The importance of defining the scope of a reference to adjudication

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Authored by: KK Cheung

In Manor Co-Living Ltd v RY Construction Ltd [2022] EWHC 2715 (TCC), the Claimant (MCL) sought declarations from England’s Construction and Technology Court that an adjudicator’s decision was invalid and of no effect on the grounds that he had declined to consider, and excluded from his consideration, MCL’s case that it had been lawfully entitled to terminate the contract, thereby depriving MCL of a potential common law defence to the dispute and thereby acting in breach of the requirements of natural justice. The court held that the adjudicator had considered MCL’s common law defence and there had been no breach of natural justice. The judgment usefully sets out the principles applicable to determining the scope of an adjudication.

Background

MCL and RYC were parties to a JCT Standard Building Contract 2016. MCL alleged defective work and served a Termination Notice on RYC. RYC asserted that the Termination Notice had not been validly served and that MCL was not entitled to terminate the contract and, as a result, MCL’s conduct amounted to a repudiatory breach, which RYC accepted, thereby bringing the contract to an end.  

Referral to Adjudication

RYC referred the dispute to adjudication. In the Notice of Adjudication, RYC set out what it considered to be the boundaries of what was being referred to adjudication, namely whether MCL had correctly served its Notice of Termination and/or otherwise complied with the notice requirements in the contract, and, if not, the effect of this. The Notice of Adjudication specifically stated that the adjudicator would not be asked to consider whether there were substantive grounds for MCL to terminate RYC’s employment.

The Notice of Adjudication set out the relief sought, namely declarations that MCL purported to terminate RYC’s employment under the contract prematurely, failed to comply with the notice requirements in the contract and that MCL’s purported termination was wrongful and invalid and it had thereby acted in breach of contract and repudiated the contract, which repudiation, RYC had accepted.

The court noted that it is commonplace for a referring party to seek to limit the scope of an adjudication and there is nothing impermissible about this as a strategy. Whether, however, a referring party is ultimately able to constrain the scope of an adjudication, the court said, depends upon how matters develop, and in particular, how a responding party puts its defence to the matters alleged.

In its Response, MCL raised the defence of common law repudiation i.e. that it had been entitled to terminate the contract at common law and had done so. MCL contended that the way in which the Notice of Adjudication had been drafted did not preclude it from advancing such defence.

Adjudicator’s decision

The adjudicator held that MCL had prematurely sought to terminate the contract and its purported termination was therefore of no effect. He held that MCL wrongly and in breach of the contract prevented RYC from accessing the site to carry out works and its breach of contract was repudiatory and had been accepted by RYC.

Proceedings for declaration that adjudicator’s decision was invalid

MCL issued proceedings, seeking a declaration that the adjudicator’s decision was invalid because he had failed to consider its common law defence that it had successfully terminated the contract at common law and that this issue could not be excluded by the way in which RYC had framed the Notice of Adjudication. 

Legal Principles – Scope of Adjudication

The court referred to the following legal principles in respect of the scope of an adjudication:

（1）A referring party is entitled to define the dispute to be referred to adjudication by its notice of adjudication and, in doing so, the referring party is entitled to confine the dispute referred to specific parts of a wider dispute, such as the valuation of particular elements of work forming part of an application for interim payment.

（2）A responding party is not entitled to widen the scope of the adjudication by adding further disputes arising out of the underlying contract (without the consent of the other party).  It is open to a responding party to commence separate adjudication proceedings in respect of other disputed matters.

（3）A responding party is entitled to raise any defences it considers properly arguable to rebut the claim made by the referring party. By so doing, the responding party is not widening the scope of the adjudication; it is engaging with and responding to the issues within the scope of the adjudication

（4）Where the referring party seeks a declaration as to the valuation of specific elements of the works, it is not open to the responding party to seek a declaration as to the valuation of other elements of the works.

（5）However, where the referring party seeks payment in respect of specific elements of the works, the responding party is entitled to rely on all available defences, including the valuation of other elements of the works, to establish that the referring party is not entitled to the payment claimed.

（6）It is a matter for the adjudicator to decide whether any defences put forward amount to a valid defence to the claim in law and on the facts.

（7）If the adjudicator asks the relevant question, it is irrelevant whether the answer arrived at is right or wrong. The decision will be enforced.

（8）If the adjudicator fails to consider whether the matters relied on by the responding party amount to a valid defence to the claim in law and on the facts, that may amount to a breach of the rules of natural justice.

（9）Not every failure to consider relevant points will amount to a breach of natural justice. The breach must be material and a finding of breach will only be made in plain and obvious cases.

（10）If there is a breach of the rules of natural justice and such breach is material, the decision will not be enforced.

The court emphasised, in particular, the fact that a responding party is entitled to raise any defences it considers properly arguable to rebut the claim (principle (3) above). It added that use of the word “may” in principle (8) above should not be taken to suggest that the enquiry into whether an adjudicator has asked the right question is somehow discretionary. Instead, it indicates that not all failures to have done so will be a breach of natural justice i.e. the point elucidated in principle (9) above.

The court drew the following observations from the relevant case authorities, which guided its judgment:

• Failure to consider a critical or fundamental element of a defence (even if it may properly be described as a sub-issue) may make the decision unenforceable.

• The court must bear in mind the distinction between (a) considering an asserted defence and concluding it is not tenable and (b) deciding not to consider an asserted defence at all. The former is unlikely to be a breach of natural justice, whereas the latter may well be.

• The distinction between a deliberate or conscious decision to exclude consideration of a defence and an inadvertent omission is a relevant consideration, but is not determinative. Of much more importance is the gravity of the omission.

• Whilst a relevant factor may also be whether an error was brought about by tactical manoeuvring by the claiming party, this will usually be at most a secondary consideration.

• It is necessary to look at the substance of the decision rather than the form.

Was there a breach of natural justice?

The court said that the starting point was to consider the case actually advanced in the adjudication. That case was that the Termination Notice constituted a valid contractual termination notice, and in the alternative constituted a valid communication which brought to an end the contract by common law termination, accepting RYC’s repudiatory breach. The court found that the case advanced by MCL had been fully dealt with by the adjudicator, albeit in the context of his consideration of the jurisdiction argument raised by RYC. It was very clear, the court said, that the substantive question of common law termination was not outside the adjudicator’s jurisdiction, because it had been raised by way of a material defence to declarations which could not be granted if MCL had validly terminated the contract. It was equally clear that the adjudicator had dealt with this head on: he rejected the contention that the Termination Notice constituted an acceptance of repudiatory breach for the purposes of a common law termination, and in these circumstances, it was unnecessary to consider the substantive question of repudiatory conduct. There was no breach of natural justice.

Comments

This case illustrates the importance of defining the scope of reference of the adjudication and the difference between the respective positions of the referring and the responding parties. The responding party is entitled to raise all available defences to the referring party’s claim. Such defences are not limited to issues narrowly defined by the claimant if the claim is for outstanding payment.

Key Contacts

Kwok Kit (KK) Cheung

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