Adjudication - Be careful what you wish for!

Wed, 30 Jun 2010

It has been a common practice for the last 12 years for the Referring Party to carefully choose the terms of reference for the adjudicator so that the matter referred is the most advantageous to the Referring Party and most disadvantageous to the Other Party. It appears that such practices are being frowned upon by the Judiciary!
 
As an example say a party referred 3 out of 5 heads of a final account and asked the adjudicator to award them a significant sum of money. The Other Party defends the specific claims and defends the money claim by reference to ‘over measures’ on the other 2 heads of the final account. The Referring Party challenges the adjudicator’s jurisdictional stating that he does not have jurisdiction to consider the other two heads of the final account as they were expressly excluded from the Notice of Adjudication. The Other Party says the adjudicator did have jurisdiction as the Referring Party wanted money and the ‘over measure’ defence was a good defence to the claim for money. Sometimes the adjudicator agreed with the Referring Party.
 
The Court has disapproved of such ‘tactical’ adjudication in a recent decision of Mr Justice Coulson QC in Pilon Ltd v Breyer Group Ltd [2010] EWHC 837(TCC). In that case a similar approach was taken to a valuation certificate, the Referring Party (Pilon) referred a dispute specifically limited to the valuation of batches 26 to 62 and sought payment of £337,000.67. The Other Party (Breyer) defended the valuation and also sought to argue that there had been an overvaluation in relation to batches 1 – 25 so that no monies were due.
 
Pilon objected to Breyer’s defence as the Notice of Adjudication was limited to the valuation of batches 26 to 62. The adjudicator accepted Pilon’s argument and excluded the overvaluation defence.
 
One of Breyer’s defence’s in the enforcement proceedings was that the Adjudicator had taken an erroneously restrictive view of the dispute referred to him. Mr Justice Coulson took the opportunity to review the caselaw that has recently developed in this area. Having reviewed the caselaw he concluded:
 
22. As a matter of principle, therefore, it seems to me that the law on this topic can be summarised as follows: 
 
22.1. The adjudicator must attempt to answer the question referred to him. The question may consist of a number of separate sub-issues. If the adjudicator has endeavoured generally to address those issues in order to answer the question then, whether right or wrong, his decision is enforceable: see Carillion v Devonport. 
 
22.2. If the adjudicator fails to address the question referred to him because he has taken an erroneously restrictive view of his jurisdiction (and has, for example, failed even to consider the defence to the claim or some fundamental element of it), then that may make his decision unenforceable, either on grounds of jurisdiction or natural justice: see Ballast, Broadwell, and Thermal Energy. 
 
22.3. However, for that result to obtain, the adjudicator’s failure must be deliberate. If there has simply been an inadvertent failure to consider one of a number of issues embraced by the single dispute that the adjudicator has to decide, then such a failure will not ordinarily render the decision unenforceable: see Bouygues and Amec v TWUL. 
 
22.4. It goes without saying that any such failure must also be material: see Cantillon v Urvasco and CJP Builders Limited v William Verry Limited [2008] EWHC 2025 (TCC). In other words, the error must be shown to have had a potentially significant effect on the overall result of the adjudication: see Keir Regional Ltd v City and General (Holborn) Ltd [2006] EWHC 848 (TCC).
 
22.5. A factor which may be relevant to the court’s consideration of this topic in any given case is whether or not the claiming party has brought about the adjudicator’s error by a misguided attempt to seek a tactical advantage. That was plainly a factor which, in my view rightly, Judge Davies took into account in Quartzelec when finding against the claiming party.
 
Mr Justice Coulson went on to conclude that the overpayment defence would have made a significant difference to the monies payable by Breyer and was a material issue. However the Judge also stressed that a party defending in a matter such as this had to show a substantial injustice akin to the test for serious irregularity in S68 of the Arbitration Act 1996. The Judge then went on to consider severing the overvaluation from the adjudicator’s decision but concluded that the whole decision was tainted and so severance was not available. 
 
The case also highlights the fact that adjudicators need to keep an eye on the bigger picture and fairness when construing Notices of Adjudication in his view this was a dispute about the amount due to Pilon not simply the valuation of part of the work.
 
A major factor in Mr Justice Coulson’s thinking was that Pilon had tried to take tactical advantage by carefully wording the Notice of adjudication:
 
30. However, I have concluded that Pilon are wholly to blame for that result. Pilon had a choice: they could either run a jurisdictional defence which they knew or should have known was erroneous, or they could have dealt with their response to the over-payment defence on its merits. Because they chose the former course, the adjudicator never considered that defence, and it seems to me that it is now too late for Pilon to complain about that. It is a direct result of their own deliberate strategy.
 
Therefore those who seek to take tactical advantage in carefully drafting a notice of adjudication to avoid the negative aspects of a claim need to be careful what they wish for!
 
By Peter Collie

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