Adjudication
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KEYWORDS: |
Adjudication, Housing Grants, Construction and Regeneration Act 1996, natural justice, jurisdiction, valuation, defects, set off, evidence, exclusion of evidence, disregard of evidence, interest, the Scheme, paragraph 12(a), paragraph 17, paragraph 20(c), reasons, provisional conclusions, Mr Justice Jackson. |
The judgment by the Honourable Mr Justice Jackson on 26 April 2005 in Carillion Construction Ltd v Devonport Royal Dockyard [2005] EWHC 778 (TCC) is important reading for all those involved in adjudication.
Justice Jackson provides an extensive review of authorities to establish the four principles of law that define the status of an adjudicator's decision.
Importantly Justice Jackson provides five propositions for the process required of an adjudicator in dealing with submissions, issues and evidence and the giving of reasons.
Justice Jackson recognises the juridical nature of the process but provides a practical restriction on the application of the principle in Balfour Beatty v the London Borough of Lambeth [2002].
Justice Jackson examines the power of an adjudicator to award interest under paragraph 20(c) of the Scheme - although this matter has also been examined by the Court of Appeal on appeal from his judgment.
Devonport carried out refits and refuels of warships and nuclear submarines for the Royal Navy. In March 1997, Devonport purchased the dockyard from the Secretary of State for Defence. At the time when the dockyard was privatised, it was decided that the existing facilities should be upgraded and new facilities should be provided. The Secretary of State engaged Devonport to carry out the whole of these works under a modified engineering contract which contained a target cost mechanism.
Devonport engaged Carillion as subcontractor to carry out one part of the works, namely the upgrading of 9 Dock which included replacing the dock walls and base and constructing four new buildings. These works would provide facilities for refitting and refuelling Vanguard submarines. One of the new buildings was a decontamination building which would contain apparatus for removing nuclear Contamination.
Carillion commenced work on 9 Dock under the provisions of a written instruction to proceed dated 18th November 1998. On 10th March 1999, Devonport and Carillion entered into a written sub-contract under seal for the works at 9 Dock. The original completion date was specified as 21st March 2001 and the price originally agreed was £ 54,198,373.
At the same time as entering into the subcontract, Devonport and Carillion also entered into a written agreement called the "Alliance Agreement" dated 10th March 1999. The Alliance Agreement supplemented and in part superseded the provisions of the subcontract. The Alliance Agreement contained provisions to promote partnering and harmonious relations between the parties. The Alliance Agreement provided for adjustment of the target cost and of Carillion's fee in the event of variations or similar matters.
During the course of the works a series of six amendments were made to the Alliance Agreement, which reflected the delays and cost overruns and which provided for additional payments to be made to Carillion. Devonport also entered into negotiation with the Ministry of Defence concerning a substantial increase in the pricing of the main contract works. On 3rd July 2001 Devonport stated that in the event that it negotiated a financial settlement with MOD, then the target cost in Carillion's subcontract would be adjusted accordingly. A worked example was then set out, showing how the target cost might be increased. During December 2001, Devonport's negotiations with MOD were concluded.
Carillion's works were not entirely completed by February 2002 but sufficient progress had been made to enable HMS Vanguard to enter dock on 9th February 2002.
Carillion completed its subcontract works in August 2002. By that time, Devonport had paid to Carillion sums totalling £110 million. An adjudication concerning Carillion's financial claims ensued but the adjudication was fruitless since the court held that the adjudicator lacked jurisdiction (see Carillion Construction Ltd v Devonport Royal Dockyard [2002]).
On 4th January 2005, Carillion served on Devonport a further notice of adjudication. On 5th January 2005 the adjudicator was appointed and on 6th January 2005 Carillion served its notice of referral. The adjudicator was provided with extensive documentation. The Referral ran to some 67 pages, the Response on 21st January 2005 ran to some 75 pages, Carillion's reply on 28th January ran to 56 pages and Devonport's rejoinder on 11th February 2005 was 76 pages long. The parties also sent lengthy and detailed letters to the adjudicator. They served numerous witness statements, expert reports and appendices. In all, the adjudicator was furnished with 29 lever arch files of materials.
The adjudicator then proposed an oral hearing in order to bring matters into focus. The oral hearing did not take place. On 22nd February 2005 the adjudicator proposed that in the absence of a meeting that the parties provided written summaries of their cases. The adjudicator directed that each summary should be limited to four pages in length which was adhered to by each party.
The adjudicator requested and was granted two extensions of time totalling 42 days. As a result the adjudicator was allowed a period of ten weeks in all in which to consider the issues and produce his decision.
On 17th March 2005, the adjudicator issued his decision and decided that
After the interest was added to the sums awarded, the total sum due to Carillion was £10,646,327 plus VAT. The adjudicator directed that Devonport should pay that sum to Carillion within seven days. The adjudicator assessed his own fees and expenses in the sum of £26,083 plus VAT
Devonport declined to pay the sum due under the adjudicator's decision and resolved to challenge the decision. Carillion took the view that the adjudicator's decision was valid and should be enforced.
On 4 April 2005 both parties commenced proceedings. It was agreed that both actions should be heard together in London. The trial commenced on 20th April.
Devonport challenged the adjudicator's decision on four grounds:
It was common ground that interest was severable and if necessary the balance of the adjudicator's decision could be enforced if Devonport succeeded only on that issue.
Before addressing the four challenges, Justice Jackson usefully set out the relevant law at some length and established principles of law and relevant propositions.
Justice Jackson referred to ten main cases and for each set out the relevant parts of the judgment.
The statutory provisions came into force in 1998. The first authoritative decision on the manner in which those provisions should be interpreted was given by Mr Justice Dyson in Macob Civil Engineering Limited v Morrison Construction Limited [1999] BLR 93. In that case, Mr Justice Dyson enforced an adjudicator's decision and rejected a challenge on natural justice grounds.
At page 97, Mr Justice Dyson stated:
"The intention of Parliament in enacting the Act was plain. It was to introduce a speedy mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring the decisions of adjudicators to be enforced pending final determination of disputes by arbitration, litigation or agreement: see section 108(3) of the Act and paragraph 23.2 of Part 1 of the Scheme. The timetable for adjudications is very tight (see section 108 of the Act). Many would say unreasonably tight, and likely to result in injustice. Parliament must be taken to have been aware of this. So far as procedure is concerned, the adjudicator is given a fairly free hand. It is true (but hardly surprising) that he is required to act impartially (section 108(2)(e) of the Act and paragraph 12(a) of Part 1 of the Scheme). He is, however, permitted to take the initiative in ascertaining the facts and the law (section 108(2(f) of the Act and paragraph 13 of Part 1 of the Scheme). He may, therefore, conduct an entirely inquisitorial process, or he may, as in the present case, invite representations from the parties. It is clear that Parliament intended that the adjudication should be conducted in a manner which those familiar with the grinding detail of the traditional approach to the resolution of construction disputes apparently find difficult to accept. But Parliament has not abolished arbitration and litigation of construction disputes. It has merely introduced an intervening provisional stage in the dispute resolution process. Crucially, it has made it clear that decisions of adjudicators are binding and are to be complied with until the dispute is finally resolved."
At page 98, Mr Justice Dyson stated:
"The present case shows how easy it is to mount a challenge on an alleged breach of natural justice. I formed the strong provisional view that the challenge is hopeless. But the fact is that the challenge has been made and a dispute therefore exists between the parties in relation to it. Thus on Mr Furst's argument, the party who is unsuccessful before the adjudicator has to do more than assert a breach of the rules of natural justice, or allege that the adjudicator acted partially, and he will be able to say that there has been no 'decision'. "At first sight, it is difficult to see why a decision purportedly made by an adjudicator on the dispute that has been referred to him should not be a binding decision within the meaning of section 108(3) of the Act, paragraph 23(1) of the Scheme and clause 27 of the contract. If it had been intended to qualify the word 'decision' in some way, then this could have been done. Why not give the word its plain and ordinary meaning? I confess that I can think of no good reason for not so doing, and none was suggested to me in argument. If his decision on the issue referred to him is wrong, whether because he erred on the facts or the law, or because in reaching his decision he made a procedural error which invalidates the decision, it is still a decision on the issue. Different considerations may well apply if he purports to decide a dispute which was not referred to him at all."
The judgment of Mr Justice Dyson in Macob was subsequently approved by the Court of Appeal and therefore carried added authority.
Justice Jackson noted that the judgment in Macob had certain consequences. If an adjudicator made an error of law, he was not complying with the second limb of paragraph 12(a) of the Scheme which provides:
"The adjudicator shall ...
(a) act impartially in carrying out his duties and shall do so in accordance with any relevant terms of the contract and shall reach his decision in accordance with the applicable law in relation to the contract:"
Nevertheless, such non-compliance with the Scheme did not prevent his decision being valid and enforceable. Indeed, errors by an adjudicator may give rise to other breaches of the Scheme. For example, an adjudicator may wrongly decide that a piece of evidence is irrelevant and therefore he may fail to take that evidence into account as required by paragraph 17 of the Scheme which provides:
"The adjudicator shall consider any relevant information submitted to him by any of the parties to the dispute and shall make available to them any information to be taken into account in reaching his decision."
Nevertheless, such non-compliance did not deprive the adjudicator's decision of its temporarily binding force. These were consequences which flowed from Mr Justice Dyson's reasoning in Macob.
In Bouygues (UK) Limited v Dahl-Jensen (UK) Limited [2001] 1 All ER (comm) 1041 the adjudicator erroneously awarded to a subcontractor monies which should have been retained by the main contractor pending certificates of completion under the main contract. Both the TCC and the Court of Appeal held that the adjudicator's decision should be enforced. At paragraphs 14 to 15, Lord Justice Buxton stated:
"Here, Mr Gard answered exactly the questions put to him. What went wrong was that in making the calculations to answer the question of whether the payments so far made under the subcontract represented an overpayment or an underpayment, he overlooked the fact that that assessment should be based on the contract sum presently due for payment, that is the contract sum less the retention, rather than on the gross contract sum. That was an error, but an error made when he was acting within his jurisdiction. Provided that the adjudicator acts within that jurisdiction his award stands and is enforceable.
Bouygues contended that such an outcome was plainly unjust in a case where it was agreed that a mistake had been made, and particularly in a case, such as the present, where Dahl-Jensen was in insolvent liquidation, and therefore the eventual adjustment of the balance by way of arbitration will in practical terms be unenforceable on Bouygues's part. I respectfully consider that the judge was quite right when he pointed out that the possibility of such an outcome was inherent in the exceptional and summary procedure provided by the 1996 Act and the CIC adjudication procedure."
At paragraphs 27 to 28, Lord Justice Chadwick stated:
"The first question raised by this appeal is whether the adjudicator's determination in the present case is binding on the parties - subject always to the limitation contained in section 108(3) and in paragraphs 4 and 31 of the Model Adjudication Procedure to which I have referred. The answer to that question turns on whether the adjudicator confined himself to a determination of the issues that were put before him by the parties. I f he did so, then the parties are bound by his determination, notwithstanding that he may have fallen into error. As Mr Justice Knox put it in Nikko Hotels (UKI Limited v MEPC ~ l c [I9911 2EGLR 103 at 108, in the passage cited by Lord Justice Buxton, if the adjudicator has answered the right question in the wrong way, his decision will be binding. If he has answered the wrong question, his decision will be a nullity.
I am satisfied, for the reasons given by Lord Justice Buxton, that in the present case the adjudicator did confine himself to the determination of the issues put to him. This is not a case in which he can be said to have answered the wrong question. He answered the right question. But, as is accepted by both parties, he answered that question in the wrong way. That being so, notwithstanding that he appears to have made an error that is manifest on the face of his calculations, it is accepted that, subject to the limitation to which I have already referred, his determination is binding upon the parties."
Lord Justice Peter Gibson agreed with both judgments.
The Court of Appeal decided Bouygues on 31st July 2000, Just over a week later, the Court gave judgment in the first round of Discain Project Services Limited v Opecprime Development Limited [2000] BLR 402. In this case, the adjudicator had oral and written communications with one party, from which the other party was excluded. His Honour Judge Bowsher QC held that this was a serious breach of the rules of natural justice, such that this court ought not to give summary judgment enforcing the award. Instead the judge gave leave to defend.
Discain proceeded to trial. 'At trial Judge Bowsher heard oral evidence from the adjudicator and there was a much more extensive citation of authority than had been possible at the application for summary judgment. Judge Bowsher adhered to his original view that there had been a substantial breach of the rules of natural justice and he declined to enforce the adjudicator's decision.
In paragraph 34 of his judgment at trial, Judge Bowsher cited the passage from Mr Justice Dyson's judgment at page 98 of Macob. He explained that this passage did not mean that any breach of the rules of natural justice by an adjudicator, however serious, had no effect. At paragraph 39, Judge Bowsher cited with approval the following dictum of Judge Humphrey Lloyd in Glencot Development and Design Co Limited v Ben Barrett & Son (Contractors) Limited [2001] 80 Construction Law Reports 14 at 31:
"It is accepted that the adjudicator has to conduct the proceedings in accordance with the rules of natural justice or as fairly as the limitations imposed by Parliament permit ..."
At paragraph 68 of his judgment, Judge Bowsher stated his conclusions in Discain in the following terms:
"So the parties have entered into a compulsory agreement that the decision of the adjudicator is binding until the dispute is 'finally determined' by legal proceedings et cetera. Although I have heard a trial of an action, I have not 'finally determined' the dispute that was before the adjudicator. This action is brought only to enforce the decision of the adjudicator and there has been no examination of the merits of what lay behind that decision. On the face of the 1996 Act and the Scheme, therefore the decision is still binding on the parties. However, just as the court will decline to enforce contracts tainted by illegality, so I do not think it right that the court should enforce a decision reached after substantial breach of the rules of natural justice. I stress that an unsuccessful party in a case of this sort must do more than merely assert a breach of the rules of natural justice to defeat the claim. Any breach proved must be substantial and relevant."
In C&B Scene Concept Design Limited v Isobars Limited [2002] BLR 93 the Court of Appeal held that an adjudicator's decision should be enforced, even though it might be based upon an error of law. Sir Murray Stuart-Smith (with whom Lord Justice Rix and Lord Justice Potter agreed) said on pages 98 to 99:
"In Northern Developments (Cumbria) Limited v J&J Nichols, His Honour Judge Bowsher QC cited with approval the following formulation of principles stated by His Honour Judge Thornton QC Sherwood v Casson:
"(i) A decision of an adjudicator whose validity is challenged as to its factual or legal conclusions or as to procedural error remains a decision that is both enforceable and should be enforced;
"(ii) A decision that is erroneous, even if the error is disclosed by the reasons, will still not ordinarily be capable of being challenged and should, ordinarily, still be enforced;
"(iii) A decision may be challenged on the ground that the adjudicator was not empowered by the Act to make the decision, because there was no underlying construction contract between the parties or because he had gone outside his terms of reference.
"(iv) The adjudication is intended to be a speedy process in which mistakes will inevitably occur. Thus, the Court should guide against characterising a mistaken answer to an issue, which is within an adjudicator's jurisdiction, as being an excess of jurisdiction.
'(v) An issue as to whether a construction contract ever came into existence, which is one challenging the jurisdiction of the adjudicator, so long as it is reasonably and clearly raised, must be determined by the Court on the balance of probabilities with, if necessary, oral and documentary evidence.
I respectfully agree with this formulation. I would also add, as I have already pointed out, the provisional nature of the adjudication, which, though enforceable at the time can be reopened on the final determination.
Errors of procedure, fact or law are not sufficient to prevent enforcement of an adjudicator's decision by summary judgment. The case of Bouygues (UK) Limited v Dahl-Jensen (UK) Limited [2000] BLR 522 is a striking example of this. The adjudicator had made an obvious and fundamental error, accepted by both sides to be such, which resulted in a balance being owed to the contractor, whereas in truth it had been overpaid. The Court of Appeal held that the adjudicator had not exceeded his jurisdiction, he had merely given a wrong answer to the question which was referred to him. And, were it not for the special circumstances that the claimant in that case was in liquidation, so that there could be no fair assessment on the final determination between the parties, summary judgment without a stay of execution would have been ordered ...
But the adjudicator's jurisdiction is determined by and derives from the dispute that is referred to him. If he determines matters over and beyond the dispute he has no jurisdiction. But the scope of the dispute was agreed, namely as to the Employer's obligation to make payment and the Contractor's entitlement to receive payment following receipt by the Employer of the Contractor's applications for interim payment, numbers 4, 5 and 6 (see paragraph 12 above). In order to determine this dispute the adjudicator had to resolve as a matter of law whether clauses 30.3.3-6 applied or not, and if they did, what was the effect of failure to serve a timeous notice by the Employer. Even if he was wrong on both these points, that did not affect his jurisdiction.
It is important that the enforcement of an adjudicator's decision by summary judgment should not be prevented by arguments that the adjudicator has made errors of law in reaching his decision, unless the adjudicator has purported to decide matters that are not referred to him. He must decide as a matter of construction of the referral, and therefore as a matter of law, what the dispute is that he has to decide. If he erroneously decides that the dispute referred to him is wider than it is, then, insofar as he has exceeded his jurisdiction, his decision cannot be enforced. But in the present case there was entire agreement as to the scope of the dispute, and the adjudicator's decision, albeit he may have made errors of law as to the relevant contractual provisions, it is still binding and enforceable until the matter is corrected in the final determination."
The Court of Appeal's judgment in C&B Scene was delivered on 31st January 2002. Approximately three months later, in Balfour Beatty v the London Borough of Lambeth [2002] BLR 288, His Honour Judge Humphrey Lloyd QC refused to enforce an adjudicator's decision for breach of natural justice. The facts of this case, however, were extreme. The dispute concerned a claim for extension of time, together with loss and expense, on a Local Authority building contract which had overrun. The adjudicator used a different methodology to that which either party had put forward and made his own independent analysis of the critical path. The adjudicator did not invite either party to comment on this approach before issuing his decision.
On 22nd January 2003, the Court of Appeal gave judgment in Levolux AT Limited v Ferson Contractors Limited [2003] EWCA Civ 11; 86 Construction Law Reports 98. The Court of Appeal upheld the judgment of this Court, enforcing an adjudicator's decision. Lord Justice Mantell (with whom Lord Justice Ward and Lord Justice Longmore agreed) cited with approval the passage on page 97 of Mr Justice Dyson's judgment in Macob above. Lord Justice Mantell then discussed the Court of Appeal's decision in Bouygues. At paragraph 9, Lord Justice Mantell stated:
"The case of Bouygues is a good illustration of the scheme put into practice. The adjudicator had made what was acknowledged to be an obvious and fundamental error which resulted in the contractor recovering monies from the building owner whereas in truth the contractor had been overpaid. The Court of Appeal held that since the adjudicator had not exceeded his jurisdiction but had simply arrived at an erroneous conclusion, the provisional award should stand."
Later in 2003, the Court of Appeal returned to the topic of enforcing adjudicators' decisions. In Pegram Shofitters Limited v Tally Wiejl (UK) Limited [2003] EWCA Civ 1750; [2004], 1 All ER 818, the Court of Appeal held that there should not be a summary judgment enforcing an adjudicator's award, because it was arguable that there was no construction contract between the parties. Lord Justice May gave the leading judgment. He set out the historical background to the 1996 Act. At paragraph 9, Lord Justice May said this:
"A number of first instance decisions in the Technology and Construction Court have striven to implement the policy of Parliament. Enforcement proceedings, as they are called, are brought using the CPR part 8 procedure and habitually there is a claim to summary judgment. Judges of the Technology and Construction Court have rightly been astute to examine technical defences to such applications with a degree of scepticism consonant with the policy of the 1996 Act, aptly described by Lord Justice Ward in RJT Consulting Engineers Limited v DM Engineering (Northern Ireland) Limited [2002] EWCA Civ 270, (2002) 83 Con LR 99, [2002] 1 WLR 2344 as 'pay now, argue later'. There has been a number of appeals to this court. I understand anecdotally that this Court may be regarded as less than entirely supportive of the policy of the 1996 Act. There certainly are cases in which this Court has upheld challenges to the enforceability of decisions of adjudicators, but examination of the cases shows that this has occurred when legal principle has to prevail over broad-brush policy, as was the case in the Gilbert-Ash case."
In paragraph 12 Lord Justice May went on to note that, despite the general policy of the 1996 Act, the Court of Appeal would not uphold an adjudicator's award, if a respectable case had been made out for disputing the adjudicator's jurisdiction.
In Gillies Ramsav Diamond & Others v PJW Enterprises Limited [2004] BLR 131 the Inner House of the Court of Session in Scotland dismissed certain challenges to the decision of an adjudicator. One of the unsuccessful challenges concerned the adequacy or inadequacy of the reasons given by the adjudicator. Lord Justice Clerk, (with whom Lord MacFadyen and Lord Caplan agreed) said this at paragraph 31:
"31. In my opinion, a challenge to the intelligibility of stated reasons can succeed only if the reasons are so incoherent that it is impossible for the reasonable reader to make sense of them. In such a case, the decision is not supported by any reasons at all and on that account is invalid (Save Britain's Heritage v No 1 Poultry Limited, supra). In my view, that cannot be said in this case. The adjudicator has understood what questions he had to answer. He has reached certain conclusions in law on those questions which, however erroneous, are at least comprehensible. Even if the question is one of the adequacy of the reasons, I am of the opinion that the reasons are sufficient to show that the adjudicator has dealt with the issues remitted to him and to show what his conclusions are on each (Save Britain's Heritage v No 1 Poultry Limited, supra, at page 167)."
In Amec Capital Projects Limited v Whitefriars Citv Estates Limited [2004] EWCA Civ 1418; [2005] BLR 1 the Court of Appeal reversed the decision of His Honour Judge Toulmin CMG QC that an adjudicator's decision should not be enforced for breaches of the rules of natural justice. Lord Justice Dyson in his judgment (with which Lord Justice Kennedy and Lord Justice Chadwick agreed) included the following important passages:
"14. The common law rules of natural justice or procedural fairness are two-fold. First, the person affected has the right to prior notice and an effective opportunity to make representations before a decision is made. Secondly, the person affected has the right to an unbiased tribunal. These two requirements are conceptually distinct. I t is quite possible to have a decision from an unbiased tribunal which is unfair because the losing party was denied an effective opportunity of making representations. Conversely, it is possible for a tribunal to allow the leading party an effective opportunity to make representations, but be biased. In either event, the decision will be in breach of natural justice, and be liable to be quashed if susceptible to judicial review, or (in the world of private law) to be held to be invalid and unenforceable ...
"22. I t is easy enough to make challenges of breach of natural justice against an adjudicator. The purpose of the scheme of the 1996 Act is now well known. I t is to provide a speedy mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring the decisions of adjudicators to be enforced pending final determination of disputes by arbitration, litigation, or agreement. The intention of Parliament to achieve this purpose will be undermined if allegations of breach of natural justice are not examined critically when they are raised by parties who are seeking to avoid complying with adjudicators' decisions. I t is only where the defendant has advanced a properly arguable objection based on apparent bias that he should be permitted to resist summary enforcement of the adjudicator's award on that ground ...
"41. A more fundamental question was raised as to whether adjudicators are in any event obliged to give parties the opportunity to make representations in relation to questions of jurisdiction. I respectfully disagree with the judge's view that the requirements of natural justice apply without distinction, whether the issue being considered by the adjudicator is his own jurisdiction or the merits of the dispute that has been referred to him for decision. The reason for the common law right to prior notice and an effective opportunity to make representations is to protect parties from the risk of decisions being reached unfairly. But it is only directed at decisions which can affect parties' rights. Procedural fairness does not require that parties should have the right to make representations in relation to decisions which do not affect their rights, still less in relation to 'decisions' which are nullities and which cannot affect their rights. Since the 'decision' of an adjudicator as to his jurisdiction is of no legal effect and cannot affect the rights of the parties, it is difficult to see the logical justification for a rule of law that an adjudicator can only make such a 'decision' after giving the parties an opportunity to make representations."
The judge observed that prior to 1998, if there was a dispute about payment within the construction sector, money would generally remain in the pocket of the paying party until final resolution of that dispute. This was a source of concern, for reasons set out in a number of reports including Sir Michael Latham's report, "Constructing the Team", published in 1994. The statutory system of compulsory adjudication was set up to address this problem. The purpose of an adjudication was and is to determine who shall hold the disputed funds, and in what proportions, until such time as the dispute is finally resolved.
In order to achieve this objective, it was necessary that adjudication should be as speedy and inexpensive as circumstances permit. The adjudicator was not necessarily expected to arrive at the solution which will ultimately be held to be correct. That would be asking the impossible. The adjudicator was required to arrive at an interim resolution within strictly drawn constraints.
Over the last seven years, adjudication has been widely used in the construction industry. On many occasions, the parties have chosen to use the adjudicator's decision as, or as the basis for the final settlement of their disputes. This was a perfectly sensible and commercial approach. It had been remarked upon by the judges of this Court. Nevertheless that perfectly sensible and commercial approach, which many parties chose to adopt, could not change the juridical nature of adjudication or transform the legal duties which are imposed upon adjudicators by statute.
Slight differences in emphasis and approach could be detected in the first instance cases. In borderline cases what one judge might regard as a permissible error of law or procedure on the part of an adjudicator, another judge might characterise as excess of jurisdiction or a substantial breach of the rules of natural justice.
Justice Jackson restated four basic principles:
Justice Jackson then set out the five propositions which bore upon the instant case:
After reviewing the relevant legal principles Justice Jackson turned to the four challenges to the adjudicator's decision in the instant case.
Devonport contended that the adjudicator's decision on target cost was a decision which was outside his jurisdiction and therefore should not be enforced.
Justice Jackson held that the adjudicator's decision on target cost was one stage in the reasoning process, whereby the adjudicator calculated the primary sum due to Carillion under the Alliance Agreement.
Devonport contended that the adjudicator had carried out an exercise which he was not asked by the parties to carry out and which was outside his jurisdiction. Devonport argued that the adjudicator had performed what was described as a judgment of Solomon.
Justice Jackson did not accept the argument for six reasons:
As a result Justice Jackson rejected the first challenge to the adjudicator's decision.
Devonport contended that the adjudicator's decision on target cost should not be enforced on the basis that the Adjudicator had disregarded three issues/evidence. Devonport submitted that individually and cumulatively, the three disregards were fatal to the adjudicator's decision. Devonport characterised the three disregards in two ways. First, they amounted to an exclusion of relevant considerations, therefore the adjudicator was in breach of paragraph 17 of the Scheme. Secondly, the three disregards were a breach of the rules of natural justice.
Justice Jackson dealt with each of the disregards on their facts.
In his reasons, the adjudicator stated that although the parties had made submissions relating to the detail of the discussions between the MOD and Devonport concluded during late 2001, he considered that they had not been undertaken under agreement, and therefore he did not enter into the merits or otherwise of their outcome if any, which might affect the issues referred.
Justice Jackson held that the first disregard was no more than the implementation of a decision of law. The adjudicator concluded that negotiations between Devonport and MOD could not impact upon the calculation of target cost under the Alliance Agreement and its amendments. In this respect, the adjudicator was rejecting an argument advanced by Carillion and accepting an argument which had been advanced more than once by Devonport. During the adjudication, Devonport put in evidence about its negotiations with MOD. Nevertheless, Devonport contended in the response in the adjudication that no figure attributable to Carillion's works could be derived from the negotiations with MOD and that Carillion's proposed figures were neither advanced nor accepted in those negotiations. These arguments were developed in Devonport's rejoinder.
Justice Jackson held that it was clearly an issue for the adjudicator to decide whether the negotiations between Devonport and MOD were relevant to the assessment of target cost and, if so, how. The adjudicator concluded that those negotiations were not relevant.
Whether the adjudicator was right or wrong in this conclusion could not affect the validity of his decision. Having reached such a conclusion, the adjudicator, when assessing target cost, did not take into account the negotiations between Devonport and MOD. The adjudicator could not be criticised for taking that course.
One of Devonport's expert witnesses, dealt with the assessment of target cost on the contractual basis for which Carillion contended. The adjudicator took this passage into account, although in the end he did not agree with its conclusions.
The Expert also undertook an as an alternative calculation which produced a target cost of £81 million to £84 million. The adjudicator rejected the contractual basis of the alternative calculation. The adjudicator therefore did not make use of the supporting information. In his reasons the adjudicator stated that he would not consider "the alternative calculation".
Justice Jackson held that there was nothing objectionable in the adjudicator adopting that course and referred to the caselaw and propositions above.
Devonport made a further complaint that five specific defence arguments were not referred to in the adjudicator's decision.
Justice Jackson observed that the adjudicator was the recipient of literally hundreds of pages of legal argument. The parties' positions shifted as the adjudication progressed. By way of example, Devonport took numerous points of jurisdiction which were subsequently not pursued. The adjudicator did a remarkable job in keeping abreast of the battle and in keeping under control the torrent of incoming material. He made it plain in his written decision which arguments he accepted and how his figures were calculated. It is clear that the adjudicator was not persuaded by the five specific arguments mentioned by Devonport's. Justice Jackson held that there was no need for the adjudicator specifically to recite and address those five arguments in his decision.
Devonport delivered a further natural justice argument which was that the adjudicator decided the issue concerning target cost on a different basis to that advanced by the parties and without giving Devonport an opportunity to make representations.
Justice Jackson did not accept the argument. He considered that Devonport had proper opportunity to make representations concerning the assessment of target cost on the basis adopted by the adjudicator and that Devonport did indeed make such representations in the form of expert reports.
The judge therefore rejected Devonport's case insofar as it is based upon the three disregards.
For all of the above reasons the judge rejected the second challenge to the adjudicator's decision.
Devonport contended that the adjudicator's decision on allowance for defects was reached in breach of the rules of natural justice and was not supported by any, or any adequate, reasons and therefore should not be enforced.
Devonport maintained that it had a counterclaim for defects which originally it quantified at £2.9 million in its dispute notice dated 8th November 2004, which was submitted to the Alliance Board on 9th November 2004 as part of the initial dispute resolution procedure. In January 2005, Devonport revised its defects claim upwards to £21 million, as set out on in the experts first report. A revised version of this claim (on an abated cost basis) amounting to £19.8 million was set out in the expert's second report.
Carillion argued that there could be no set-off for defects on the following basis:
The adjudicator rejected all of Carillion's threshold defences. He held that an allowance of £2,354,091, reflecting the cost of defects, should be deducted from the sums otherwise due to Carillion.
Devonport considered that the allowance made for defects should have been higher and mounted three separate attacks on the adjudicator's assessment of £2,354,091:
Justice Jackson held that on the first line of attack, it was clear from his reasons that the adjudicator specifically considered Devonport's expanded defects claims of January and February 2005. The adjudicator considered that the defects alleged by Devonport in November 2004 had been properly notified to Carillion under clause 17(3) of the subcontract. However the adjudicator did not find that the second batch of defects (which came to light in or around January and February 2005) had been properly notified to Carillion. Furthermore, the adjudicator took the view that the only satisfactory evidence relating to defects was the evidence supporting the first batch of defects.
Although he did not consider it was relevant to any matter he had to decide, Justice Jackson observed that the evidence supporting the second batch of defects showed that of the £21 million claimed for defects, only £56,614.10 had so far been expended. Also, the assessment of future remedial work involved a significant degree of speculation. The adjudicator was perfectly entitled to find that the expanded defects claim had not been satisfactorily proved at that stage.
The adjudicator may have been right or he may have been wrong in (a) his analysis of the effect of clause 17 of the subcontract and (b) his assessment of the expert evidence. These were two separate and independent justifications of the decision which the adjudicator reached. Whether the adjudicator was right or wrong in these matters, it could not be said that he failed to consider and address Devonport's expanded claims for defects in the sum of about £20 million.
The adjudicator accepted Devonport's original claim for defects, but made a modest reduction in quantum for perfectly sensible reasons. This reduction amounted to about £550,000. In the context of the overall dispute between the parties, this was a very small sum. Justice Jackson held that the circumstances of the present case are far removed from Balfour Beatty v the London Borough of Lambeth [2002] BLR 288, relied upon by Devonport.
The 20 per cent reduction in quantum which the adjudicator made was the result of casting a critical eye over the expert evidence. This was precisely the kind of exercise which one would expect the adjudicator to undertake.
It was unrealistic to expect an adjudicator, who is struggling under tight time limits with a growing mass of evidence and legal submissions, as well as a barrage of intricate correspondence, to contact the parties and to invite their comments on a matter of this nature.
Justice Jackson considered the reasons which the adjudicator gave for his decision on defects perfectly adequate. The adjudicator explained why he rejected the expanded defects claim. He also explained the reduction factor which he applied to the original defects claim.
For all of the above reasons, Justice Jackson rejected the third challenge to the adjudicator's decision.
Devonport contended that the adjudicator had no jurisdiction to award interest.
Carillion advanced a claim for interest in its notice of adjudication dated 4th January 2005. The basis of this claim was spelt out in Carillion's referral dated 6th January 2005, together with the appendices. Carillion relied upon paragraph 20(c) of the Scheme.
The only reference to interest in Devonport's various submissions to the adjudicator was in the response:
"No sum is due and owing to CCL. Therefore the question of interest does not arise."
The adjudicator concluded in his reasons, that in the absence of any submissions to the contrary from Devonport, that he had power to award interest under paragraph 20(c) of the Scheme. The issue which subsequently arose was whether the adjudicator did indeed have power to award interest under paragraph 20(c) which provided:
"20. The adjudicator shall decide the matters in dispute. He may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication or which are matters under the contract which he considers are necessarily connected with the dispute. In particular, he may -
- open up, revise and review any decision taken or any certificate given by any person referred to in the contract unless the contract states that the decision or certificate is final and conclusive,
- decide that any of the parties to the dispute is liable to make a payment under the contract (whether in sterling or some other currency) and, subject to section 111(4) of the Act, when that payment is due and the final date for payment,
- having regard to any term of the contract relating to the payment of interest decide the circumstances in which, and the rates at which, and the periods for which simple or compound rates of interest shall be paid."
Devonport submitted that under paragraph 20(c) of the Scheme an adjudicator could only award interest if the contract between the parties provided for interest. Paragraph 20(c) did not create a freestanding power to award interest. Carillion argued that paragraph 20(c) did create such a power.
Justice Jackson held that paragraph 20(c) of the Scheme created a freestanding right to award interest for five reasons:
For all of the above reasons, the judge rejected the fourth challenge to the adjudicator's decision.
The judge concluded that Devonport failed in its various challenges to the adjudicator's decision and that Carillion was entitled to an order enforcing that decision.
For the reasons previously indicated, Justice Jackson gave judgment for Carillion in each of the two actions.
The judgment of Justice Jackson is of great importance to those involved in adjudication because it emphasises the judicial nature of the adjudication process and provides useful guidance on the difficult issue of the rules of evidence in adjudication. For a further detailed analysis of this issue refer to the article Judicial Decision Making in Adjudication by Daniel Atkinson.
As to the matter of the power of an adjudicator to award interest based on paragraph 20(c) of the Scheme refer to the Court of Appeal decision.