Be careful what you wish for when it comes to a question of jurisdiction
Whether an adjudicator correctly identifies an issue as something which he or she has jurisdiction to decide is potentially determinative of whether the decision is enforceable. If the adjudicator refuses to consider an issue or argument on the basis that it is outside of his or her jurisdiction and the consequences of that failure are sufficiently serious then the decision will not be enforced.
It is a question that arises in many adjudications and much of an adjudicator’s training will be to correctly identify what is within and without the scope of their jurisdiction.
They will have to do that against the background that in many cases the question does not have an easy answer and the parties to the adjudication will make competing submissions.
From the referring party’s perspective you want the adjudicator to get the answer right and to deal with all the issues.
Surely the easiest way to avoid such problems is for the referring party to take an expansive view of the scope of an adjudication and not to seek to curtail the activity of the adjudicator?
But that approach might seem less attractive in some situations. For example you may find yourself on the receiving end of a reverse ambush where the responding party starts raising arguments or issues that it had not raised before and that in the short time allowed, you have limited opportunity to respond to.
Or you may wish to secure some procedural advantage by excluding matters that you would rather not deal with.
The case below is a cautionary tale of tactics gone wrong and a referring party leading the adjudicator into error which proved a costly lesson for the referring party.
In the recent case of Global Switch Estates Limited v Sudlows Limited the employer Global Switch Estates Limited (“GSEL”) had engaged Sudlows Limited (“Sudlows”) under a JCT design and build contract in relation to a project to fit out and upgrade GSEL’s specialist data centre housed in the listed former Financial Times print works building at East India Dock House, East India Dock Road, London.
Sudlows had made interim applications and on a number occasions the employer’s agent under the contract had failed to issue timely payment notices or payless notices. At the point interim application 27 was made the employer’s agent had issued a payment notice but the employer considered that aspects of the amount notified still represented an overpayment. GSEL therefore sought a true valuation of part of the amounts valued.
The notice of adjudication sought a decision as to the true value of parts of interim application 27 and that Sudlows should pay GSEL the sum of £6,831,163.03 or such other amount as the adjudicator determined.
The notice defined the dispute as follows:
“By this adjudication, Global Switch is asking the Adjudicator to open up, review and revise – and determine the true value of certain parts of Interim Applications numbered 27 for the Section 1 and Section 2 Works dated 31 March 2020 (“Interim Applications 27”). In order to reach a Decision, this will also technically require the Adjudicator to open up, review and revise and determine the true value of – the equivalent parts of the Payment Notices served by Mace in response to Interim Applications 27.”
The Notice then set out the parts to be opened reviewed and revised and continued by setting out a series of “Excluded Matters” stating;
“25. As such, and for the avoidance of doubt only, the following matters are not part of the dispute/difference being referred to this adjudication and so are not included within the scope of this adjudication (the “Excluded Matters”):”
It then listed certain entitlements to extension of time, and liability for defective works.
The notice also stated that the adjudicator should decide the true valuation of the sums contended for and that taking into account sums already paid by GSEL to Sudlows and the applicable retention, Sudlows was required to pay GSEL the sum of £6,831.163.03 or such other amount as the adjudicator determined.
Sudlows objected to this approach and wished to rely on the excluded matters as part of their defence to the claim. In particular there was entitlement to loss and expense in relation to the extensions of time and also in relation to the alleged defects. Sudlows’ position on the true valuation of application 27 was that GSEL should pay Sudlows the sum of £5,529,046.72.
GSEL took the view that the matters which it had sought to exclude were without merit or that no entitlement in respect of those matters had arisen. However in the notice of adjudication it had sought to exclude such matters and its correspondence with the adjudicator stated the adjudicator had no jurisdiction to consider those matters.
On 17 July 2020 the adjudicator issued his decision (corrected on 21 July 2020). The adjudicator considered that GSEL was entitled to limit the scope of his jurisdiction to specified parts of interim applications 27 and that he did not have jurisdiction to award further extensions of time or decide whether Sudlows was entitled to additional loss and expense in respect of any such matters.
The adjudicator ordered payment of £5,019,120.86. Sudlows refused to pay and so GSEL sought to enforce the decision.
Sudlows resisted enforcement and argued (among other things) that the adjudicator had wrongly failed to consider the matters raised in their defence and that this was a material breach of the requirement of natural justice.
The question was had the adjudicator wrongly decided not to consider parts of Sudlows’ defence and if so would the court decline to enforce the decision.
The Judge Mrs Justice O’Farrell reviewed the authorities up to the recent Supreme Court case Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd  UKSC 25, where Lord Briggs JSC stated at :
“However narrowly the referring party chooses to confine the reference, a claim submitted to adjudication will nonetheless confer jurisdiction to determine everything which may be advanced against it by way of defence, and this will necessarily include every cross-claim which amounts to (or is pleaded as) a set-off.”
Mrs Justice O’Farrell summarised the legal principles.
A referring party is entitled to define the dispute to be referred to adjudication by its notice of adjudication. In so defining it, the referring party is entitled to confine the dispute referred to specific parts of a wider dispute, such as the valuation of particular elements of work forming part of an application for interim payment.
A responding party is not entitled to widen the scope of the adjudication by adding further disputes arising out of the underlying contract (without the consent of the other party). It is, of course, open to a responding party to commence separate adjudication proceedings in respect of other disputed matters.
A responding party is entitled to raise any defences it considers properly arguable to rebut the claim made by the referring party. By so doing, the responding party is not widening the scope of the adjudication; it is engaging with and responding to the issues within the scope of the adjudication.
Where the referring party seeks a declaration as to the valuation of specific elements of the works, it is not open to the responding party to seek a declaration as to the valuation of other elements of the works.
However, where the referring party seeks payment in respect of specific elements of the works, the responding party is entitled to rely on all available defences, including the valuation of other elements of the works, to establish that the referring party is not entitled to the payment claimed.
It is a matter for the adjudicator to decide whether any defences put forward amount to a valid defence to the claim in law and on the facts.
If the adjudicator asks the relevant question, it is irrelevant whether the answer arrived at is right or wrong. The decision will be enforced.
If the adjudicator fails to consider whether the matters relied on by the responding party amount to a valid defence to the claim in law and on the facts, that may amount to a breach of the rules of natural justice.
Not every failure to consider relevant points will amount to a breach of natural justice. The breach must be material and a finding of breach will only be made in plain and obvious cases.
If there is a breach of the rules of natural justice and such breach is material, the decision will not be enforced.
Mrs Justice O’Farrell concluded that the adjudicator correctly identified that the notice of adjudication set the boundaries of his jurisdiction. However, he failed to appreciate that what GSEL was claiming in the notice was not only the true valuation of specific parts of interim application 27 but also payment of the net sum considered due having regard to the sums already paid and applicable retention.
The adjudicator was entitled to limit the declaratory relief to the issues of valuation identified by GSEL but determination of the claim for payment required him to consider all of the matters raised by Sudlows in support of its case that it was entitled to additional sums as part of the valuation. The adjudicator’s failure to take into account Sudlows’ defence based on its additional claims for loss and expense amounted to a breach of the rules of natural justice.
The breach of natural justice was plain and obvious on the face of the adjudicator’s decision. The breach arose as a result of GSEL’s erroneous submission that the adjudicator did not have jurisdiction to consider Sudlows’ claims for loss and expense.
Mrs Justice O’Farrell therefore declined to enforce the decision. The adjudicator’s fees and expenses in the sum of £81,588.00 will now be payable by the referring party.
Mrs Justice O’Farrell was not critical of the adjudicator and considered that it was the referring party’s erroneous submissions that had caused the breach.
Given the sums involved and the commercial position that GSEL found themselves in the strategy to attempt this tactical win was perhaps understandable. That said one cannot help thinking that if GSEL really considered that the defences raised by Sudlows were without merit they should have addressed them and allowed the adjudicator to reach a decision having considered all the material.
Seeking to limit the jurisdiction of the adjudicator is a perilous course of action.
Tim Willis MA FCIArb, Solicitor Advocate, Morgan Phelps Solicitors