Successful Part 8 Challenge of Adjudication Decision
Paul Cowan | 24 Jul 2019
On 25 June 2019, Pepperall J. in the TCC handed down an important judgment upholding a Part 8 challenge relating to a major part of an adjudicator’s decision, and preventing enforcement of that part as a result. It is the first known example of such a challenge succeeding following the judgment of Coulson J. (as he then was) in Hutton Construction Limited v Wilson Properties (London) Limited  EWHC 517 (TCC), as subsequently followed by O’Farrell J. in Actavo UK Limited v Babcock Doosan Limited  EWHC 2849 (TCC).
Part 8 Challenges
The Hutton Construction and Actavo cases had addressed the situation in which a party had issued Part 7 proceedings to enforce an adjudicator’s decision, against which the opposing party sought to challenge the decision on the basis of an error of law or contractual interpretation by the adjudicator. The TCC in those cases indicated that such challenges might be made by way of a claim for a declaration by the Court via Part 8 proceedings, if made sufficiently promptly to be considered by the Court on enforcement. Otherwise, the adjudicator’s decision will stand even if it is substantively wrong, absent jurisdictional error or breach of the rules of natural justice, with any challenge on the merits of the decision having to be pursued thereafter.
Coulson J. in Hutton Construction had indicated that this was a limited exception that would apply where the party could demonstrate that:
“(a) there is a short and self-contained issue which arose in the adjudication and which the defendant continues to contest;
(b) that issue requires no oral evidence, or any other elaboration beyond that which is capable of being provided during the interlocutory hearing set aside for the enforcement;
(c) the issue is one which, on a summary judgment application, it would be unconscionable for the court to ignore.”
Coulson J. further commented that:
“What that means in practice is, for example, that the adjudicator’s construction of a contract clause is beyond any rational justification, or that the adjudicator’s calculation of the relevant time periods is obviously wrong, or that the adjudicator’s categorisation of a document as, say, a payment notice when, on any view, it was not capable of being described as such a document.”
The Adjudication Decision
In the present case (concerning the construction of the new Nobu luxury hotel in London), the adjudicator was asked by the Contractor to determine disputed payment deductions relating to LADs for delay and costs incurred by the Employer in rectifying defects. In respect of the former, late in the course of the project, the parties had agreed on a supplementary agreement whereby the Works were to be completed by a revised date of 28 July 2017, but that practical completion could be achieved for the Works notwithstanding that designated parts of the hotel remained to be completed thereafter. Otherwise the JCT D&B 2011 terms (as amended) remained in effect.
In his decision, the adjudicator decided that the supplementary agreement required the Employer to accept practical completion had been achieved on 28 July 2017 even though significant parts of the Works remained incomplete, provided there was a list of outstanding works. On that basis, the adjudicator decided that the LADs deducted for completion being achieved later than 28 July 2017 could not be deducted and should be repaid to the Contractor.
This constituted approximately 60% of the amounts that the adjudicator awarded to be paid, the remainder comprising residual amounts that the adjudicator decided could not be deducted in respect of defect rectification works.
Move Promptly and Proactively
Following the adjudicator’s decision, the Employer promptly and proactively commenced Part 8 proceedings (doing so about a week after the decision), ahead of the Contractor commencing Part 7 enforcement proceedings. The Court (Pepperall J.) considered that this was a significant procedural point:
“Here, Willow took the proactive step of issuing its Part 8 claim without waiting for MTD to launch enforcement proceedings. Such Part 8 claim was listed for hearing before me together with the summary judgment application. Accordingly, this is not a case in which Willow simply seeks to resist the summary judgment on the basis of the Part 8 claim, but rather it now seeks final declaratory relief. The construction issue is, in my judgment, short, self-contained and well-suited to being determined in Part 8 proceedings. I am therefore content to determine that issue.”
As a result, whilst the Employer challenged the adjudicator’s construction and application of the parties’ supplementary agreement as being “beyond any rational justification” (in line with the dicta in Hutton Construction), the Court was not constrained only to act in such a narrow circumstance. Thus, where the Court found – as it did in this case – that the proper construction of the parties’ agreement was different to that applied by the adjudicator, the Court issued its declaration to that effect, and which took effect by overriding the adjudicator’s otherwise binding but not final decision to the contrary on that point.
Severance of the Adjudicator’s Decision
Having done so, another novel feature of the Court’s judgment in this case was its decision to sever the impugned part of the adjudicator’s decision relating to LADs from the rest of the decision dealing with the defects costs. The prior case law, notably Akenhead J’s obiter comments in Cantillon Ltd v. Urvasco Ltd  EWHC 282 (TCC), had indicated that severance was only possible where more than one dispute had been referred, and one dispute was subject to a jurisdictional challenge. However, subsequently and further to a challenge expressed by Coulson J. in Pilon Ltd v. Breyer Group plc  EWHC 837 (TCC) (para. 40), the Court noted the judgment of Edward-Stuart J. in Lidl UK GmbH v. RG Carter Colchester Ltd  EWHC 3138 (TCC), following Akenhead J.’s judgment in Working Environments Ltd v. Greencoat Construction Ltd  EWHC 1039 (TCC);  BLR 309:
“At first sight it may appear that the decision in Greencoat conflicts with the general principle that a decision cannot be severed where only one dispute or difference has been referred. The rationale underlying this principle is, I think, that where a single dispute or difference has been referred it will generally be difficult to show that the reasoning in relation to the part of the decision that it is being sought to sever had no impact on the reasoning leading to the decision actually reached, or that the actual outcome would still have been the same. If this is the case, the part cannot safely be severed from the whole. However, where, in the case of the referral of a single dispute additional questions are brought in and adjudicated upon, whether by oversight or error, there should be no reason in principle why any decision on those additional questions should not be severed provided that the reasoning giving rise to it does not form an integral part of the decision as a whole. However, failing this, the entire decision will be unenforceable.”
Applying this, in the present case, Pepperall J. concluded that the adjudicator’s error of construction of the parties’ agreement did not impact the adjudicator’s other findings in respect of defects. As a result, the part of the decision on LADs could be severed, leaving the remainder in place:
“I agree with Edwards-Stuart J that in the context of a single dispute or difference it can often be difficult to divorce any significant flaw in the adjudication from the balance of the decision. Indeed, significant breaches of natural justice are particularly prone to infect and therefore undermine the entire decision. In my judgment, the proper question is not, however, to focus on whether there was a single dispute or difference but upon whether it is clear that there is anything left that can be safely enforced once one disregards that part of the adjudicator’s reasoning that has been found to be obviously flawed. Such analysis need not be detailed and, in many cases, it may remain the position that the entire enforcement application should fail. It would, however, further the statutory aim of supporting the enforcement of adjudication decisions pending final resolution by litigation or arbitration if the TCC were rather more willing to order severance where one can clearly identify a core nucleus of the decision that can be safely enforced.
In this case, I am satisfied that the effect of the error of law on the issue of contractual construction was limited to Mr Molloy’s dismissal of the claim for liquidated damages and that such error did not infect the balance of the decision. I therefore consider that the good can and should be severed from the bad. The value of the claim for liquidated damages was £715,000. Accordingly, I enforce the balance of the decision.”
This case highlights how the proactive use of the Part 8 procedure can enable a party to challenge an adjudication decision that is based in significant part on an error of law or an erroneous interpretation of the relevant contract. Rather than always having to accept the “pay now, argue later” approach that applies generally in adjudication, it provides a party with a limited but nonetheless significant and effective mechanism by which it can avoid the consequences of an adverse adjudication decision where it is based on an incorrect determination and application of legal principles and / or contractual construction.
Paul Cowan is a barrister and arbitrator practising at 4 New Square, with over 20 years’ specialist experience advising clients on major construction projects. Paul regularly appears as counsel in construction disputes before the English Courts and in adjudication, as well as having many years of experience in international construction disputes in civil law jurisdictions around the world.