REUTERS | Kevin Lamarque

TCC refuses to enforce adjudicator’s decision due to material natural justice breach

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.

My thoughts

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.

6 thoughts on “TCC refuses to enforce adjudicator’s decision due to material natural justice breach

  1. Dear Jonathan
    Thank you for your blog regarding Global Switch Estates 1 v Sudlows. I have an interest in the matter since I was the Adjudicator in question. Both the adjudication and the judgment are interesting.
    [30] of the Hon. Mr Justice Coulson’s (as he then was) judgment in St Austell Printing Co Ltd v Dawnus Construction Holdings [2015] stated:
    “…the mere fact that Dawnus had limited their own claim to the measured work…, did not in any way limit or prevent St A from defending the claim, and raising their own cross-claim by way of set-off. That would have been an entirely legitimate defence to the claim in the adjudication, whatever the notice of adjudication or referral might have said.”
    [52] in Global it was submitted that:
    “…Sudlows did not rely on the excluded matters as a defence by way of set off or as a cross claim. Although Sudlows sought to include the excluded matters (or at least those relating to loss and expense) in the valuation of Interim Applications 27, it was not entitled to do so because at the time of the application it had not properly made any claim for further extensions of time, or substantiated its loss and expense claims attributable to further delay.”
    I decided the value of Interim Applications 27 and, contrary to Global’s [39] submission that the call on the bank guarantee was irrelevant to the adjudication, I am recorded [65] (amongst others) as having considered and decided upon the set off claim that Sudlows presented in relation to the bank guarantee as well. However, since “…Sudlows did not rely on the excluded matters as a defence by way of set off or as a cross claim”[52], I proceeded to my Decision in the absence of such. It would seem from the judgment [56] in Global that in the absence of an express set off or cross claim, an adjudicator is to identify for themselves what the set off or cross claim is, including the value and the basis of such value, and to take that into account in relation to the payment due but this too has natural justice consequences.
    Yours sincerely
    Nigel Davies

    1. Hello Nigel,

      Without a doubt a very interesting/useful case and write up by Jonathan.

      The more I learn about adjudication and am not long off the beginning (3 or 4 years) the more it becomes clear that being an Adjudicator is often very hard work and in many instances a thankless task.

      I know it is irrelevant to the outcome of the TCC judgement but do you think what you set out above could be used as a suitable argument against the award?

      Best wishes,

      James

      1. Dear James
        Thank you for your reply. The TCC Judges are simply superb and are led by their excellent Judge in Charge, Mrs Justice O’Farrell DBE. Those involved in construction law are very, very fortunate indeed to have the benefit of their skill and knowledge. Their task can be enormously difficult and challenging under sometimes very tight time constraints and I am deeply grateful that they are in position.
        All I seek when reading their judgments is to understand their reasoning so that I may continue to develop, remain current and be able to place the judgments in context of the law generally so that I may effectively apply the same in future. Sometimes a judgment may cause some surprise and require deeper consideration. I found this judgment particularly fascinating because I was the Adjudicator in question and felt compelled to share because I thought to do so may assist others in future.
        Best wishes
        Nigel

    2. Dear Jonathan
      It occurred to me that another interesting aspect of the judgment to note would appear to be that whereas Global said, “Sudlows sought to include the excluded matters (or at least those relating to loss and expense) in the valuation of Interim Applications 27, it was not entitled to do so because at the time of the application it had not properly made any claim for further extensions of time, or substantiated its loss and expense claims attributable to further delay”[52] it was nevertheless held that, “the excluded loss and expense claims were material to the true value of Interim Applications 27…”[75]. Accordingly, this would seem to suggest that if a dispute regarding a past interim application is referred to adjudication then a party is entitled to have included within that determination, amongst other things, a claim for loss and expense based upon a claim for an extension of time notwithstanding that neither of which had been submitted in accordance with the contract at the time of the disputed past interim application.
      Yours sincerely
      Nigel Davies

      1. Many thanks for taking the time to comment Nigel; no doubt your comments, as adjudicator, will be of interest to readers.

        Kind regards

        Jonathan

        1. Dear Jonathan

          Thank you for your kind response. This is my third and last reply to your blog regarding Global Switch Estates 1 v Sudlows.
          Given the judgment stated:
          1. [31], “The notice of adjudication sought a decision as to the true value of parts of Interim Applications 27…” and payment on that basis,
          2. [50.ii] “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)” but not withstanding that
          3. [53], “Sudlows’ defence to that claim for payment was that it was not due on a true valuation of Interim Applications 27”
          I was surprised to read that [52] leading counsel for Global had submitted, “that the issue for the adjudicator was the true value of Interim Applications 27” especially given that in accordance with the notice of adjudication the judgment recorded [40] that it was stated within the decision, “My jurisdiction was to open up, review and revise – and determine the true value of – certain parts of Interim Applications 27, i.e. a true valuation of those certain parts as at the date of Interim Applications 27.” The two are clearly not the same, the latter is plainly narrower than the former.

          Further, in addition to the above, given that:
          1. [30] of the Hon. Mr Justice Coulson’s (as he then was) judgment in St Austell Printing Co Ltd v Dawnus Construction Holdings [2015] stated:
          “Thirdly, let us now assume, in St A’s favour, that they did have some sort of cross-claim, whether by reference to a claim for overpayment, or a claim for liquidated damages, or a claim for damages for defects. Let us also assume that this cross-claim arose for assessment at the same time as interim application 19, and that the cross-claim would have reduced or even extinguished the sum due by reference to the measured work element of the 115 changes. In my view, as Ms Lee correctly points out, the mere fact that Dawnus had limited their own claim to the measured work value of the 115 changes, did not in any way limit or prevent St A from defending that claim, and raising their own cross-claim by way of set-off. That would have been an entirely legitimate defence to the claim in the adjudication, whatever the notice of adjudication or the referral might have said” (my emphasis added) and,
          2. [52] in Global recorded not only that:
          “…Sudlows did not rely on the excluded matters as a defence by way of set off or as a cross claim” but also that, “Although Sudlows sought to include the excluded matters (or at least those relating to loss and expense) in the valuation of Interim Applications 27, it was not entitled to do so because at the time of the application it had not properly made any claim for further extensions of time, or substantiated its loss and expense claims attributable to further delay”
          I think it is interesting that it was held that [75], “the excluded loss and expense claims were material to the true value of Interim Applications 27…”

          Kind regards
          Nigel Davies

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: