Is a clause which allows one party to the contract to nominate the adjudicator valid?

Successfully challenging an adjudicator’s decision as a result of a breach of natural justice.

Sprunt Limited v London Borough of Camden

Bias in Adjudication is always a sensitive area; the recent case of Sprunt Limited v London Borough of Camden has provided guidance on cases where there is a possibility of bias on the part of the adjudicator.

The facts

Sprunt Limited (“Sprunt”) provided consultancy services to the London Borough of Camden (“Camden”) in relation to a development known as the Ampthill Square Estate project.

During the second phase of the Ampthill Square Estate project, a dispute arose regarding the level of Sprunt’s fees. Sprunt served a notice of adjudication on Camden and applied to the RICS for the appointment of an adjudicator.

Camden argued, amongst other things, that the adjudicator did not have the necessary jurisdiction to decide the dispute because the contract between the parties stated that Camden was to act as the adjudicator nominating body. The adjudicator disagreed with this argument and found in favour of Sprunt.

Camden refused to make payment in accordance with the adjudicator’s decision and Sprunt brought proceedings in the Technology and Construction Court to enforce the Adjudicator’s decision.

Camden argued that the adjudicator’s decision was unenforceable on the basis that he did not have jurisdiction because he was not nominated in accordance with the terms of the contract. Sprunt argued that the Scheme applied to any adjudication between the parties and therefore the Adjudicator had the necessary jurisdiction to decide the parties’ dispute.

Did the Scheme Apply?

A particular clause in the contract provided that an adjudicator’s decision would not be binding on the parties if the decision was challenged in Court.

Clearly, this clause was contrary to section 108(3) of the Construction Act, which provides that any adjudicator’s decision is binding on the parties unless and until the dispute is finally determined by legal proceedings.

As a result of this breach of the provisions of the Construction Act, the adjudication provisions of the Scheme applied to the contract in their entirety. Accordingly, all of the adjudication provisions in the contract, including the provision allowing Camden to nominate the adjudicator, were treated as having been deleted and replaced with the provisions of the Scheme.

Under the Scheme, Sprunt was entitled to apply to any adjudicator nominating body for the nomination of an adjudicator and its application to the RICS was valid. This meant that the adjudicator did have jurisdiction and his decision was enforceable.

Would Camden ever be entitled to nominate the adjudicator?

The Court found that even if the Scheme had not overridden the terms of the contract, Camden would never be allowed to act as the adjudicator nominating body because it is directly  contrary to the policy of the Construction Act to allow one party to the contract to choose an adjudicator.

The Court stated that although any adjudicator appointed by Camden would not automatically be biased, there would be a real possibility of bias, as there was nothing to stop Camden from appointing an adjudicator who was sympathetic to its position. Furthermore, there would be nothing to stop Camden from nominating an adjudicator who was entirely independent but whose fees were so high that it would deter Sprunt from continuing with the adjudication.

Accordingly, the Court held that a clause which allows one party to nominate an adjudicator is contrary to the Construction Act, and thus unenforceable.

Summary

This case will be of interest to contractors whose own bespoke terms and conditions allow them to nominate an adjudicator. Any contractor whose terms and conditions contain such a clause should seek to have them amended in light of this decision.

Highlands and Islands Airports Limited v Shetland Islands Council

Adjudicators are not required to have legal training to decide a construction dispute. As a result, some adjudicators may sometimes have to seek legal advice from a third party, such as a solicitor or barrister. In such cases the adjudicator should ask the parties for their comments on the legal point in question and ask for their approval to seek legal advice from the third party.

The Scottish case of Highlands and Islands Airports Limited (“HIAL”) v Shetland Islands Council (“SIC”) considers the validity of an adjudicator’s decision when he obtains legal advice without the parties’ knowledge, comment or consent.

The Facts

HIAL were engaged by SIC to design and construct an extension to the runway at Sumburgh Airport. After the extension works were completed, a dispute arose between the parties which HIAL referred to adjudication.

When examining the contract between the parties, the adjudicator had to consider clause 41.3 of the NEC3 Professional Services Contract (the “Clause”), which governed the assessment of future remedial costs where there was a defect in the works. The adjudicator had never dealt with or considered this Clause before and was uncertain of its interpretation.

Instead of asking the parties about their interpretation of the Clause, the adjudicator sought confirmation of his own interpretation of the clause from a barrister, who confirmed the adjudicator’s interpretation of the Clause. The adjudicator was never charged for the barrister’s advice; it was considered by both parties as a “freebie”.

The adjudicator issued a decision in favour of HIAL and ordered that SIC pay a sum in excess of £2 million for their breach of contract.

When seeking a subsequent legal opinion, SIC discovered that the adjudicator had received legal advice during the adjudication. SIC questioned the adjudicator on the legal advice he had obtained and the adjudicator responded that he had not obtained any formal legal advice, only a confirmation of a view that he had already formed.

When SIC did not make a payment in accordance with the adjudicator’s decision, HIAL commenced enforcement proceedings. SIC argued that the decision could not be enforced as the adjudicator had breached the rules of natural justice by seeking legal advice on the interpretation of the Clause without inviting the parties to comment on the meaning of the Clause or the advice received.

Was the Adjudicator’s decision unenforceable?

The Court held that the rules of natural justice are applied to adjudications to prevent the possibility of injustice.

The fact that the adjudicator had not paid for the legal advice was neither here nor there, it was still legal advice.

If the adjudicator had told the parties of  his conversations with the barrister, even after the event, and invited the parties’ opinions on the Clause, there would have been no breach of the rules of natural justice.

The Court stated that although there was no suggestion that the adjudicator had been unfair, or that his interpretation of the Clause was incorrect, there was an opportunity for injustice to be done, and that was all that was needed to make the adjudicator’s decision unenforceable.

Summary

As this is a decision by the Scottish Courts, English Courts are not bound to follow it. Nevertheless, it does give an indication of the position English Courts may take in similar circumstances.  The Court was clear that where there is possibility for injustice in an adjudication, the adjudicator’s decision will not stand.