Let me straight away declare an interest: I represented the defendant. And to spare any suspense, the court did enforce the adjudicator's decision. Tony Bingham has already written an article about the case but it is probably helpful to summarise the background in order to understand its importance.
The plaintiff, Macob Civil Engineering, agreed with Morrison Construction to carry out certain groundworks in connection with a retail development in Carmarthen, South Wales. Macob alleged Morrison had failed to make payment of application number 6. It referred the dispute to an adjudicator, who published his decision on 6 January.
He directed Morrison to pay Macob approximately £300 000, plus VAT, interest and fees forthwith. He purported to issue his decision peremptorily under paragraph 23(1) of the Scheme for Construction Contracts and gave permission, under section 42 of the Arbitration Act 1996 (as amended), that in the event of non-compliance, either party could apply to the court for an order requiring compliance.
The dispute arose because of differences between the parties in relation to the contractual requirements as to the due date for payment and the date for final payment. Morrison contended that, at the date of the appointment of the adjudicator, the sum claimed was not due. The contract also provided that any notice of intention to withhold payment should be given not later than seven days before the final date for payment. Morrison had served such a notice, disputing the calculation of the sum claimed by Macob.
The adjudicator's decision
The contractual provisions as to payment were ambiguous. The adjudicator decided that, consequently, there was no adequate mechanism within the meaning of section 110 of the Construction Act, and so the provisions of the scheme should apply. Having decided this, it followed that the due date and final date for payment had already passed by the date of his appointment, and that accordingly the notice of intention to withhold payment was out of time.
Does natural justice apply?
The whole intention of the Construction Act is to ensure the swift interim resolution of disputes pending a full hearing.
What the act and scheme do not address is how disputes as to the validity of the decision itself are to be dealt with. Although there is no doubt that the intention is that the underlying dispute is to be finally decided at a later stage, nothing is said as to what is to occur where there is an allegation of a breach of natural justice in the process adopted by the adjudicator in arriving at his decision.
One principle of natural justice is that both parties should have an opportunity to make representations. In arbitration or other quasi-judicial proceedings, a breach of natural justice and, in particular, a breach of this principle, can lead to the award being set aside. However, the extent to which the requirements of natural justice extend to adjudications is not at all clear.
As the court pointed out, the timetable for the adjudication is very tight and might itself result in injustice, and the act and scheme give the adjudicator the power to conduct an entirely inquisitorial scheme or, as he did in this case, invite representations from the parties. Unsurprisingly, he is required, by both the act and the scheme, to act impartially. The suggestion is, therefore, that either the rules of natural justice do not apply to an adjudication or, more probably, that the requirements of natural justice, in such a summary procedure, are more limited.
Morrison contended that the adjudicator had failed to comply with the rules of natural justice. In particular, that he had failed to give the parties an opportunity to address the adjudicator on whether or not the payment mechanism of the contract satisfied the requirements of section 110 of the Construction Act and as to whether he should make an order under section 42 of the Arbitration Act 1996, as amended.
Morrison alleged that, as a result, his decision was of no effect. If that were right, obviously the decision could not be enforced. Therefore the question arose: did this dispute – as to the validity of the decision – have to be decided before the decision itself could be enforced and, if so, who was to try this issue? Given that there was an arbitration clause in the contract referring all disputes "on any matter arising out of or in connection with the contract" to arbitration, on the face of it, only the arbitrator could decide this issue.
Enforcement of adjudicator's decision
The court was not attracted by this argument. If it were correct, "it substantially undermines the effectiveness of adjudication. The intention of parliament in enacting the act was plain. It was to introduce a speedy mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring decisions of adjudicators to be enforced pending the final determination of disputes by arbitration, litigation or agreement." The court's answer to Morrison's argument was in the proper construction of the word "decision". Paragraph 23(2) of the scheme states that: "The decision of the arbitrator shall be binding on the parties, and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration … or by agreement between the parties." The court held that a decision was still a decision within the meaning of the paragraph, even if invalid because of a procedural error – and therefore enforceable under the scheme.
Second, the arbitration clause in the contract provided for disputes concerning an adjudicator's decision to be referred to arbitration. The court held that if it were asserted that the decision was a nullity, because of a breach of the rules of natural justice, then equally it was a nullity so far as the arbitration clause was concerned.
Thus, it was said, that once Morrison had chosen to treat the decision as one capable of being referred to arbitration (by serving the arbitration notice), it was also bound to treat the decision as binding and enforceable, unless revised by the arbitrator.
Lessons to be learned
First, even an invalid decision is a decision within the meaning of paragraph 23(2). Thus, an invalid decision is binding and must be complied with. However, paragraph 23 only applies where the contractual provisions do not comply with the basic requirements of section 108 of the 1996 act. Since most standard form adjudication schemes probably comply with section 108, this argument will not be available.
Second, depending on the precise wording of the adjudication and arbitration provisions in the contract, an allegedly invalid decision may be unenforceable in court and open to challenge by way of arbitration proceedings.
As I said at the outset, some may feel this decision vindicates the new regime, others may feel that it has revealed a lack of clarity as to how, and in what circumstances, decisions can be challenged and enforced. Since Morrison was given leave to appeal, it may be that the Court of Appeal will have the opportunity to consider these questions.