there had been a material breach of the rules of natural justice in the way the adjudication had been conducted. It was only at the end of September 2019 that it also raised the fact that the adjudicator had used the services of a QS to support its breach of natural justice argument.

Near the end of his judgment, Lord Doherty described the six-month delay in raising this point as “highly regrettable” and said it should have been raised much earlier. I can’t help wondering if the point was only raised then because of Lord Doherty’s judgment in Dickie & Moore Ltd v McLeish, which had been handed down earlier that month. Ultimately, in that case he concluded that the same adjudicator’s use of a pupil adjudicator was not a material breach of the rules of natural justice.

Contract with the adjudicator

In February 2019, when Mr Bunton was appointed as the second adjudicator, he wrote to the parties confirming acceptance of the appointment and enclosing a copy of his “Terms and Conditions of Appointment”.

From the judgment it is clear that the status of this document was disputed, with HSBC saying it was not part of the contract with the adjudicator, Babcock arguing that it was. As far as I can tell, it was not a matter that Lord Doherty decided. He’s saved that for another day. However, it was relevant because paragraph 14 provided that:

“If I require quantity surveying input during the Adjudication I will utilise the resources of Bunton Consulting Partnership. This matter is at my absolute discretion and I will not require the consent of the parties. A senior QS will be charged at £85 per hour plus expenses and a junior QS at £55 per hour plus expenses.”

Clause 2.3 of the NEC’s adjudicator’s contract also provided for something similar (although it goes further):

“After notifying the parties of his intention, the Adjudicator may obtain from others help that he considers necessary in reaching his decision. Before making his decision, the Adjudicator provides the parties with a copy of any information or advice from others and invites their comments on it.”

It seems the adjudicator believed he could obtain QS input and did so. He clearly didn’t think he needed to tell the parties (as the NEC terms required) and didn’t do so. The 28 hours that were recorded in his fee note (and sent to the parties in March 2019), was the first they knew about it. However, neither party raised an issue at the time. It was only on 1 October 2019 (over six months later) that HSBC asked what the QS assistant had done. The following day the adjudicator said it was something that was “entirely at his discretion” and he had not been required to tell the parties. He made the point about the time lag since his fee note and said that as he was out of the office, he couldn’t recall the detail, but observed the work:

“… would probably involve clerical and administrative assistance, checking that the parties (sic) submissions contained the documents set out in any inventory, checking the parties (sic) calculations… assisting me in checking if the parties have submitted vouching information… double checking figures after my calculations, and populating the Scott Schedule with values I had decided…”

Breach of natural justice

HSBC said this was “an opportunity… for injustice to be done” and was a material breach of the rules of natural justice. It wanted to know precisely what the QS had done and thought it was necessary to inquire further.

In contrast, Babcock said that what the QS had done was irrelevant and using a QS for clerical or administrative duties did not result in a breach of natural justice. It also said that by sending the parties his own terms and conditions, the adjudicator had complied with clause 2.3 of the NEC terms and had told the parties (his paragraph 14) that he might use a QS without further notice. It was reasonable to infer that since he did not tell the parties anything, the work was merely clerical or administrative.

Lord Doherty was not persuaded by Babcock’s paragraph 14 argument. He thought it was a provision for what would happen if the adjudicator needed QS input during the adjudication and it was “going too far too fast” to infer that what the QS had done was the sort of work that did not need to be disclosed.

He also considered it a moot point whether what the QS had done should have been disclosed under the NEC terms. He thought it arguable that clause 2.3 was concerned with matters that were “likely to be material to the decision-making process”, which should be disclosed to enable the parties to comment.

However, he was “inclined to the view” that natural justice required clerical or administrative assistance to be disclosed, not detailed disclosure, just in “brief, broad terms” as to what the QS was doing. Whether this breach was material was not something he could decide on the evidence before him and further inquiry (as HSBC had asked for) was necessary.

Will history repeat itself

It will be interesting to see how Lord Doherty rules on the question of materiality, but perhaps we have a clue from his judgment in Dickie and Moore. There the pupil adjudicator had carried out tasks of an administrative, secretarial, arithmetical and mechanical nature (which sounds very familiar).

Although Lord Doherty said the parties should have been advised about what the pupil was doing (and so there was a breach), it was not a material breach of the rules of natural justice as the adjudicator had made all the material decisions on the issues in the adjudication.

My take-aways

We all know that losing parties are not necessarily slow to come up with ways to challenge the enforceability of an adjudicator’s decision, and appear to be increasingly more creative with their arguments as the years pass by. Pouring over the decision, looking for examples of deficient reasoning or evidence and/or submissions that appear to have been overlooked is never an easy route to take, as this judgment demonstrates.

That said, how the adjudicator conducts the adjudication can provide those parties with just the opportunity they are looking for. Adjudicators need to remember this and need to take steps to protect themselves. For example, in this case, a quick email to the parties advising that someone was checking the arithmetic and other bits and bobs in the decision would have deprived HSBC of running this part of its natural justice challenge.

From the adjudicator’s perspective, it would have been much easier to defend that person’s involvement at the time, rather than retrospectively, months later. It would also have meant no-one really needed to consider whether the adjudicator’s own terms and conditions had been incorporated into the contract with the parties – it would have been irrelevant given the NEC terms have that point covered.

Adjudicators have to remember that not all parties and their representatives conduct themselves the “old fashioned way” – perhaps understandably, in view of the significant sums that can be involved and the effect this may have – parties do take these types of points when they arise. Instead of,  “was there an opportunity afforded for injustice to be done?”, we could say there was an opportunity afforded for a challenge to be done. That is not something any of us want.