Date:

Adjudication - Disputing the adjudicator's decision – Accidentally affirming the validity of an award - Errors and natural justice

The recent case of Dawnus Construction Holdings Ltd v Marsh Life Limited demonstrates that even where a potential defence to adjudication enforcement exists, a party may lose the right to challenge an adjudicator's award by simply acting in a way that is deemed inconsistent with rejecting it.

Dawnus Construction Holdings Ltd v Marsh Life Limited [2017] EWHC 1066 (TCC)

A number of our recent updates have concerned issues around challenging adjudication awards post the adjudication decision and how these are enforceable subject to very limited grounds of defence – essentially a lack of jurisdiction and/or breaches of the principles of natural justice (see Payment and Pay-less Notices – Disputing the Adjudicator's Decision - To fight, pay or stay and Disputing the Adjudicator's Decision – Oral Contracts and Jurisdictional Uncertainty). To continue with this theme, this case demonstrates that even where such a defence potentially exists, a party may lose the right to challenge an adjudicator's award by simply acting in a way that is deemed inconsistent with rejecting it. There is also commentary around differentiating between an adjudicator merely 'misunderstanding' part of a party's case (which does not go to validity) and acting in breach of the principles of natural justice (which does).

Background

HHJ McKenna sitting recently in the Technology & Construction Court ("TCC") in London enforced a £1.25m adjudication award in favour of the claimant contractor under the terms of a JCT D&B 2011 main contract.

Marsh Life Ltd ("Marsh Life") engaged Dawnus Construction Holdings Ltd ("Dawnus") to design and build a hotel, restaurants and a retail unit in Poole. Various delays occurred leading to the termination of the contract. As a result, a number of disputes arose leading to a total of four adjudications between the two parties.

This case concerned the enforcement of the decision in the fourth adjudication. Marsh Life sought a valuation of the account before termination. The adjudicator decided the total amount due to Dawnus came to £1.25 million. Whilst it was Marsh Life that referred the dispute to adjudication, the adjudicator held in favour of Dawnus. Marsh Life raised 'natural justice' challenges in respect of the award but Dawnus contended Marsh Life's ability to challenge the decision (on this or any other basis) was lost as it had invited the adjudicator to correct alleged errors in his decision under the 'slip rule'. Dawnus argued that by inviting the adjudicator to correct errors in this way (notwithstanding that the adjudicator actually declined to make any corrections), Marsh Life accepted the decision as being valid.  As there had also been no reservation by Marsh Life of its rights in relation to the veracity of the award (whether natural justice issues or otherwise), it had therefore elected to forgo any opportunity it might have had to challenge the decision.

Marsh Life's position was that during the adjudication process, the adjudicator failed to properly consider the defences it raised and, as a consequence, the rules of natural justice were breached. Marsh Life sought to draw a distinction between issues of jurisdiction and natural justice in relation to its actions.  It conceded that whilst invoking the slip rule may be said to waive or elect to abandon a jurisdictional challenge, this did not apply to breaches of the principles of natural justice and it was thereby still open to Marsh Life to run this defence at enforcement.

The TCC Decision                                     

The TCC held that Marsh Life had effectively waived, or elected to abandon, it's right to challenge the validity of the adjudicator's decision when it invited the adjudicator to exercise his powers under the slip rule - despite the adjudicator declining to make any actual corrections. It could have prevented these actions from affirming the validity of the decision by expressly reserving its rights of challenge - but it failed to do so.

The Court relied on previous judgments in Laker Vent Engineering Ltd v Jacobs E&C Ltd [2014] EWHC 1058 (TCC) and Shimizu Europe Limited v Automajor Limited [2002] EWHC 1571 (TCC) and did not accept any distinction could be made between a breach of the rules of natural justice and an excess of jurisdiction.

The distinction was described by HHJ McKenna as:

"conceptually unsound and contrary to the authorities. It presumes that there is a clear distinction between excess of jurisdiction and breach of the rules of natural justice when, in reality, there is often no such clear distinction, with challenges frequently being framed in the alternative…"

 HHJ McKenna further reiterated that:

"…Assuming that good grounds exist on which a decision may be subject to objection, in the absence of an express reservation of rights, either the whole of the relevant decision must be accepted or the whole of it must be contested…"

Interestingly, despite finding that the right to run the natural justice defence had been lost, HHJ McKenna  then went on the consider the substantive merits of this argument and affirmed the relevant test in relation to issues of natural justice is that:

"… for a breach of natural justice to be a bar to enforcement, the breach must be 'plain', 'significant', 'causative of prejudice' or 'material."

Here he found that the rules of natural justice had not been breached. Whilst there may have been a 'misunderstanding' by the adjudicator of part of Marsh Life's defence (Marsh Life appeared to argue that delays were caused by a statutory undertaker so that Dawnus was entitled to an extension of time but no loss and expense whereas the adjudicator seems to have understood the argument to be that the delaying party was not a statutory undertaker at all), the Court concluded that the adjudicator had determined exactly the issue asked of him;  Dawnus' entitlement to loss and expense. Marsh Life had argued there was no contractual entitlement to loss and expense and the adjudicator rejected this. Marsh Life was therefore "stuck with" the fact its argument that Dawnus was not entitled to such loss and expense was rejected.

Case Commentary

Whilst it seems generally well understood that failing to raise jurisdictional/natural justice issues during the adjudication itself can result in a 'deemed acceptance' of the decision that follows, this case confirms that the same principles can also apply post the issue of the adjudicator's decision. Where a party fails to reserve its rights in relation to an award and acts in such a way as to 'elect' to treat the decision as valid, the Courts have made clear that it cannot both approbate and reprobate in relation to an adjudicator's award (or 'blow hot and cold'  - in non-legal speak). In other words, without an express reservation of rights you accept the entire decision as either invalid or valid for all purposes – you cannot consider it invalid for one thing but not for another. For example, you cannot argue the decision is invalid for the purpose of enforcement but valid for the purpose of making a payment against it or submitting the decision to arbitration or, as here, invoking the slip rule.  The case also affirms that no distinction will be drawn between issues of jurisdiction and natural justice when applying this principle.

Another key lesson from this case is the difficulty in successfully arguing that an error/misunderstanding by an adjudicator in a decision that answers the general questions referred to him will constitute a breach of the principles of natural justice and thereby invalidate that decision. On a first analysis of Marsh Life's case, there would appear to be the bones of a reasonable 'natural justice' argument. However, the Judge's comments indicate that the Courts will view matters in a broader sense in that if a referred claim (or claim element) is considered and addressed by an adjudicator in his award (such as what is the extension of time entitlement, what is the value of variations etc.), the Court will be reluctant to 'drill down' into the details of the adjudication submissions in relation to such elements.

In these circumstances, there seems to be a judicial distinction between an adjudicator merely misunderstanding a pleaded legal or factual case as opposed to not considering such a case at all or going on a 'frolic of his own' by independently producing his own 'stand-alone' legal and/or factual analysis that neither party had a reasonable opportunity to address.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Paul Barge

Partner

I am a Partner in DWF’s Manchester office and Head of the Construction & Infrastructure team in the North West.