Adjudicator’s awards – temporarily binding?
Posted: Tuesday 20 July 2010
It has long been accepted that where parties to a construction contract are in dispute either of them can refer the matter to an adjudicator. That adjudicator, should s/he accept jurisdiction is asked to make a decision, usually on a distinct issue. Despite the short time frames involved in the adjudication process, the decision, howsoever that was reached and whether or not parties like it, it is binding albeit temporarily until the issues are finally determined though litigation or arbitration.
It goes to say then, where a party obtains a decision ordering another party to make payment, that payment must be made, at least on an interim basis? Well you would have thought so but a recent decision of Lord Hodge in the Commercial Courts seems to suggest that all may be not as it seems.
The right of either party to a construction contract (in writing) to refer a dispute to adjudication is found in section 108 of the Housing Grants Construction & Regeneration Act 1996 (“the Act”). That section provides that contracts shall enable parties to refer matters to adjudication and “the decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration…or by agreement.” If the contract does not provide for adjudication and the binding nature of an adjudicator’s award then the Scheme for Construction Contracts is said to apply (“the Scheme”). The Scheme uses the same wording as the Act at para 23 (2).
Early cases seemed to agree that the adjudicator’s decision had to be complied with, at least on a temporary or interim basis until overturned. All that has changed. In early 2007 the long running case of George Wimpey v Melville Dundas was finally determined in the House of Lords. In that case Melville Dundas made an application for payment. George Wimpey failed to issue notices of withholding and therefore the application, in accordance with the terms of the contract between the parties, was due and payable. Melville Dundas then had administrative receivers appointed. George Wimpey failed to pay the sums which were on the face of it, due and payable and determined Melville Dundas’ employment. Section 111 of the Act says that in the absence of notices of withholding sums fall due and must be paid. Not in this case. The interrelation of section 111 and determination provisions in the event of insolvency meant that it would be inequitable to order payment.
The recent decision of Integrated Building Services Engineering Consultants trading as Operon v Pihl UK Limited applies the logic of the House of Lords in the Melville Dundas case to a situation where an adjudicator’s decision was subject to challenge. Here, an adjudicator was asked to determine three separate matters and did so. Pihl failed to pay and so IBS raised enforcement proceedings – so far so good. By this point IBS were insolvent. Pihl argued that the supervening insolvency of IBS meant that the adjudicator’s awards ought not to be enforced (and payment ordered) as it was entitled to the extension of the right of retention known as the balancing of accounts in bankruptcy. Lord Hodge determined that Pihl were entitled to plead balancing of accounts in bankruptcy. The basis for this decision was that Pihl were not in a position to plead this argument in the adjudications as there had been no evidence of that insolvency at the time of the adjudications.
So, the adjudicator made an order which, on the face of it, was binding on the parties. According to this latest development an adjudicator’s decision cannot, in fact, be enforced (and therefore is not binding temporarily or otherwise) in the face of a defence of balancing of accounts in bankruptcy. With the current economic conditions there will undoubtedly be further case law on how and when adjudicator’s decisions can be challenged, perhaps even guidance on making that challenge on a temporary or interim, binding award.
Lisa Dromgoole, Associate
