TCC enforces adjudicator’s decision to apply his own “fair and reasonable” rates

Background

In Clegg Food Projects Limited v Prestige Car Direct Properties Limited the claimant (“Clegg”) applied for summary judgment to enforce an adjudication decision in the Technology and Construction Court of the High Court of Justice in Leeds.

Following the adjudicator’s decision, the Defendant, (“Prestige”) refused to pay the sum it was ordered to pay on the basis that:

The decision was in breach of the principles of natural justice; and
The adjudicator had failed to provide sufficient reasons for his decision

which, it asserted, rendered the decision unenforceable.

The Parties had entered into a JCT Design and Build contract with amendments on 10 November 2022 in which Clegg was the contractor and Prestige was the employer. The dispute was in relation to the valuation of Clegg’s application for payment under this contract.

The dispute was referred to adjudication. Both Clegg and Prestige submitted their proposed gross valuations to the adjudicator, each requesting the adjudicator determine that their valuation is applicable or “such other sum as the adjudicator may decide”. The submissions also included the parties’ valuations of eight Employers Agent Instructions under the contract (the “Relevant Changes”).

The adjudicator ultimately decided that Prestige had undervalued the amount due to Clegg in respect of the Relevant Changes and ordered Prestige to pay £541,880.12 plus VAT and interest. To value five of the eight Relevant Changes, the adjudicator used his own “fair and reasonable” rate (with reference to the valuation clause of the contract).

Prestige claimed that the adjudicator had breached the principles of natural justice by using his own rates which the adjudicator refuted. Clegg applied to the court for summary judgment to enforce the adjudicator’s decision.

Agreed Principles

The parties generally agreed on the applicable legal principles to be derived from the case law for a finding that the adjudicator’s decision is unenforceable but disputed how these principles should apply to the circumstances.

Those principles may be summarised as follows:

The adjudicator must have failed to apply the rules of natural justice.
The breach must be material. Breaches are material where the adjudicator fails to bring a point to the attention of the parties which they ought to be given the opportunity to comment upon if it is decisive or of considerable potential importance. Whether the issue is decisive or of considerable potential importance is a question of degree for the judge.
If an adjudicator intends to determine a point based on material which has not been advanced by the parties, the adjudicator must give the parties an opportunity to make submissions. However, fairness does not require further submissions if the decision is on a basis for which neither party has contended but is based on the material advanced by the parties and the issues have been fairly canvassed before the adjudicator.

Decision

Was there a breach of natural justice by failing to invite the parties to make further submissions?

The court held that the adjudicator had not breached the principles of natural justice. Both parties invited the adjudicator to either award the valuation set out in their submissions or “such other sum as the adjudicator may decide”. While the adjudicator could not decide rates without considering the submissions of the parties, the adjudicator had not been tasked with declaring the individual rates applicable to each item nor with making a determination solely on the basis of the rates submitted by the parties. Instead, in this case, the parties had sought a global valuation.

The court also held that a significant point was that each “fair and reasonable” rate was either a midway figure between the valuations submitted by the parties or more favourable to Prestige. The court noted that it would be unobjectionable if the adjudicator had selected the valuations proposed by Clegg Food or a “crude split the difference rate” despite both of these rates being worse for Prestige. The court therefore rejected Prestige’s position. In line with previous authority, the court held that it is not a breach of natural justice to consider the original submissions of the parties and then determine that the appropriate rate lies within the range of the two parties’ valuations without the need for further submissions. However, the court arguably went further than previous authorities by framing the question concerning whether the parties needed to be consulted by an adjudicator applying their own rates as follows:

“At what point does a variation by an adjudicator from the Claimant’s rate, the Defendant’s rate or a broad “split the difference” rate require consultation? Does any deviation at all from the unobjectionable rates require consultation? I would expect any party to answer “of course not” to that question.”

The same reasoning was applied to the question of whether a breach was material. It was accepted that the adjudicator could have selected the rate proposed by Clegg which would have resulted in a less favourable decision for Prestige. Indeed, the rates applied by the adjudicator had, in fact, benefitted Prestige by more than £200,000. The court held therefore that Prestige had not suffered a substantial injustice by the adjudicator selecting his own “fair and reasonable” rates and there was, therefore, no material breach.

The court highlighted that cases regarding whether an adjudicator’s decision breached natural justice are invariably fact sensitive and that “[i]t is only in an exceptional case that the court would consider a breach to be sufficiently serious that the court would decline to enforce a decision.”

Did the adjudicator fail to provide sufficient reasons?

The court noted that Prestige’s position was too granular and unrealistic. If the parties had asked the adjudicator to determine the value of every item, then it would have a stronger claim, but the parties did not. The court accepted that fuller reasons could have been given in the adjudicator’s decision but that does not mean these were required or that the reasons given were inadequate. On this point the court endorsed the test in Gillies Ramsay Diamond & Others v PJW Enterprises Ltd that the reasons were not “so incoherent that it makes it impossible for the reasonable reader to make sense of them”. Further, detailed reasons were not required for each individual item when the adjudicator was required only to determine a global valuation.

The court noted that even if it was incorrect and the reasons given by the adjudicator were inadequate this would not affect the court’s decision that Prestige was unable to demonstrate that it had suffered “substantial prejudice” from the way the adjudicator had set out his reasons.

Key Takeaways

The court’s decision reinforces previous authorities that it is a very high bar that must be met for the court not to enforce the decision of an adjudicator on grounds of a breach of natural justice. There must be both a breach and substantial or material injustice/prejudice. An error in fact or law alone is not sufficient.
Where the parties to an adjudication include what they may consider to be “boiler plate” drafting in the Referral Notice and the Response such as expressly providing that the adjudicator may determine a valuation to be what is contended or “such other sum as the adjudicator may decide”, the adjudicator is entitled to exercise that discretion.
Challenging the enforcement of an adjudicator’s decision poses an inherent litigation risk because, as the court stated, whether there has been a breach of natural justice will be “exquisitely fact sensitive in the majority of cases”.

A link to the full judgement can be found here.

If you would like to discuss construction contracts or any of the topics raised in this article, please contact our property and infrastructure disputes team.

This article was co-authored by Trainee Jamie Hadden.

Contributors: