It is settled in adjudication that, (1) only the dispute referred in the Notice of Adjudication may be decided by the adjudicator; and (2) a Respondent may advance any defence open to it (which may include set-off).
The Technology and Construction Court (“TCC”) has clarified how these two principles interact in the context of the valuation of an Interim Application. The case, for which the judgment was given on 3 December 2020, is Global Switch Estates 1 Limited v Sudlows Limited.
Sudlows Limited (“Sudlows”) was engaged by Global Switch Estates 1 Limited (“GSEL”) to undertake works in connection with the fit out of GSEL’s specialist data centre housed in the former Financial Times print works building at East India Dock House, London.
In the fourth adjudication between the parties, GSEL sought payment from Sudlows in respect of an Interim Application. The scope of the Interim Application was wide, however GSEL made a concerted effort to define the dispute narrowly. It specified within its Notice of Adjudication and Referral Notice the particular items within the Interim Application which it considered should be opened up and revised by the adjudicator, and set out a number of purported “Excluded Matters”.
Sudlows challenged GSEL’s attempt to limit the scope of the adjudication. Its defence was that a true valuation of the Interim Application required consideration of Sudlows’ various loss and expense claims (which fell within GSEL’s purported “Excluded Matters”).
The parties agreed that Sudlows was entitled to advance any relevant defence to the dispute, but GSEL argued that the dispute was restricted to the valuation of the specific items within the Interim Application it had listed in its Notice. As such, GSEL argued that Sudlows’ loss and expense claims could not be set off as a defence to the matter at hand.
The adjudicator agreed with GSEL and decided that GSEL was entitled to limit the scope of his jurisdiction to specified parts of the Interim Application. Accordingly, he decided that he did not have jurisdiction to decide Sudlows’ loss and expense entitlement (or other “Excluded Matters”, including the validity of a bank guarantee). The defence was not taken into account and the adjudicator awarded payment to GSEL.
Enforcement proceedings in the TCC
Sudlows failed to make payment and GSEL raised enforcement proceedings in the TCC.
As is widely appreciated, the bar for resisting enforcement of an adjudication decision is high. Even if the decision is incorrect (in fact and / or law), it must be paid unless the adjudicator did not have jurisdiction to reach the decision or breached the rules of natural justice (the latter includes what in Scotland is termed a failure to exhaust jurisdiction).
After considering the full relevant case law, The TCC held:
- The adjudicator had been “misled by GSEL and wrongly failed to consider and deal with matters relied on by Sudlows as defences to GSEL's claim, thereby acting in breach of the rules of natural justice”.
- GSEL was not simply claiming for the true valuation of specific parts of the Interim Application, but also payment of the net sum due.
- The adjudicator was entitled to limit the declaratory relief to the issues of valuation identified by GSEL. Determination of the claim for payment, however, required the adjudicator to consider all of the matters raised by Sudlows in support of its case that it was entitled to additional sums in relation to other issues of valuation arising out of the same Interim Application.
- The adjudicator’s failure to take into account Sudlows’ defence based on its claims for loss and expense amounted to a “plain and obvious” breach of the rules of natural justice.
- The breach was material, and GSEL’s case to enforce the adjudication decision was dismissed.
Points to take away
This case makes clear that where a Referring Party seeks payment based on the valuation of a payment assessment it cannot limit the scope of the dispute to specific items within that assessment. Although this case was concerned with an Interim Application, the principles are equally applicable to Final Account disputes.
In view of this decision, before referring a dispute to adjudication a potential Referring Party should consider the defences that will be available to the Respondent. The scope of these defences may be wider than expected.