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05/12/19

Severing the good from the bad and the ugly

Severing the good from the bad and the ugly

Severing the good from the bad and the ugly

Jane Hughes, Senior Associate Solicitor Stevens & Bolton LLP looks at Willow Corp S.A.R.L and MTD Contractors Limited [2019] EWHC 1591 (TCC) and the ability to sever an adjudicator’s decision.

Introduction

Challenging an adjudicator’s decision is no mean feat. Over 20 years after the introduction of adjudication there are still only limited ways in which the paying party can resist court enforcement of an adjudicator’s decision, namely:

  1. By persuading the Court that the adjudicator had no jurisdiction to make the decision she did;
  2. That there was a serious breach of the rules of natural justice;
  3.  In some insolvency situations;
  4. Where fraud can be demonstrated.

Even where an adjudicator’s decision is merely erroneous, or irrational, or eccentric, the courts will generally refuse to interfere. Adjudication is an interim remedy, designed to facilitate cashflow, and not designed to provide a final determination of the parties’ rights.  But the “pay now, argue later” ethos of adjudication may lead to injustices, and the courts are now becoming more active in finding subtle ways to mitigate the previous robustness of their approach.

Severance

Whether it is possible to sever the decision of an adjudicator has been discussed for a number of years in the specialist construction press, in construction textbooks and has been addressed in obiter remarks in a number of judgements.  Can it be done? If the adjudicator acts without jurisdiction, does that taint the whole of their decision, or can parts of it remain viable? If a decision is to be severed, how would it be done and when could it be done? What will happen to the good, the bad and the ugly parts of the decision?

We now have answers to some of these questions in the judgement of Pepperall J in Willow Corp S.A.R.L and MTD Contractors Limited [2019] EWHC 1591 (TCC).

Facts

Willow Corp S.A.R.L (“Willow”) had engaged MTD Contractors Limited (“MTD”) to design and build a hotel for a contract price of £33.5m. Following delays to the project, the parties entered into an agreement which provided for a revised date for Practical Completion of 28 July 2017 “with an agreed list of outstanding work”. By 28 July, the works were incomplete and Willow’s Agent, GVA Second London Wall Project Management Limited (“GVA”) declined to certify Practical Completion. A dispute arose between the parties and the dispute was referred to adjudication, the dispute being over the balance of payments due under the building contract. 

Willow argued that Practical Completion had not been achieved by the agreed revised date, this meant that liquidated damages (“LADs”) were payable by MTD in the sum of £715k and had to be accounted for when considering the balance due under the building contract.   

However, the adjudicator disagreed, deciding that on proper construction of the June agreement, GVA was required to certify Practical Completion provided that there was an agreed list of outstanding works (which there was). As Practical Completion had been achieved, Willow was not entitled to claim LADs. The adjudicator ordered that Willow should pay MTD £1,174,854.92 plus VAT in respect of amounts due under the contract. 

Willow refused to pay the award and issued Part 8 proceedings claiming declaratory relief from the Technology & Construction Court (TCC), asking the court to hold that the adjudicator’s decision was unenforceable. It asked the court to decide:

  • What was the true construction of the June agreement;
  • That practical completion had not been achieved by 28 July 2017;
  • That the rejection of the LADs claim was “legally unenforceable” as the adjudicator’s interpretation of the contract was flawed; and
  • In any event, the adjudication was unenforceable due to breaches of natural justice.

MTD also sought to enforce the adjudicator’s award applying for summary judgement via Part 7 proceedings. Both claims were heard together before Mr Justice Pepperall in the Technology and Construction Court.

Decision

In relation to the first three declarations, Pepperall J concluded that upon its true construction, the June agreement did not require Willow to accept that Practical Completion had been achieved simply upon agreement of a list of outstanding works. The adjudicator had incorrectly construed the agreement and dismissal of Willow’s right to LADs was an error of law.

However, Pepperall J dismissed Willow’s breach of natural justice claim, holding that “these are...no more than complaints about the rough and tumble inherent in” adjudication. 

Willow therefore succeeded in their submissions as to the construction of the agreement, the effect of which was to entitle them to set off the LADs against the contract sum, but failed to convince Pepperall J of a breach of natural justice, the effect of which was to entitle MTD to the balance of its claim for the contract sum. The question arose as to whether the court could order severance of the adjudicator’s decision and separate the good parts of the decision from the bad.

The judge held that the question to determine was whether there is anything left that can be safely enforced once the flaw in the adjudication decision is disregarded. He commented that the TCC should be “rather more willing to sever adjudicator’s decisions where one can clearly identify a core nucleus of the decision that can safely be enforced”. He held that the adjudicator’s error on Practical Completion did not infect the balance of the decision and so it was enforced.

In doing so he built upon previous authorities of Quartzelec Ltd v Honeywell Control Systems Ltd [2008] EWHC 3315 and Lidl UK GmbH v RG Carter Colchester Ltd [2012] EWHC 3138 (TCC) which showed the Court developing a more flexible and pragmatic view of severance in the right circumstances.

That this is the first case where severance has been held to be appropriate suggests that it will be of limited application and will only be useful in certain circumstances. But it is still a useful weapon to have in the armoury, particularly if, as in this case, significant sums of money depend upon it.

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