Adjudication
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KEYWORDS: |
Housing Grants Construction and Regeneration Act 1996, jurisdiction, contract-based, statutory, adjudicators failures, nullity, judicial review, Scheme. |
The judgment of Lord Reed in Ballast plc v The Burrell Company (Construction Management) Limited (2001) is an important analysis of the legal status of adjudication adopting a contract-based approach. Based on this approach Lord Reed develops the tests for the jurisdiction of the adjudicator and the validity of his decision.
The adjudicator was appointed on 16 November 2000. The dispute was referred to him by a notice of referral dated 21 November 2000. That notice of referral gave details of the dispute, and repeated what had been said in the notice of adjudication as to the redress sought. The matter in dispute was the amount of the payment due and payable
The adjudicator had been appointed on three previous occasions as an adjudicator in respect of disputes concerning the same project. He had issued a decision in the first two adjudications. The dispute referred to him in the third appointment was between Ballast and Burrell and was identical to that in the instant Notice of Adjudication. He had resigned from that appointment under paragraph 9(1) of the Scheme, as a consequence of Burrell’s refusal to consent to an extension of the period allowed for a decision, under paragraph 19(1)(c) of the Scheme.
The Adjudicator’s decision in dispute was not clearly expressed, but it was apparent that the adjudicator has refused to grant the redress sought. He did not decide the amount due. In relation to the central request made by Ballast as the Referring Party - that "the adjudicator assess the value of work done, the common services, the management fee, loss and expense and other appropriate amounts due and payable to the Referring Party and... make directions as to the amounts due and payable to Works Package Contractors" - his decision was: "Not valid".
After examination of a “Commentary” provided by the adjudicator, it was held that the adjudicator considered that he was unable to determine the matter which had been referred to him as being in dispute, namely the amount due and payable by Burrell to Ballast.
Lord Reed first examined the legal framework within which to address the issues raised by the adjudicator’s decisions. Was the adjudicator to be regarded as a statutory decision-maker, albeit one whose statutory powers and duties have been clothed in contractual form, which was the approach adopted by Lord Macfadyen in Homer Burgess Ltd v Chirex (Annan) Ltd? Alternatively was adjudication to be regarded as a contractual procedure as Dyson J. appears to have regarded it in, for example, Macob Civil Engineering Ltd v Morrison Construction Ltd?
Lord Reed held that the parties have a contractual right to adjudication. The construction and effect of its terms, in the instant case the term implied by paragraph 23(2) of the Scheme “The decision of the adjudicator shall be binding on the parties, and they shall comply with it”, depended on the construction of the express and implied terms of the contract.
Lord Reed held that although the provisions for adjudication had contractual effect, they could not be regarded as terms to which the parties have freely agreed. In one form or another, they were compulsory contract terms imposed by statute. Nevertheless, the approach to the issue was not on the basis that the adjudicator was exercising a jurisdiction created by statute or, in other words, exercising statutory powers and bound by statutory duties. First, such an approach would not be warranted if the adjudication procedure had been one expressly incorporated into the contract, since the adjudicator's powers and duties would then be created and defined by contract. It was held not to be appropriate or desirable to draw a fundamental distinction between adjudication under contract terms complying with section 108(1) to (4) of the Act and adjudication under the Scheme. Lord Reed suggested that it was possible that an adjudication might be governed partly by express contract terms and partly by the Scheme, since the contract might comply only in part with the requirements of section 108(1) to (4). He suggested that this was reflected in the terms of section 114(4) ("Where any provisions of the Scheme for Construction Contracts apply..." emphasis added). In that event he stated, it would be unrealistic to treat differently the Scheme provisions from the express contractual provisions. Secondly, section 114(4) itself requires the court to give effect to the Scheme provisions as implied terms of the contract between the parties.
Lord Reed then examined the legal nature of Adjudication. He observed that it was apparent from Section 108(3) of the Act, and from paragraph 23(2) of the Scheme, that adjudication did not oust the jurisdiction of the courts or of an arbiter to determine the merits of the same dispute. In that respect it differed from arbitration. On the other hand, the adjudicator's decision was binding, pending a final determination of the dispute by the courts or by arbitration. The adjudicator's decision was of a provisional nature, and not intended necessarily to be the same as the decision that would eventually be reached by litigation or arbitration.
Section 108(2) of the Act and paragraphs 13 and 19 of the Scheme showed that adjudication was intended to be an expeditious means of reaching a decision: the timetable envisaged was too short to allow for the type of procedure, or the type of hearing, which would in most cases be necessary for the issues of fact and law involved in the dispute to be explored as fully as in an arbitration or in court proceedings. The adjudicator was therefore entitled to adopt a more inquisitorial role than that of a judge or an arbiter.
These aspects of adjudication - the short timetable, the scope for inquisitorial procedure, and the provisional nature of the decision - fitted together as elements in a coherent scheme.
Lord Reed then examined the legal effect of an Adjudicator’s Decision using a contract-based approach. Lord Reed observed that notwithstanding the provisional nature of the decision, the parties agreed to comply with it. That obligation could be enforced by application to the court. It was held that on such an application being made, it was not appropriate for the courts to undertake an investigation into the merits of the dispute in order to ascertain whether the adjudicator has reached the same decision, as a court would have done. To some extent, therefore, the adjudicator's decision must be binding, temporarily, notwithstanding that a court would not agree with it. To the extent that the adjudicator's decision was binding, it might be said that there was, in effect, a temporary ouster of the court's jurisdiction to determine the matters in dispute.
Lord Reed noted that the contract based on the Scheme imposed a number of express requirements with which the adjudicator "shall" comply:
Lord Reed also observed that the consequences of any failure to comply with those requirements was not stated in the contract, and held therefore that they were to be determined by interpretation of the contract.
Lord Reed then examined the legal effect of an Adjudicator’s failure to comply with the contract requirements.
Lord Reed held that if the requirements are intended to be enforceable, the means of enforcement was the release of the parties from obligations which would otherwise be binding upon them: notably the obligation to comply with the adjudicator's decision, or the obligation to pay his fees and expenses. The adjudicator was not, in the absence of bad faith, liable for anything done or omitted to be done in the discharge or purported discharge of his functions (section 108(4), and paragraph 26 of the Scheme). He was not liable in damages for any breach of the requirements of the contract. For his decision to be held up by applications to the court for the enforcement of those requirements would generally be incompatible with the contractual timetable and with the intention that the procedure should be expeditious.
The requirements in question may not necessarily be intended to be enforceable. The requirements may be stated for the guidance of the adjudicator and the parties but without the intention that non-compliance should affect the binding character of his decision. Alternatively the consequences of a failure to comply with the requirements may depend on the specific nature of the failure. The provisions of the Scheme had to be interpreted in the light of the intention of Parliament in enacting the 1996 Act, and more particularly the intention of the Minister in making the Scheme. That intention would be imputed to the parties to the contract, given the incorporation of the Scheme provisions as implied contractual terms. Lord Reed referred to the general intention stated by Dyson J. in Macob Civil Engineering Ltd v Morrison Construction Ltd as a speedy mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring the decisions of adjudicators to be enforced pending the final determination of disputes by arbitration, litigation or agreement. An adjudicator's decision was intended to be binding notwithstanding any failure to comply with the requirements of the Scheme, provided the decision was of the dispute which had been referred to him. Lord Reed considered that the issue was whether a given error did or did not "invalidate" the decision in the sense of rendering the decision non-binding
Lord Reed then examined the legal process of Judicial Review in Scotland and concluded that the process was consistent with the general intention stated by Dyson J. If the relevant grounds for challenge were confined to the sort of matters that can be raised under Scots law in the context of challenges to the decisions on Wednesbury grounds - then experience in other contexts suggests that such challenges were generally capable of speedy resolution. They did not normally require any detailed or prolonged investigation into complex issues of fact.
If the Scheme was construed as conferring upon the adjudicator a jurisdiction to take decisions which, albeit provisional, excluded pro tanto the ordinary jurisdiction of the courts to determine parties' rights and obligations, then under Scottish procedure such decisions would be capable of challenge (on limited grounds) by an application for judicial review. That approach was implicit in proceedings that had been brought by way of judicial review in Scotland (eg. Allied London and Scottish Properties plc v Riverbrae Construction Ltd [1999], Karl Construction (Scotland) Ltd v Sweeney Civil Engineering (Scotland) Ltd [2001], Watson Building Services Ltd [2001]).
Lord Reed considered that adjudicators' decisions were not intended to be entirely immune from challenge. Whilst both parties to the contract undoubtedly had a strong interest in the enforceability, without delay, of adjudicators' decisions, they also had an interest in being protected against decisions that were unjust. As was observed by His Honour Judge Bowsher, Q.C. in Austin Hall Building Ltd v Buckland Securities Ltd [2001] the enforcement of an adjudicator's decision through the courts might put one party into liquidation or bankruptcy or save the other from a similar fate. An adjudicator's decision may be at least as important as a decision of a court making an order for a temporary injunction or for a payment to account. The potential for irremediable injustice was equally apparent as observed by Dyson J. in Bouygues v Dahl Jensen [2000].
Notwithstanding the ephemeral and subordinate character of an adjudicator's decision, and the deemed intention that adjudication should be an expeditious procedure rooted in commercial common sense, Lord Reed considered that the Court should be slow to attribute to the parties an intention that the adjudicator's decision should always be binding notwithstanding errors of law, procedural unfairness or lack of consideration of relevant material submitted to him by the parties, no matter how fundamental such a breach of the adjudicator's obligations might be.
Lord Reed observed that one difference between Scots and English law (in procedure at least), was that judicial review was not confined under Scots law to issues of public law. It extended to powers conferred by a contract upon a third party to determine the rights of the parties to the contract inter se. In particular, judicial review under Scots law extended to arbitration and was not uncommon in the context of arbitration under building and engineering contracts. He considered that those responsible for the Scottish Scheme were be taken to have been aware both of the possibility, under Scots law, of a relatively rapid determination of questions as to the compatibility of a decision with what might be described as Wednesbury standards and of the role played by judicial review under existing Scots law and practice in relation to construction contracts.
Lord Reed recognised that the contractual approach differed to some extent, in emphasis at least, from the approach adopted by Lord Macfadyen in Homer Burgess Ltd v Chirex (Annan) Ltd [2000] who regarded the adjudication procedure as "clothed in contractual form" but as essentially statutory. Although Lord Reed did not treat the adjudicator as a "statutory decision maker" - primarily because of the statutory requirement to give effect to the Scheme provisions as implied contractual terms – he considered that the authorities on judicial review to which Lord Macfadyen referred may nevertheless be relevant, since the scope of such authorities is not restricted, under Scots law, to inferior jurisdictions of a statutory nature. In other words, the adjudicator may be, in Lord Macfadyen's words, "in substantially the same position" as a statutory decision maker. In particular, if the decision of an adjudicator is susceptible to challenge on Wednesbury grounds, under judicial review procedure, but is not otherwise open to challenge on the basis of error of fact or law, then the guidance given by Lord Reid in Anisminic Ltd v Foreign Compensation Commission [1969] applied.
Lord Reed observed that in Homer Burgess Ltd v Chirex (Annan) Ltd [2000] was itself an example of a case where the adjudicator had no jurisdiction to enter on the inquiry: the contract was not a "construction contract" within the meaning of the 1996 Act. There were other examples of the same kind of case (eg. The Project Consultancy Group v The Trustees of the Gray Trust [1999]). In other English cases it has been held that the adjudicator must also, in the course of proceedings falling within his jurisdiction, comply with the requirements of natural justice, or act fairly, as it might tend to be expressed (eg. Austin Hall Building Ltd v Buckland Securities Ltd [2001]). In Bouygues v Dahl Jensen [2000] Dyson J. accepted that an adjudicator's decision was of no effect in law if he had "decided the wrong question rather than given a wrong answer to the right question". Lord Reed considered that test could equally well be expressed, in Lord Reid's words, as asking whether the adjudicator had misconstrued the provisions giving him power to act so that he failed to deal with the question remitted to him and decided some question which was not remitted to him. The decision of the Court of Appeal in in the same case similarly distinguishes between error within jurisdiction and jurisdictional error.
Lord Reed concluded that the Scheme should be interpreted as requiring the parties to comply with an adjudicator's decision, notwithstanding his failure to comply with the express or implied requirements of the Scheme, unless the decision is a nullity. The decision would be a nullity if the adjudicator has acted ultra vires, (using that expression in a broad sense to cover the various types of error or impropriety which can vitiate a decision), for example because he had no jurisdiction to determine the dispute referred to him, or because he acted unfairly in the procedure which he followed, or because he erred in law in a manner which resulted in his failing to exercise his jurisdiction or acting beyond his jurisdiction.
Lord Reed then applied the general approach to the circumstances of the case. He held that the adjudicator was bound to determine the dispute referred to him, provided the dispute fell within his jurisdiction. Paragraph 20(1) of the Scheme expressly provides that "the adjudicator shall decide the matters in dispute" (subject to his power to issue separate decisions on different aspects of the dispute); and that is reflected in paragraph 9(2). The adjudicator had decided that he could not carry out any valuation, or find any payment due, because the parties had departed from the terms of the pre-printed contract in a number of respects. Given the nature of the allegations being made, the adjudicator's error was material. The error was the belief that, as a matter of law, a departure from the JCT conditions necessarily entails that no adjudication can be carried out. As a result of that error, the adjudicator misconstrued his powers, and in consequence failed to exercise his jurisdiction to determine the dispute. His decision was therefore a nullity.