Karl Construction (Scotland) Ltd v Sweeney Civil Engineering (Scotland) Ltd (2000) Crt of Session is an important case in the development of the law governing the standards of conduct to be adopted by adjudicator’s. The essential issue was - what is the status of an adjudicator’s decision if it is based on deciding a question of law which is not an issue between the parties and on which the adjudicator has failed to seek submissions from the parties? The answer appears to be that the decision will not be in excess of jurisdiction if the finding of law is a necessary step to the decision. It appears to have been left open whether the decision could be challenged on the basis of breach of natural justice or rules of fairness, since these issues were not raised in the enforcement proceedings.

Sweeney were subcontractors to Karl Construction for building works and made a reference to adjudication for alleged non-payment. The Adjudicator’s finding was that Sweeney was entitled to payment from Karl Construction of the sum of £39,872.24 exclusive of VAT. Karl Construction challenged the Adjudicator’s decision on the grounds that it was in excess of jurisdiction.

Karl Construction claimed that Sweeney's right to interim payments was governed by the terms of the Sub-Contract which provided that although interim payments to the Sub-Contractor may become due, they were only payable to the sub-contractor when the value of the equivalent works were included in the certificate from the architect or contract administrator under the Main Contract or otherwise approved by the employer under that contract. Karl Construction claimed that Sweeney had already been paid more than their certified entitlement.

Karl Construction’s challenge was not directed against the merits of the Adjudicator’s Decision but rather that the decision was beyond the limits of the reference to the adjudicator. It was argued that the question which the adjudicator had to answer was dependent on the nature and extent of the dispute referred to him by a valid Notice of Intention to refer. The dispute referred was expressed as the failure of Karl Construction to comply with the "payment provisions" of the Scheme.

The Adjudicator decided that the Sub-Contract terms and conditions do not make adequate provision for time of payment as required by section 110 of the 1996 Act and accordingly the adjudicator decided the Scheme applied. Karl Construction argued that the compliance of the Sub-Contract with the 1996 Act was never an issue referred to adjudication. Reference was made communications from Sweeney as conclusive evidence of the fact that the applicability of the payment provisions of the Scheme formed no part of the dispute between the parties. If the applicability of the Sub-Contract had been under challenge, Karl Construction would have hotly contested the matter. They had no opportunity to do so. Karl Construction argued that if an adjudicator or arbiter decided a matter beyond that which is referred to him or beyond the powers conferred upon him, his decision would be void.

Sweeney argued that in this case the formal Notices, Response and the correspondence showed clearly that Sweeney's plain objective was to get immediate payment for work they had done and detailed in their Application for Payment No 5.

The issue was therefore what precisely was the dispute referred to the adjudicator? Karl Construction contended that the dispute between the parties was whether or not they were entitled to delay the relevant interim payment because the prerequisites for payment set out in the Sub-Contract were not fulfilled. Sweeney on the other hand argued that Karl Construction had to give a written notice indicating their intention to withhold payment. Karl Construction contended that no notice of withholding was necessary because the relevant provisions only applied where there was non-payment of sums otherwise due. They contended that at the stage at which the contract had arrived the sums in the Application for Payment No 5 were not yet due so that there was nothing to withhold.

Karl Construction submitted that by finding the Sub-Contract did not make clear provisions for determining when an interim payment was due and therefore relying upon the payment provisions of Part 11 of the Scheme, the adjudicator strayed beyond the bounds of what had been referred for adjudication. Sweeney on the other hand submitted that the dispute referred to adjudication was wider in scope and that it was a dispute which arose from the fact that Karl Construction had failed to pay the sums due for work which had been done and valued and was the subject of the claim incorporated in the application for Payment No 5.

It was held by Lord Caplan that in forming a view of the nature and extent of the adjudication proceedings a number of factors had to be kept in mind. The objective was to get a practical provisional decision in proceedings where the parties are likely to have commercial considerations in mind rather than to have a concern for extensive legal analysis. The timescale both for the development of, and decision in, the adjudication was both strict and exacting. Thus a degree of procedural requirement that might be expected in litigation or arbitration was neither appropriate nor likely to be achieved. Moreover in the background is the fact that any resolution of the dispute in the adjudication is only a provisional result to deter stalemate but that errors can eventually be corrected.

A question might arise as to whether during the course of an adjudication parties can adjust or change their contentions. It was difficult to see why when confronted with Karl Construction's Response Sweeney should not, if they had been so advised, have added an alternative contention that if they were not due payment under the terms of the contract because the contract did not contain a mechanism for determining when payment was due, then they would be entitled to payment under Part 11 of the Scheme. It was surely to be expected in flexible procedures such as apply in adjudication that the adjudicator can raise new questions of fact or law if he considered that they were relevant to the dispute. It was held that it was important to distinguish between the dispute (which will turn on the practical implications for the parties) and the contentions and support of each party's stance over the material issue which might be adjusted in the course of communications between them.

It was held that Karl Construction were disputing their obligation to make payment. Both parties appear to have got at least their principal contentions in support of their respective cases wrong. Sweeney considered it was apt for them to rely on the contractual provisions because they believed that the notice of withholding provisions applied. Karl Construction on the other hand thought they could delay payment on the application under what they perceived as their right to get a certificate on the Main Contract was satisfied. However, looking at the issue more broadly, the parties were in dispute as to when was the time for payment of the outstanding works set out in Application for Payment 5. This was certainly what Sweeney, at least, wanted to resolve.

The essence of Karl Construction’s case was that the Adjudicator’s decision was not confined to the contentions advanced by the parties, but based on an issue not referred to adjudication. The express contentions advanced by the parties in the adjudication procedure contained competing views of the construction and applicability of the payment provisions for interim payments which are contained in the Sub-Contract. It was held that the adjudicator therefore was required to give consideration to the relevant provisions of the Sub-Contract to see what was to be made of them. The adjudicator rightly or wrongly concluded that the Sub-Contract did not provide an adequate mechanism for deciding when instalment monthly payments become due. In the circumstances the adjudicator's position seems to be that in order to answer the central issue in the referral it was necessary to make a finding explaining why one or other of the paths suggested by the parties was not followed. It was held that such a finding would be an integral part of the decision on the reference.

If the adjudicator rejects a suggestion that the Sub-Contract contains provisions about when payments become due then because of the implications of this on the resolution of the referral it was difficult to say that the question of whether or not the Sub-Contract contains an adequate provision for governing when payment of instalments is due is not part of the dispute which has been referred and that the matter constitutes a separate and independent dispute requiring a different referral.

It was held that Sweeney's claim for payment in terms of the Application for Payment No 5 was inextricably linked to the construction of the Sub-Contract. If the construction and application of the Sub-Contract payment provisions required (even in part) separate adjudication, it is easy to see what a tangle could result if a different adjudicator reached a different conclusion. There would result the very protracted wrangling which the summary remedy for provisional decisions by an adjudicator was designed to avoid.

The adjudicator's finding about the inadequacy of the payment provisions in the contract would be a matter for challenge in respect of the handling of the adjudication, but the procedure adopted by the adjudicator would have to be assessed within the adjudication itself.

Prima facie when a case is decided even provisionally, on a point which the parties may have had no opportunity to address, the Court is left feeling uncomfortable. Indeed this case may well illustrate the severe problems that can arise when a truncated summary procedure is applied to problems requiring complicated preparation and considerable care in presentation. It may be suggested that having seen how the matter referred to has developed, the adjudicator should have made arrangements to give parties an opportunity to make submissions on the view that there was no adequate mechanism in the Sub-Contract for determining when a monthly instalment became due. On the other hand the adjudicator may have decided that Karl Construction had made submissions on the applicability of the Sub-Contract to the situation being considered, and that their contentions were erroneous because the Sub-Contract in fact did not have an adequate payment mechanism. The adjudicator may also have had problems about extending the referral procedures because of the strict timescale that had to be observed. On the other hand should it be the case that the procedures followed were unsatisfactory, or that the decision regarding the effect of the payment provisions in the Sub-Contract was not adequate, then these problems would represent mistakes made by the adjudicator in the treatment of the referral rather than an excess of jurisdiction.

Lord Caplan rejected the challenge on the adjudicator’s jurisdiction.

It is clear that adjudicators should attempt at an early stage to identify the legal issues to be resolved. It makes good practical sense for the adjudicator to invite submissions of law so as to avoid mistakes of law and to avoid the feelings of unfairness when a decision is made on a legal basis which has not been argued by the parties. The decision of Lord Caplan is consistent with other decisions in avoiding the attempt to categorise mistakes, whether of fact law or procedure, as actions in excess of jurisdiction. It is suggested however that the decision is not clear authority allowing the adjudicator to decide questions of law which are not disputed and which the parties have not had an opportunity to argue.