It's a balancing act for adjudicators

Two recent enforcement decisions of the Scottish courts show how fine a line adjudicators may be asked to tread when it comes to considering a defence.

In the first case, the defender complained the adjudicator had failed to consider its defence of set off, or had failed to give adequate reasons for rejecting the same. In the second case, the adjudicator was asked to determine whether a set off for unliquidated damages was the same as a claim which he had rejected in a previous adjudication.

Natural justice – did the adjudicator fail to address material lines of defence?  

UK Grid Solutions Ltd and Amey Power Services Ltd v Scottish Hydro Electric Transmission Plc [2024] CSOH 5

The pursuer and the defender entered into an NEC3 contract for works to be carried out at an existing electricity substation. The pursuer was to construct a new substation building and carry out installation and commissioning. However, responsibility for delivery and installation of two transformers (SGT5 and SGT6) remained with the defender. 

Delivery and installation of the two transformers was delayed. The project manager (PM) made an assessment that this compensation event under the contract did not result in any increase to the defined cost, nor affect completion nor the meeting of key dates (all as defined in NEC3). The pursuer rejected the PM’s assessment and submitted its own assessment and claim for extension of time (EOT) for the impact of the delays. This was in turn rejected by the defender who issued a nil payment notice. This gave rise to the adjudication and the court proceedings.

 The pursuer claimed EOT and payment was based on what the PM should have awarded at the time of the compensation event on the “prospective approach”, which the pursuer said was what NEC3 required. This meant that as the completion date had not been reached, there was no question of any liability for liquidated damages at that time and they were entitled to payment consistent with the objective of cashflow.

The defender argued that it was the “retrospective approach” (looking back at what had actually happened) which the PM and therefore the adjudicator should adopt. This issue arose in the Reply and Rejoinder where, for the first time, the defender claimed that even on the basis that the pursuer was entitled to the EOT claimed, it was late achieving completion. The defender raised a set off for liquidated damages which exceeded the payment claimed by the pursuer, so that nothing was due to the pursuer but some £1.5m was due to the defender.

The adjudicator found for the pursuer and awarded an EOT and a payment of £1.85m. In doing so it was contended by the pursuer that he must have followed their “prospective” approach and rejected the defender’s “retrospective” approach, though he did not expressly say so, nor deal with the set off, nor give reasons for rejecting it.

The defender opposed the application to enforce the adjudicator’s decision on the grounds that:

(1) the adjudicator had failed to deal with a “material defence” of set off;

(2) the adjudicator had failed to give any discernible reasons for rejecting the set off defence;

(3) his award in terms of remedy was meaningless as a result of the way the redress was expressed¹ and a clerical error in the figures and the fact that no time period for payment was included.   

In a very careful judgment, after referring to case law, relevant extracts from Referral and subsequent submissions in the adjudication, the adjudicator’s findings and the respective senior counsels’ submissions to the court, Lord Richardson delivered his conclusions.

Awards were to be enforced unless the adjudicator was not validly appointed, acted outside his jurisdiction, did not comply with the rules of natural justice, or provided inadequate reasoning. The adjudicator was obliged in fairness to consider and determine any material line of defence. It was not necessary to deal with every point made but the reasons for the decision must be coherent.

In this case, grounds 1 and 2 amounted to the same complaint – that the adjudicator had failed to consider the defence of set off. His Lordship rejected that complaint. It was clear that the question of whether the assessment should be made on a “prospective” or “retrospective” basis was in issue in the Response, Reply and Rejoinder. In accepting the pursuer’s case on the assessment, as could be seen or deduced from section 10 of his Decision, leading to an award of what should have been assessed by the PM at the time, and paid in full by the defender, the adjudicator had accepted the “prospective” approach. Thus, he must have rejected any right of set off for liquidated damages since this was not a claim which had by then arisen. In addition, at section 10 of his Decision he had said: “Adjudication is a process to facilitate cash flow. Therefore, had the Project Manager certified the payments in accordance with my assessments in a prospective nature, the Employer would be in no worse financial status."

As to reasons, it was not necessary that the adjudicator deal expressly with every allegation. It was discernible from the Decision both what he decided and the reasons for that decision. The court rejected the second argument.  

It was acknowledged that there were errors in the final part of the Decision that could have been, but remained, uncorrected. The court found that it would have been clear to the “reasonable reader” from the earlier findings, what sum the adjudicator intended to award and that payment was to be made within seven days. The court repelled the defender’s pleas in law and granted decree to the pursuer. 

Jurisdiction – the same or substantially the same dispute?

Engenda Group Limited v Petroineos Manufacturing Scotland Ltd [2024] CSOH 36

This was a petition for a judicial review by the petitioner, claiming an excess of jurisdiction by the adjudicator in what was the fourth adjudication between the parties. This arose from a turnaround contract for works at the respondent’s Grangemouth plant using NEC3 Option C. It was said that the adjudicator, Mr Malone, was not entitled to find that the respondent could plead a right to set off a claim for unliquidated damages in Adjudication 4 to defeat the petitioner’s right to payment of its final account, since he had decided in Adjudication 3 that the respondent’s claim for unliquidated damages had not been proved.

The key issues were: what had Mr Malone decided in Adjudication 3 and was it the same, or substantially the same, question that he was asked to determine in Adjudication 4.

Adjudication 3 had been brought by the respondent as a claim for damages for delay to the project completion and in which it sought various declarators. In summary, the adjudicator found that the petitioner was in breach of its obligations in relation to key dates and liable for certain periods of delay. While this may have led to a loss of revenue, liability for the failure to meet key dates was restricted by clause 25.3, and no claim had been made out under that clause. That left a possible liability for failure to meet the completion date in terms of clause 30.1, but the respondent had neither framed its case on that basis, nor provided an expert report demonstrating the consequences of that failure. Accordingly, while the respondent was, in the adjudicator’s view, entitled to recover a loss of revenue (unliquidated damages) in principle, it had not proved any entitlement to such an award and, accordingly, its case failed.

In light of that decision, the petitioner submitted a demand for payment of £1,134,547.15 which sum had been withheld by the respondent. In response, the respondent served a pay less notice for the full amount of the demand. As a consequence, the petitioner referred to adjudication the dispute as to the entitlement to withhold payment, and Mr Malone was appointed in Adjudication 4. 

In his decision in Adjudication 4, Mr Malone found that the respondent was entitled to prove, and had proved, that it had suffered damages in excess of the disputed sum as a consequence of the petitioner’s failure to complete the works by the completion date. Accordingly, he made no order for payment in favour of the petitioner.

The question now for decision was whether Mr Malone had already decided, in Adjudication 3, the claim for unliquidated damages raised by way of set off in Adjudication 4.

The correct approach to determining whether the same or a similar dispute had been determined in an earlier adjudication was synthesised in a series of decisions in England² which were now considered by the court.  

In Adjudication 4, Mr Malone rightly accepted that he was bound by his previous decision. However, he considered and decided that the question he was being asked to determine was not the same as that which he had previously decided in Adjudication 3. The claim for unliquidated damages was not fully articulated in Adjudication 3 and it was now put on a different basis, supported by different evidence.

Lord Young said that while the court should give due weight to that view, it was not bound by it. The respondent urged the court to only discount the adjudicator’s view if it was plainly wrong.

His Lordship went on to hold that the adjudicator’s view was “clearly wrong”. His statement that the respondent did not frame its case on the basis of entitlement to unliquidated damages was contradicted by numerous references in the decision in Adjudication 3. It was at least in part based on a failure to complete by the completion date. In reaching that conclusion, his Lordship felt no need to resort to the presumption of regularity³. There was no difficulty finding on an objective assessment of the decision itself that Adjudication 3 did purport to deal with the respondent’s claim for damages due to a failure to complete by the completion date. The existence of new evidence did not of itself indicate a different dispute.

The court looked in detail at the judgment in Hitachi Zosen Inova AG v John Sisk & Son Ltd, concluding that when the whole of the earlier decision (of the adjudicator in that case) was considered, it became clear that the adjudicator’s decision was restricted in its scope. Thus there was a distinction between a decision that a case was not proved and one where the adjudicator expressly reserved any decision for another day. In the present case, when issuing his decision in Adjudication 3, the adjudicator did not seek to limit the scope of his determination that the respondent had failed to prove its damages claim. 

His Lordship concluded: “In my view, Hitachi falls to be regarded as a somewhat unusual case on its facts in which the adjudicator expressly limited what he was deciding and made that clear in his decision to the parties. In relation to adjudications where a party seeks but fails to prove its loss due to a lack of evidence led before the adjudicator, the normal consequence will be that a further adjudication seeking to establish the loss will be barred.”   

Conclusions

The ‘fine line’ referred to in the introduction to this article requires the adjudicator to address every defence advanced by the responding party so as to ‘exhaust his/her jurisdiction’ and to give coherent reasons for accepting or rejecting any defence.

Perhaps we may add, if it is not obvious, that the adjudicator need only deal with the defences or claims framed in the dispute and should confine themselves to what is actually put forward. Where an adjudicator recognises the existence of claim that is not relied on or an issue which cannot be decided, the decision may be restricted in its scope (see Hitachi), so that, for example, it is a decision on liability only, leaving quantum for another day.

Written by Kenneth T Salmon, Consultant Solicitor and Mediator

Courtesy of Ciarb.

Read more about Ciarb’s role as an Adjudicator Nominating Body.

About the author: Kenneth T Salmon MCIArb is a qualified solicitor in England, Wales and Eire. He is a Ciarb-qualified and CMC-accredited Mediator and Chair of Education at Ciarb North West Branch. Kenneth is a construction specialist currently working as a consultant to Slater Heelis Limited. He has extensive experience of all forms of dispute resolution including arbitration, adjudication, expert determination and mediation. He is the author of Cases on the Enforcement of Construction Adjudication Awards (2012) and the series ‘Cases’ (on adjudication enforcement) published in Ciarb’s journal Arbitration: The International Journal of Arbitration, Mediation and Dispute Management, 1999-2017 and again from 2023.

[Footnotes]

¹ It seemed to have been ‘cut and pasted’ from the Referral without the necessary editing to make it an award, directing payment to be made and specifying a time for payment. The amount also duplicated some figures.

² Carillion Construction Limited v Smith [2011] EWHC 2910 (TCC) per Akenhead J at para [56] and Brown v Complete Building Solutions Ltd 2016 EWCA Civ 1 per Simon LJ at para [20]. The most recent iteration is set out in Lewisham Homes Ltd v Breyer Group Plc, by Waksman J at para [34], which the Court of Appeal in Sudlows Limited v Global Switch Estates 1 Limited [2023] EWCA Civ 813 at para [53] was content to adopt. 

³ The presumption that an adjudicator who deals with an issue in the decision thereby leaves no scope for a gap between what was referred and what was decided.