There has been a further development in Babcock Marine (Clyde) Limited (“Babcock”) v HS Barrier Coatings Limited (“HSB”) which we previously commented on in July. This decision from the Court of Session in Scotland (the previous decision being from the Technology and Construction Court (TCC) in England) considers under what circumstances an adjudicator’s decision can be ‘reduced’ (set aside) for failure to exhaust jurisdiction and a breach of natural justice.
Babcock contracted with HSB in December 2014 to carry out re-preservation of shiplift docking cradles at Her Majesty’s Naval Base Clyde. The total contract price was £800,000; however, during the course of the works, there were disagreements between the parties and HSB submitted claims for seven compensation events. In June 2018, Babcock terminated the contract.
Two adjudications followed: the first concerned the validity of payment notices and the second concerned the valuation of the works at the date of termination. Three principal elements of the valuation were in dispute: the value of the base scope works; the value of the compensation events; and the value of termination costs.
The adjudicator issued his decision in the second adjudication in March 2019. He decided the gross valuation of the works at termination was £1,524,420.58 and directed HSB to pay to Babcock the sum of £613,338.03 (inclusive of VAT) plus interest and fees. HSB failed to pay this sum and sought to challenge the validity of the decision. Babcock therefore raised enforcement proceedings in the TCC in April 2019 to enforce the adjudicator’s decision against HSB. The TCC was chosen as HSB was domiciled in England. In May 2019, HSB raised a jurisdictional challenge to the TCC proceedings, arguing the Court of Session in Scotland was the appropriate forum. The TCC agreed, and the enforcement proceedings in England were ‘stayed’ (put on hold).
Babcock then raised proceedings in the Court of Session in July 2019. The defender resisted payment on four grounds, either relating to a failure to exhaust jurisdiction or a breach of natural justice. HSB submitted that although it was clear the adjudicator preferred Babcock’s base scope works calculation and termination valuation, he had not explained the reasoning behind his decision. HSB argued that this failure to give reasons was a “material failure”. It further contended that the adjudicator had wrongly asserted that HSB could not submit a base scope works valuation higher than that in the Termination Application. This led to a failure to properly consider an expert report (the Cookson report). Consequently, HSB submitted that the adjudicator had failed to consider a material defence, amounting to a failure to exhaust jurisdiction and a breach of natural justice, as the point had not been put in issue.
The fourth ground also related to a breach of natural justice. The adjudicator employed a quantity surveyor (QS), who provided him with a total of 28 hours of assistance. HSB argued that the adjudicator’s failure both to advise it of the appointment of the QS and the nature of the work that the QS undertook, had provided an opportunity for injustice to be done. The NEC Adjudicator’s Contract also required the adjudicator to notify the parties if assistance was required. Conversely, it was the adjudicator’s position that the assistance was only of a clerical and administrative nature, for example checking calculations and populating the Scott Schedule and that his own Terms and Conditions of Appointment provided for the engagement of QS assistance at his “absolute discretion”, without the consent of parties.
When considering failure to exhaust jurisdiction, Lord Doherty stated that reasons provided by adjudicators can be brief and need not deal with every point submitted by parties. Adjudicators’ reasons are not held to the same standard as applied to judges or arbitrators. The test should be whether a reasonable person, who knows the context of the dispute, would be able to determine what the adjudicator has decided, and why they have decided it. Applying this to the value of the base scope works and termination valuation, the acceptance by the adjudicator of Babcock’s position sufficiently disclosed his reasoning for rejecting HSB’s alternative position.
In relation to ground four, Lord Doherty stated that even if the assistance provided by the QS was merely of a clerical and administrative nature, parties ought to have been informed that the QS had been engaged. Furthermore, the adjudicator ought to have given a broad indication of the work the QS was undertaking. The critical question was whether this amounted to a material breach of natural justice. Without further inquiry, Lord Doherty was unable to decide this question. He did, however, state that it was regrettable that HSB took six months to raise the complaint after it became aware that the QS had been engaged.
Therefore, Lord Doherty put the case out for a hearing by order to discuss an appropriate interlocutor to give effect to the decision and to consider further procedure, which may include a hearing on evidence as to the nature and materiality of the QS input.
This case is valuable in illustrating the relatively high test for establishing an adjudicator’s failure to exhaust jurisdiction, either by way of failure to provide reasons, or failure to consider a material defence. The judgement also provides useful guidance in relation to breach of natural justice. The first part of the test is whether there has been an opportunity for injustice to be done. The second part is whether this is material. In future, adjudicators should take care to make parties aware if they are receiving assistance and, if so, the nature of that assistance, even if they believe it to only be of an administrative nature. Finally, this case further illustrates the importance of raising objections to an adjudicator’s decision in a timely manner, as the courts will not look favourably upon delay.
With additional reporting by Fiona Kennedy