NATURAL JUSTICE IN ADJUDICATION
LING TEK LEE
UNIVERSITI TEKNOLOGI MALAYSIA
PSZ 19: 16 (Pind. 1/97)
UNIVERSITI TEKNOLOGI MALAYSIA
BORANG PENGESAHAN STATUS TESIS ♦
JUDUL: NATURAL JUSTICE IN ADJUDICATION
SESI PENGAJIAN : 2005 / 2006
Saya
LING TEK LEE ___________________________
(HURUF BESAR)
mengaku membenarkan tesis (PSM / Sarjana / Doktor Falsafah)* ini disimpan di
Perpustakaan Universiti Teknologi Malaysia dengan syarat-syarat kegunaan seperti
berikut:
1. Tesis adalah hakmilik Universiti Teknologi Malaysia.
2. Perpustakaan Universiti Teknologi Malaysia dibenarkan membuat salinan untuk
tujuan pengajian sahaja.
3. Perpustakaan dibenarkan membuat salinan tesis ini sebagai bahan pertukaran
antara institusi pengajian tinggi.
4. ** Sila tandakan (9)
9
SULIT
(Mengandungi maklumat yang berdarjah
keselamatan atau kepentingan Malaysia seperti yang
termaktub di dalam AKTA RAHSIA RASMI 1972)
TERHAD
(Mengandungi maklumat TERHAD yand telah
Ditentukan oleh oprganisasi/ badan di mana
Penyelidikan dijalankana)
TIDAK TERHAD
Disahkan oleh
__________________________________________
(TANDATANGAN PENULIS)
Alamat Tetap:
31, Jalan Impian Emas 60,
Taman Impian Emas,
81300 Skudai, Johor Bahru.
Tarikh: _____________________
CATATAN:
__________________________________________________
(TANDATANGAN PENYELIA)
En. Norazam Othman
Nama Penyelia
Tarikh: ______________________
* Potong yang tidak berkenaan.
** Jika tesis ini SULIT atau TERHAD, sila lampirkan surat daripada pihak
berkuasa/organisasi berkenaan dengan menyatakan sekali sebab dan
tempoh tesis ini perlu dikelaskan sebagai SULIT atau TERHAD.
Š Tesis dimaksudkan sebagai tesis bagi Ijazah Doktor Falsafah dan
Sarjana secara penyelidikan, atau disertasi bagi pengajian secara kerja
kursus dan penyelidikan, atau Laporan Projek Sarjana Muda (PSM).
“We hereby declare that we have read this thesis and in our opinion this thesis is
sufficient in terms of scope and quality for the award of the degree of
Master of Science in Construction Contract Management.”
Signature
: .................................................................
Name of Supervisor I : .................................................................
Date
: ................................................................
Signature
: ................................................................
Name of Supervisor II : ................................................................
Date
: ................................................................
NATURAL JUSTICE IN ADJUDICATION
LING TEK LEE
A thesis submitted in fulfillment of the
requirements for the award of the degree of
Master of Science in Construction Contract Management
Faculty of Built Environment
Universiti Teknologi Malaysia
MARCH, 2006
ii
DECLARATION
I declare that this thesis entitled “Natural Justice in Adjudication” is the result of my
own research except as cited in the references. The thesis has not been accepted for
any degree and is not concurrently submitted in candidature of any other degree.
Signature
: .................................................................
Name
: .................................................................
Date
: .................................................................
iii
Specially dedicated to Ayln, Marcus, Audrey and Lucas for
their love and support.
iv
ACKNOWLEDGEMENT
I’m deeply grateful to all my lecturers in the Faculty of Built Environment,
Universiti Teknologi Malaysia, in particular, Associate Professor Dr. Rosli Abdul
Rashid, Associate Professional Dr. Maizon Hashim, En. Jamaludin Yaakob and En.
Norazam Othman for their tireless effort in guiding me throughout the duration of the
course.
I wish to extend my sincere appreciation to En. Norazam for his helpfulness,
advice, encouragement, courtesy and friendship in helping me to complete this
thesis.
I’m also deeply beholden to my good friends and coursemates, Yong Mei
Lee, Nor Jalilah Idris and in particular Dennis Oon Soon Lee for their kindness and
encouragement during the duration of the course when I was despaired with
competing demand.
Ling Tek Lee
March, 2006
v
ABSTRACT
Statutory Adjudication has been widely adopted by many countries and
Malaysian construction industry is actively advocating to the Malaysia Government
to enact this legislation to improve the present poor payment practices in the
Malaysian construction industry. However, Adjudication with its rough nature of its
processes is said to deliver rough justice. Therefore, this research thesis seeks to
determine the relevant of the principles of natural justice in Adjudication through the
decided cases in various jurisdictions. The research revealed that the principles of
natural justice clearly apply in Adjudication. An Adjudicator is required to conduct
the Adjudication proceeding in a way that will not lead to any element of bias or
even on the perception of bias. Each party will be afforded an opportunity to present
his case and to adduce evidence in support of his case. Nevertheless, the main
challenge here is for the Adjudicator to maintain his sense of even handedness while
managing the Adjudication proceeding in the midst of a very demanding timeframe.
Decisions from the decided cases in various jurisdictions clearly show that the courts
are prepared to consider the circumstances under which the Adjudicators operate and
will undoubtedly enforced the Adjudicators’ determination unless there is a clear
breach on the principles of natural justice within the main issue that is of
considerable importance to the outcome.
vi
ABSTRAK
Undang-undang adjudikasi telah diterima pakai oleh banyak negara secara
luasnya dan industri pembinaan Malaysia kini giat menganjurkannya kepada
kerajaan Malaysia supaya undang-undang ini diperintahkan bagi mengatasi masalah
pembayaran dalam industri pembinaan Malaysia.
Walaupun begitu, adjudikasi
dikatakan memberi keadilan secara kasar kerana ciri-ciri prosedurnya yang mudah
dan cepat. Oleh itu, kajian ini dijalankan untuk mengenalpasti kesesuaian prinsip
asal keadilan dalam adjudikasi melalui keputusan-keputusan mahkamah dari
pelbagai bidang kuasa. Kajian ini mendapati bahawa prinsip asal keadilan diberi
perhatian dalam adjudikasi.
Seseorang adjudikater dikehendaki mengendalikan
prosedur adjudikasi secara tidak berat sebelah. Setiap pihak mempunyai peluang
yang sama untuk mengemukakan kesnya dan bukti-bukti bagi menyokong hujahnya.
Walau bagaimanapun, cabaran utama kepada adjudikater ialah mengekalkan
kesedarannya semasa menguruskan prosedur adjudikasi dalam tempoh masa yang
singkat.
Keputusan-keputusan mahkamah dari pelbagai bidang kuasa jelas
menunjukkan bahawa mahkamah bersedia untuk mempertimbangkan keadaankeadaan dimana adjudikater beroperasi dan penentuannya dikuatkuasakan tanpa
keraguan kecuali terdapat pemungkiran prinsip asal keadilan yang jelas dan ianya
dianggap sebagai isu utama yang boleh mempengaruhi keputusan akhir kes tersebut.
vii
TABLE OF CONTENTS
CHAPTER
TITLE
PAGE
TITLE
i
DECLARATION
ii
DEDICATION
iii
ACKNOWLEDGEMENT
iv
ABSTRACT
v
ABSTRAK
vi
TABLE OF CONTENTS
vii
LIST OF CASES
x
LIST OF ABBREVIATIONS
xiii
LIST OF APPENDICES
xiv
CHAPTER 1 INTRODUCTION
1.1
Background Of Study
1
1.2
Problem Statement
5
1.3
Objective Of The Study
7
1.4
Scope And Delimitation Of The Study
7
1.5
Research Methodology
8
1.6
Previous Study
8
1.7
Significance Of The Study
9
viii
CHAPTER 2 THE DELIMMAS IN THE CONSTRUCTION INDUSTRY
2.1
Introduction
10
2.2
The Malaysian Scenario
12
2.3
Why Adjudication?
16
2.4
Conclusion
17
CHAPTER 3 THE NATURE OF ADJUDICATION
3.1
Introduction
19
3.2
Statutory Adjudication
22
3.3
Challenges to Adjudicator’s Decision
23
3.3.1 Erroneous Decision
27
3.4
Determinations beyond the Stipulated Time Limits 31
3.5
Conclusion
34
CHAPTER 4 NATURAL JUSTICE IN ADJUDICATION
4.1
Introduction
36
4.2
Rule Against Bias
39
4.3
Rule To ‘Hear The Other Side’
46
4.4
Conclusion
49
CHAPTER 5 BREACH OF THE PRINCIPLES OF NATURAL JUSTICE
5.1
Introduction
51
5.2
The Position Of The Various Jurisdiction
52
5.2.1
Discain Project Services Ltd v Opecprime
Development Ltd
5.2.2
53
Glencot Development And Design Co Ltd
V Ben Barrett & Son (Construction) Ltd
54
ix
5.2.3
Balfour Beatty Construction Ltd v
Lambeth London Borough Council
5.3
5.4
56
Does Limitation Of Documentation
Constituted A Breach?
59
Conclusion
69
CHAPTER 6 CONCLUSION AND RECOMMENDATIONS
6.1
Introduction
71
6.2
Research Findings
73
6.3
Recommendations
76
6.4
Conclusion
77
REFERENCES
79
APPENDICES
A
Housing Grants, Construction And Regeneration Act 1996,
United Kingdom
B
83
Building and Construction Industry Security of Payment
Act 1999, New South Wales
94
x
LIST OF CASES
CASE
PAGE
Anisminic Ltd v Foreign Compensation Commission (1969) 2 AC147
31
Balfour Bratty Construction Ltd v Lambeth London Borough Council
(2002) EWHC 597
6, 47, 52, 56, 74, 75, 77
Ban Hong Joo Mines Ltd v Chen & Yap Ltd (1969) 2 MLJ 83
15
Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd
(1998) 2 All ER 778
27
Bouyques (UK) Ltd v Dahl-Jensen (UK) Ltd (1999) 70 ConLR 41
Brodyn Pty Ltd v Davenport (2003) NSWSC 1019
28
52, 70, 72
Carrillion Construction Ltd v Devonport Royal Dockyard
(2003) BLR 79
23, 60
Cib Properties Ltd v Brise Construction (2004) EWHC 2365
64
C & B Concept Design Ltd v Isobars Ltd (2002) EWCA Civ 46
29
Dawnays Ltd v FG Minter Ltd (1971) 1 WLR 74
1
Dawnays Ltd v FG Minter Ltd & Anor (1971) 1 WLR 1205,
2 All ER 138913
14
Discain Project Services Ltd v Opecprime Development Ltd
(2001) BLR 285
5, 6, 73
Disdain Project Services Ltd. v Opecprime Development Ltd.
(2001) CILL 1698
44, 54
Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd
(1974) AC 689; (1973) 3 All ER 195; (1973) 3 WLR 421
14
xi
Glencot Development and Design Co Ltd v Ben Barrett
& Son (Contractors) Ltd (2001) BLR 207
13, 43, 54, 74
Government of Ceylon v Chandris (1963) 2 QB 327
Hock Hua Bank (Sabah) Bhd v Yong Liuk Thin (1995) 2 MLJ 313
48
40, 42
Hoenig v Issacs (1952) 2 ALL ER 176
12
Interbulk Ltd v Aiden Shipping Co Ltd (‘The Vimeira’)
(1984) 2 Lloyd’s Rep 66
46
Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd
(1997) 1 CLJ Supp 448
14
Kuala Ibai Development Sdn Bhd v Kumpulan Perunding (1988) Sdn Bhd
(1999) 5 MLJ 137
40
London and Amsterdam Properties Ltd v Waterman Partnership Ltd
(2004) BLR 179
61
Macob Civil Engineering Ltd v Morrison Construction Ltd
(1999) BLR 93
20, 73
Mercury Communications Ltd v Director General of Communications
(1996) 1 WLR 48
27
Modern Engineering (Bristol) v Gilbert-Ash (Northern)
1
Mohan Lal Mirpuri v Amarjit Singh Jass (1997) 56 ConLR 31
44
Monatech (M) Sdn Bhd v Jasa Keramat Sdn Bhd (2002) 4 CLJ 401
15
Mottram Consultants Ltd v Bernard Sunley & Sons Ltd
(1975) 2 Lloyd’s Rep 197
14
MPM Constructions Pty. Ltd. v Trepcha Constructions Pty. Ltd.
(2004) NSWSC 103
32
Musico & Ors v Davenport & Ors (2003) NSWSC 977
47
New South Wales case of Musico v Davenport (2003) NSWSC 977
63
Nikko Hotels (UK) Ltd v MEPC Plc (1991) 2 EGLR 103
28
Progressive Insurance Sdn Bhd v Kumpulan Perunding
(1988) Sdn Bhd
Pacol Ltd v Joint Stock Co Rossakhar (2000) 1 Lloyd’s Rep 109
40,41
63
Pembenaan Leow Tuck Chui Sdn Bhd v Dr Leela Medical
Centre Sdn Bhd (1995) 2 MLJ 57
14
Project Blue Sky Inc. v Australian Broadcasting Authority
(1998) 194 CLR 355
33
xii
Reg v Gough (1993) AC 646
39, 55, 56
R v Camborne Justices, ex p Pearce (1955) 1 QB 41
39
R v Rand (1866) LR 1 QB 230
42
R v Sussex Justices, ex p McCarthy (1924) 1 KB 256
42
R J T Consulting Engineers Limited v D M Engineering
(Northern Ireland) Limited (2002) EWCA Civ 270;
(2002) 1 WLR 2344
RSL (South West) Ltd v Stansell Ltd (2003) EWHC 1390
Transgrid v Siemens Ltd (2004) NSWCA 395
63
47
34,52
Turner (East Asia) Pte Ltd v Builders Federal (HK) Ltd
(1988) 2 MLJ 503
VC Jacob v Attorney-General (1970) 2 MLJ 133
45
30
xiii
LIST OF ABBREVIATIONS
AC
-
Appeal Cases
All EL
-
All England Law Reports
BLR
-
British Law Reports
Con LR
-
Construction Law Reports
CLJ Supp
-
Current Law Journal Supplement
KB (or QB)
-
King’s (or Queen’s) Bench
Lloyd’s Rep
-
Lloyd’s List Law Reports
MLJ
-
Malayan Law Journal
NSWSC
-
New South Wales Supreme Court
WLR
-
Weekly Law Reports
xiv
LIST OF APPENDICES
APPENDIX
A
TITLE
Housing Grants, Construction and Regeneration Act 1996,
United Kingdom
B
PAGE
83
Building and Construction Industry Security of Payment
Act 1999, New South Wales
94
CHAPTER 1
INTRODUCTION
CHAPTER 1
INTRODUCTION
1.1
Background of Study
The origins of adjudication go back to the 1970s when it was introduced for a
limited purpose in the construction industry between main contractor and sub
contractor. At that time there were complaints that the main contractors were
defaulting their payments to the sub contractors on the account of spurious claims of
delay. After the case of Modern Engineering (Bristol) v Gilbert-Ash (Northern) 1 , the
construction industry decided that for a main contractor to withhold payments to a
sub contractor, he must notify the sub contractor of an intention with the ground of
defense, set-off or counter-claim. Only then if dispute arises, it will be referred to an
adjudicator, who will decide whether the amount disputed will be withheld or paid.
The history of Statutory Adjudication can be traced to the introduction of the
Housing Grants Regeneration and Construction Act 1996 (HGCRA 1996) which
came into force in the United Kingdom in May 1998 pursuant to Sir Michael Latham
reports “Constructing the Team” in 1994 which reported the woes of the UK’s
1
(1974) AC 689
2
construction industry. In his report, Sir Michael Latham recommended among other
things that ‘a system of adjudication should be introduced within all standard forms
of contract and that this should be underpinned by legislation’. This recommendation
therefore led to the move from consensual adjudication to statutory adjudication.
This was followed by New South Wales, Australia with the Building Industry
Security of Payments Act 1999. Since then, the legislation has come into force in
New Zealand, Victoria, Queensland, Western Australia and finally Singapore
(Building and Construction Industry Security of Payment Act 2004) in April 2005.
Lord Denning in his now famous judgment in the Court of Appeal in
Dawnays Ltd v Minter Ltd 2 has this to say about construction disputes:
“There must be cash flow in the building trades. It is the very lifeblood of the
enterprise”.
In his usual vintage style, Lord Denning did not mince his words in
criticizing the frustrating effects of a long-drawn dispute resolution process,
unfortunately common to construction disputes due to its complexity:
“One of the greatest threats to cash flow is the incidences of disputes,
resolving them by litigation is frequently lengthy and expensive. Arbitration
in the construction industry is often as bad or worst”.
Ask any contractor what is his constant headache or fear is and he will lament
that it is not about being able to do a good job or getting the building built but the
endemic problems of poor payment practices. These place unwarranted hurdles to
2
(1971) 1 WLR 1205
3
cash flowing smoothly downstream through the whole construction chain.
In
Malaysia, it is not uncommon to read press reports on the woes and cries from main
contractors, subcontractors and suppliers on the shortcomings of the payment regime
in the Malaysian construction industry. Nevertheless, such practices were never an
issue during good times when jobs were aplenty and many contractors or even
subcontractors will tolerate late payments or even part payments. However, these
problems will magnify when the construction industry is deeply scathed by bleak
market sentiments and falling construction demand.
Several countries have enacted the legislation on Adjudication to ensure that
regular and prompt payments for works under the contracts in the construction
industry – to maintain progress payments under dispute. Under the legislation –
claimants who provided works, goods and services can force the respondent to make
payments on account. The scheme is thus a process which enables a dispute to be
quickly decided on a provisional or interim basis. The scheme also provides for the
Adjudicator’s decision to be immediately enforceable subject only to the final
determination of the dispute in arbitration or litigation.
The obvious attraction of the process of Adjudication is that it is a fairly
quick process in comparison to arbitration or litigation. Whilst the objective of
various Construction Contracts or Payment related Acts is consistent, the legislations
in various jurisdictions lack uniformity, for instances, from the Notice of Referral,
the Adjudicator has 28 days in United Kingdom, 10 working days in New South
Wales, Australia, 20 days in New Zealand and 14 days in Singapore, to render a
decision. Once the Adjudicator’s decision has been rendered, the winning party can
enforce it summarily in the Court if the losing party refuses to comply with the
Adjudicator’s decision.
Therefore, the robustness of the Courts in dealing with jurisdictional
challenges and the Court’s willingness to enforce the Adjudicator’s decision by way
4
of summary judgment must certainly have contributed to the enormous growth and
widespread use of Adjudication.
Statistics from United Kingdom has been encouraging. Since the
implementation of Housing Grants Regeneration and Construction Act 1996 on May
1998, over 7500 cases have been referred to Adjudication and only 195 cases have
been challenged in the Technology and Construction Court or TCC. It is undoubtedly
an awesome record to have only about 2.6 percent of the Adjudicator’s decisions
being challenged in the Court.
In response to the growing concerns about cash flow problems, which are
frequently encountered by main contractors, sub-contractors, suppliers in the
construction industry in Malaysia, the construction industry, spearheaded by
Construction Industry Development Board (CIDB) and Institute Surveyors Malaysia
(ISM), is actively advocating the legislation on Adjudication in Malaysia. The
enactment of the Adjudication Act will introduce new developments in our law. For
instance, it provides for entitlement to progress payments to main contractors, subcontractors, and suppliers in construction and supply contracts and perhaps the
consultants, even if no such entitlement is provided in their contracts. What is more
important is that the commonly used ‘pay when pay’ provisions in construction
contracts will be unenforceable.
Statutory adjudication imposes prescriptive time limits to make payments and
provides for an effective fast track adjudication to resolve payment disputes and the
right to suspend work amongst other remedies where the adjudicated amount is
unpaid. In short, it is about getting paid on time and in the amounts rightfully due.
5
Nevertheless, there is some misconception surrounding the use of
adjudication namely that adjudication delivers ‘rough justice’ 3 . The issue which
arises is the extent to which adjudication conducted under the intense time pressures
and within the limitations envisaged for the process under the present legislations can
be expected to observe the rules of fair play which are normally described as “natural
justice”. Judge Bowsher QC in his judgment in the case of Discain Project Services
Ltd v. Opecprime Ltd 4 observed the following:
“… [One] has to recognize that the adjudicator is working under pressure of
time and circumstance which makes it extremely difficult to comply with the
rules of natural justice in the manner of a Court or an Arbitrator”.
This research thesis is intended to provide a better understanding on the
process of Adjudication to all practitioners in the Malaysia construction industry.
More importantly, focus is given to determine the relevant of the principles of natural
justice in adjudication.
This paper is written based on a research on relevant
decisions of the courts of United Kingdom and Australia, where the courts have
interpreted provisions in their legislations that could be used as a useful guide and a
valuable point of reference.
1.2
Problem Statement
It has been suggested that, while the manner by which the principles of
natural justice apply to arbitration and court proceedings have been well established,
it may be unrealistic to expect adjudicators acting under severe time constraints in
the context of the legislations to comply with these principles to the same extent.
3
Refer to the rough nature of its process; see Judge Humphrey Lloyd’s judgment in Balfour Beatty
Construction Ltd v Lambeth London Borough Council (2002) EWHC 597.
4
(2000) BLR 402
6
Given that adjudication is but an imperfect mirror of arbitration in terms of
objectives and hence the very nature of the processes involved, to what level of
compliance to the principles of natural justice is expected of an adjudicator?
Humphrey Lloyd QC J in his judgment in the English case of Balfour Beatty
Construction Ltd v Lambeth London Borough Council 5 , concurred that,
“principles of natural justice applied to adjudication may not require a party
to be aware of the case that it has to meet in the fullest sense since
adjudication may be inquisitorial or investigative rather than adversarial”
Judge Bowsher QC in his judgment in the case of Discain Project Services
Ltd v. Opecprime Ltd 6 observed the following:
“… [One] has to recognize that the adjudicator is working under pressure of
time and circumstance which makes it extremely difficult to comply with the
rules of natural justice in the manner of a Court or an Arbitrator. Repugnant
as it may be to one’s approach to judicial decision-making, I think the system
created by the (HGCRA) can only be made to work in practice if some
breaches of the natural justice which have no demonstrable consequence are
disregarded”.
Duncan Wallace, the learned editor of Hudson, called the HGCRA Act 1996,
‘pro-producer ’, ‘anti-customer’ and ‘anti-paymaster biases’ 7 .
5
(2002) EWHC 597
(2000) BLR 402
7
(2000) 16 Const LJ 102
6
7
1.3
Objective of the Study
The concept of “natural justice” is normally understood in relation to the
fairness of the procedures adopted for arbitration or courts proceedings. The primary
objective of this research is to determine the relevant of the principles of natural
justice in adjudication. This research is intended to enhance the confidence of
practitioners in the Malaysian construction industry on the use of Adjudication in the
construction industry as an effective alternative dispute resolution despite the rough
nature of the process.
1.4
Scope and Delimitation of the Study
This paper seeks to discuss the various dispute resolutions that are being
practiced in the Malaysian and around the world namely, litigation, arbitration,
mediation, adjudication, med-arb, conciliation, early neutral valuation, and dispute
board.
This research will review the existing legislations on adjudication. This
research will also review the relevant published case law on adjudication and
discussed the relevant decisions of the courts on the subject of the principles of
natural justice.
As the adjudication act has yet to be enacted in Malaysia, this research shall
be limited to the relevant decision of the courts from countries that have enacted the
act.
8
1.5
Research Methodology
The methodology of this research is by way of literature review. Much has
been written on the topic on adjudication and many books have been published on
the regime under the adjudication act of various jurisdiction. This research will
review those regimes and their provisions on the subject of the principles of natural
justice.
This research will also review the relevant case law with regards to
adjudication and seek to investigate the interpretation of the principles of natural
justice in adjudication by the courts. Case law journals are readily available through
the Lexis-Nexis database via the Internet.
Since this research is by way of literature review only, no surveys will be
conducted. Therefore, the views and sentiments of those affected parties shall be
based on the books and journals that have previously written.
1.6
Previous Research
An extensive research was done by Sir Michael Latham and his report
“Constructing the Team” (1994) was the backbone to the construction of the UK’s
Housing Grant and Construction Regeneration Act 1996.
Many books have been published on the regimes of the respective countries’
Adjudication Act. Many journals were also published on this topic. This research
9
will also review all the relevant court decisions on the issue on the principles of
natural justice.
1.7
Significance of the Study
Malaysian construction industry is proposing to the Government on the
enactment of the Adjudication Act. Once the Act is adopted, it will introduce a
totally new regime of claims, adjudications and enforcement procedures (including
the right to suspend works and to exercise a lien on goods supplied) in the event of
non-payment, all quite unfamiliar to the Malaysian construction industry. In the light
of the tight timeframes and repercussions of the proposed Act, it is necessity for
every practitioner in the construction industry to familiarize themselves on the
subject of adjudication and its processes.
Adjudication is constrained especially by the time within which a decision is
required. Given that, construction dispute is known to be usually complex in nature,
it will be a tall order for an adjudicator to meet the time constrain yet observe the
principles of natural justice as seen in arbitrations and litigations. Failure to comply
could then be the cause of the adjudicator’s decision being challenged.
It is therefore, important to determine the level of compliance of the
principles of natural justice in the adjudication process as this will help to instill
confidence on the part of practitioner when adopting the system.
CHAPTER 2
THE DELIMMAS IN THE
CONSTRUCTION INDUSTRY
CHAPTER 2
THE DILEMMAS OF THE CONSTRUCTION INDUSTRY
2.1
Introduction
Disputes and claims are something that those involved in the construction
industry must live with despite their best effort to avoid them. Nevertheless, how
they choose to resolve their differences, however, is often something that is within
their control. The decision should require careful deliberation because it can have a
significant affect on the ultimate cost of the project.
Imagine this: A contractor suffers significant cost overruns on a long,
difficult and delayed project. There is finger pointing from start to finish and by the
end of the construction, there is much resentment and distrust between the client and
contractor or even the sub-contractors. Each of them has been severely wounded by
the project and blamed each other for their respective pain. The contractor quantifies
its pain and submits a ‘global impact’ claim at the end of the project 1 .
1
Refers to claims where the causal connection between the matters complained of and
their consequences, whether in terms of time or money, are not fully spelt out. Also
see Idris, N.J., et al., ‘Global Claims – The Way Forward’, Paper presented for the
11
The client is outraged. From the client’s perspective, the contractor’s claim
have grossly mischaracterizes the facts of the project and thereby, ignores the
contractor’s problem and refuses to comply with the contract provisions or establish
a cause and effect relationship between the contractor’s allegations and cost claims.
The client simply rejects the contractor’s claim.
Believing that the only way to get his concerns heard by someone other than
the ‘biased’ client that he dealt with, the contractor decides to commence legal
proceeding. When the litigation starts, communication between the two stops and
everything is filtered through their lawyers. As a result, both sides start forgetting
their vulnerabilities and begin to fall in love with their positions. In addition, the
payments they made to the lawyers and consultants get larger and more frequent and
they begin to add up to be significant amounts of money but with no end in sight.
The parties finally start to realize that litigation is very expensive and slow.
Worse yet, they learn that they cannot control nor guarantee the outcome. It is then,
only after a requisite amount of ‘blood letting’ has taken place, the parties decided to
cut a deal that is driven more by the desire to stop the bleeding rather than by the
merits of their position. Or after years of more legal expenses, the claim ultimately
settles on the court house steps or in the courtroom itself by the people that had
nothing to do with the project and for the amount that leaves both sides unsatisfied.
Once, there is this contractor friend who made an observation that goes
something like this:
“All construction disputes have one thing in common – they are ultimately
resolved either by surrender, compromise or in court. Anyone familiar with
the legal proceedings will tell you that it is the second least preferable way.”
Master of Science in Construction Contract Management course in UTM, 2005.
Unpublished.
12
2.2
The Malaysian Scenario
The construction industry is an important cog in the wheel propelling the
Malaysian economy.
The industry provides work for many ranging from
professionals such as architects, engineers and surveyors to main contractors, sub
contractors, suppliers and ultimately laborers who are employed by these contractors.
The industry works and will only continue to work on the premises that these people
are paid for work and services properly rendered. The quantum of payment for work
and services rendered are often huge in the thousand, if not in the millions of Ringgit.
Payment in any industry has generally been an issue of concern. In the
construction industry, payment is an issue of major concern. The reasons among
others can be listed as follows:
1.
Unlike many other industries, the durations of construction projects
are relatively long.
2.
Contract sums involved are often relatively large.
3.
Payment terms are usually on credit rather than payment on delivery.
In common law, as observed in the case of Hoenig v Issacs 2 , the contractor
in the absent of any express or implied provision (in their construction contract) for
progress payments during the progress of work, he would not be entitled to claim for
their work done unless he has substantially completed the work. Therefore, in the
absence of the substantial completion, the contractor would not be able to claim for
the percentage of work done or even on the basis of quantum meruit. This can be
detrimental to the financial health of the contractor and incidentally, the contractor
2
(1952) 2 ALL ER 176
13
would end up being the financier of the project until such times that the work is
substantially completed.
Nevertheless, in the present Malaysian construction industry, the existing
standard contract forms invariably provide for payments to be paid progressively
(PAM 1998 – Clause 30) to the contractor for the duration of the project. These
progress claims or payments are pegged to the work done or materials supplied and
the standard forms of contract will also contain express provisions dealing with how
these progress claims are to be evaluated.
That notwithstanding, the construction industry is a dispute prone one. It is
therefore not uncommon for the contractor pursuing his claim for the work done or
materials or services rendered to meet with a counter claim instead for defective,
delayed completion, etc. Therefore, payment is postponed until the resolution of the
dispute. There can be multitude of reasons for the dispute. As it stands today, the
legal enforcement of the claim and counter claim is unlikely to be summarily
concluded but more likely to involve a protracted trial. This post to be a huge
problem among main contractors, sub contractors, suppliers as their cash flow and
profitability are often put in jeopardy.
This scenario was clearly illustrated in the case of Pembenaan Leow Tuck
Chui Sdn Bhd v Dr Leela Medical Centre Sdn Bhd 3 and Federal Court Judge Edgar
Joseph echoed the problems:
“It is well known to lawyers engaged in the field construction contract law
that the question whether a building owner or main contractor is entitled to
refuse to make payment of the money to a contractor or contractor, as the
case may be, alleged due and payable under an interim certificate issued by
an architect or engineer, pursuant to provisions in a RIBA contract and other
3
(1995) 2 MLJ 57
14
known forms of building contracts and sub contracts, on the ground that he
has cross-claims alleging defective work or over-valuation or damages for
delay, is a question of ever-recurring importance, which inevitably throws
open for discussion the actual terms of the particular contract or sub contract
in the case and the all too familiar trilogy of case of Dawnays Ltd v FG
Minter Ltd & Anor (1971) 1 WLR 1205; 2 All ER 1389, Gilbert-Ash
(Northern) Ltd v Modern Engineering (Bristol) Ltd (1974) AC 689; (1973) 3
All ER 195; (1973) 3 WLR 421, Mottram Consultants Ltd v Bernard Sunley &
Sons Ltd (1975) 2 Lloyd’s Rep 197 and their progeny.”
The common modes of enforcement of construction claims in Malaysia are
presently by way of litigation and arbitration. Litigation as noted earlier is expensive
and it takes too long. On the other hand, arbitration can be marginally faster but it is
also very expensive. On top of that, both the procedures can only commence upon
the completion of the projects or when the contracts had been determined. This was
illustrated in the case of Kah Seng Construction Sdn Bhd v Selsin Development Sdn
Bhd 4 ; Judge Low Hop Bing held that;
“In my judgment, it is trite law that a contractor can only terminate his
contract with the employer (at common law, as opposed to the exercise of an
express termination clause) if he shows, inter alia, a repudiatory breach by
the employer in the sense that the employer has evinced an absolute refusal
not to perform his side of the contract.
There is no intermediate right in a building contract to suspend works.
If the contractor insists on the continued performance of the contract, i.e. he
affirms the contract; he must himself continue to perform his primary
obligations under the contract, i.e. to continue performing the contract
works.
4
(1997) 1 CLJ Supp 448
15
This is why suspension of the works by the contractor, i.e. not continuing with
his primary obligations, becomes itself a repudiatory breach by the
contractor.
Even if the plaintiff can establish that the defendant is in repudiatory breach
of contract, the plaintiff would have no right to suspend works, but instead
would have had to elect to either terminate the contract or insist on the due
performance.
By suspending works without valid legal cause, the plaintiff has in fact
repudiated its contractual obligations.”
Therefore, under the standard forms of contract in Malaysia, the unpaid
contractors are left with little option but to continue with the works and perhaps
concurrently sue for the payments with interest. Alternatively, the contractors can opt
to terminate the contract if the non payment is so serious that it constitutes a
repudiatory breach as illustrated in the case of Ban Hong Joo Mines Ltd v Chen &
Yap Ltd 5 .
In other words, there is no guarantee that the unpaid contractor will be paid or
that there are assets available for execution upon obtaining a successful result after a
lengthy arbitration or litigation process. Nevertheless, there is the availability of the
Mareva injunction procedure in Malaysia.
To be successful in the Mareva
injunction, the claimant has the onerous burden to proof that he has a good arguable
case (and this is usually difficult in the light of counter claim and set-off). However,
if the Mareva injunction is granted, there is some comfort to the contractor because
breaching the injunctive order or even taking willful steps to frustrate the application
to obtain the order might constitute contempt of court as shown in the case of
Monatech (M) Sdn Bhd v Jasa Keramat Sdn Bhd 6 . Despite all that, the unpaid
contractor is still an unsecured creditor.
5
6
(1969) 2 MLJ 83
(2002) 4 CLJ 401
16
2.3
Why Adjudication?
Legislation providing protection for cash flow to the construction industry
and introducing statutory adjudication has swept across the world. While it started in
United Kingdom through the introduction of the Housing Grants Construction and
Regeneration Act (HGCRA 1996) in 1998, it had since spread to four states in
Australia, New Zealand and finally in Singapore in April, 2005.
Cash flow in the construction industry is critical because of the relatively
long duration of projects. Deficiency in cash flow in a corporation often led to
insolvency. It is the effect of insolvency in each of the above countries’ construction
industry that has been one the main factors driving the need for statutory adjudication
to provide protection to cash flow in the construction industry.
The Construction Industry Employers Council in the United Kingdom (UK)
reported figures which were picked up by the Latham report titled “Constructing the
Team”, shows that the total output for the UK construction industry in 1993 alone
was over RM 320.7 Billion or about 8 percent of the UK Gross Domestic Product
(GDP). From 1989 to 1994 in UK alone, over 35,000 business and companies
became insolvent and almost a half a million jobs had been lost.
In Australia, the Australian Corporate Reporting (ACR) 1998 reported that in
June 1998, the number of insolvencies within the building and construction industry
in New South Wales (NSW) was three times higher than any other state in Australia.
This explained the reason why the state of New South Wales was the first to enact
the adjudication Act.
17
In New Zealand, the Motu Economic and Public Policy Research 7 reported
that for the period from 1989 to 1993 and 1997 to 2000, there were approximately
1000 involuntary liquidations in New Zealand per year and within the construction
industry alone in New Zealand from January 2000 to January 2001, a sample of 13
construction related companies became insolvent with a consequent reduction in the
total yearly output by NZ$315 Million (or 7.2 percent of the total New Zealand
construction industry turnover that year). The total output for the New Zealand
construction industry in 2000 was over NZ$4.4 Billion (RM11.8 Billion) or 4.2
percent of New Zealand Gross Domestic Product.
Much has been said and written on statutory adjudication since the Housing
Grants Construction and Regeneration Act (HGCRA 1996) came into operation in
1998. The legislation provides a statutory right to payment for work done, goods and
materials supplied and services performed and consequently, improved the cash flow
in the construction industry. It imposes prescriptive time limits to make payments
and provides for an effective fast track dispute resolution to resolve payment dispute
and the right to suspend work amongst other remedies where the adjudicated amount
is unpaid. In short, it is about getting paid on time and in the amounts rightfully due.
2.4
Conclusion
The payment predicament of the construction industry cannot be singly
explained. All parties whether they are the owners, consultants, main contractors, sub
contractors and suppliers have an important role and must act in concert to take
ownership of the problems and challenges.
7
refers to Motu Economic and Public Policy Research working paper 03-18 dated February 2004
18
The adjudication Act when enacted simply means that a party who has
carried out any construction works or supplied any goods or services under a
construction contract is entitled to a statutory right to progress payment.
The Malaysian Works Minister, Dato’ Seri S Samy Velu, confirmed at the
International Forum for Construction Industry Payment Act and Adjudication in
September, 2005 that the Malaysian Government is looking forward to have a
legislation to improve our present poor payments practices in the Malaysia
construction industry. Nevertheless, this proposed legislation if materialized will not
be a panacea for all of the local construction industry ills and woes but for financial
health sake, it will go a long way in throwing a vital lifeline.
What it essentially means for the construction industry is simply a more
disciplined approach. Prescribed time frames must be strictly complied with by all
parties to avoid default consequences of failure to pay. The time limits to respond to
claim applications and for making payments and quick adjudication embedded in the
legislation to resolve payment dispute ensures cash flow are passed on downstream
engendering security for payment due. Ultimately, the legislation will unsurprisingly
impose a mindset change in the processing of and compliance with a protocol for
progress payment.
CHAPTER 3
THE NATURE OF ADJUDICATION
CHAPTER 3
THE NATURE OF ADJUDICATION
3.1
Introduction
For most of the construction industry in the United Kingdom, Australia, New
Zealand and Singapore, adjudication now means a process by which within a short
and defined time and with a curtailed procedure left primarily to the adjudicator, all
disputes under most construction contracts have to be presented to, for preliminary
determination by, a person (the adjudicator) who will not later be the arbitrator or the
judge (unless of course the parties agree). The decision is binding (and is swiftly
enforceable) until the dispute is considered and decided later by an ultimate tribunal.
That tribunal considers the dispute on its own merits, without regard to the decision
of the adjudicator so that there is, in this sense, no appeal from the adjudicator. Until
that time arrives, there are very limited means of challenging or otherwise avoiding
the result of the adjudication.
The aims of adjudication are (or, rather, were) simply that a dispute is
resolved in such a manner that the parties perforce have to put it behind them and
get on with the contract or with the remainder of their relationship (if either still
exists). The decision of an adjudicator may also give the parties a forecast of the
20
likely decision of the ultimate tribunal, whether an arbitrator or a judge.
Obviously the reliability of any such prediction in turn depends upon the quality of
the decision and the material and time available to the adjudicator, as well as, of
course, the ability of the person involved.
In 1993 Sir Michael Latham was asked by the government to inquire into and
report on various malaises that were supposedly affecting the construction industry.
Sir Michael produced his final report in July 1994: "Constructing the Team: Joint
Review of Procurement of Contractual Arrangement in the UK Construction
Industry." In his report he recommended amongst other things that;
"a system of adjudication should be introduced within all standard forms of
contract (except where comparable arrangements already existed for
mediation or conciliation) and that this should be underpinned by
legislation".
This recommendation had led to the move from consensual adjudication to
statutory adjudication. Malaysian construction industry is advocating the legislation
and takes from the International Forum on Construction Industry Payment Act and
Adjudication (September, 2005), in Kuala Lumpur, have indicated that a draft copy
of the legislation will be ready to be debate in the Parliament this year. The forum
also confirmed that the proposed legislation have received overwhelming support
from the various parties in the Malaysian construction industry.
The general nature of Adjudication was succinctly and clearly summarized by
Dyson J in the landmark case of Macob Civil Engineering Ltd v Morrison
Construction Ltd 1 in the following passage from his judgment at page 97, a passage
which remains definitive and is well worth repeating:
1
(1999) BLR 93
21
“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 the decisions of adjudicators to
be enforced pending the final determination of disputes by arbitration,
litigation or agreement: see s.108 (3) of the Act and paragraph 23(2) of Part
1 of the Scheme. The timetable for adjudications is very tight (see s.108 of
the Act). Many would say unreasonably tight, aware of this. So far as
procedure is concerned, the adjudicator is given a fairly free hand. It is true
(but hardly surprising) that he is required to act impartially (s.108 (2) (e) of
the Act and paragraph 12(a) of Part 1 of the Scheme). He is, however,
permitted to take the initiative in ascertaining the facts and the law (s.108 (2)
(f) of the Act and paragraph 13 of Part 1 of the Scheme). He may, therefore,
conduct an entirely inquisitorial process, or he may, as in the present case,
invite representations from the parties. It is clear that Parliament intended
that the adjudication should be conducted in a manner which those with the
grinding detail of the traditional approach to the resolution of construction
disputes apparently find difficult to accept. But Parliament has not abolished
arbitration and litigation of construction disputes. It has merely introduced
an intervening provisional stage in the disputes resolution process. Crucially
(Parliament) has made it clear that decisions of adjudicators are binding and
are to be complied with until the dispute is finally resolved.”
Nevertheless, statutory adjudication too had its fair share of critics and among
its famous critics is none other than Duncan Wallace, the learned editor of Hudson.
The author ridiculed the legislation that:
“an adjudicator’s decision, if arrived at in serious breach of a principle of
natural justice, must as a matter of law nevertheless be enforced in
circumstances where payment under an invalid decision could turn out to be
irretrievable and precipitate the insolvency of the party affected.”
22
Duncan Wallace went on to call the HGCRA Act 1996, ‘pro-producer ’,
‘anti-customer’ and ‘anti-paymaster biases’, he continued,
“Parliament can only have intended adjudicators’ decisions validly arrived
at on the merits or law of a properly referred dispute to be binding on the
parties for the comparatively lengthy period which could be involved before
final judgment or award and it is almost inconceivable that Parliament
intended to accord to adjudicators’ decisions or conduct an immunity and
enforceability not accorded by law to arbitrators and their awards or even to
the judiciary and their judgments.”
3.2
Statutory Adjudication
Statutory adjudication model is something of a hybrid. Unless the contract
being a construction contract, as defined under various jurisdictions, it is made by
law into a contract that does not comply. The process remains essentially contractual
and, in principle, once a contract is made that complies with the Acts the parties are
free to vary or waive its terms. Adjudication produces a decision that is binding, but
not finally, as its effect can be altered by the tribunal ultimate competent to resolve
the dispute that to the adjudication (or the dispute resulting from the adjudicator’s
decision). It is not therefore arbitration; its characteristics are close to what English
law recognizes in the determination of expert. It is in reality unequalled (sui generic)
and, since it is essentially contractual, every case has to be considered carefully in
case there are contractual which require to be observed.
23
3.3
Challenges to Adjudicator’s Decision
The Acts in the various jurisdictions make it clear that the decision is
provisionally binding and that the underlying dispute will be decided by the ultimate
tribunal, court proceedings or arbitration, if the parties do not accept the decision or
use it as a means of arriving at a settlement, although in practice this is apparently
quite frequent. In legal terms the validity of the decision of an adjudication stems
from the simple contractual proposition that if parties have agreed to leave a dispute
to be resolved by a third party, such as an adjudicator, and to be bound by the
decision, they will be held to their mutual promises. If enforcement is needed, e.g. of
the amount which the adjudicator has decided is due, the claimant then commences
proceedings in the courts. The defendant should not be able to deny that the sum is
due since it is bound by the agreement to accept the decision as provisionally
binding.
Accordingly a party cannot escape the consequences of adjudicator
decision since otherwise the contract will not be enforced in accordance with the
parties’ intentions.
In the case of Carrillion Construction Ltd v Devonport Royal Dockyard 2 ,
the Honorable Mr. Justice Jackson stated four simple principles that he considered
applied to any consideration of the enforcement of adjudication’s decision.
Devonport Royal Dockyard refits and refuels warships and nuclear
submarines for the Royal Navy. In early 1997, the dockyard was privatized and
at that time it was decided that the existing facilities should be upgraded and
new facilities provided. Part of the purpose of these works was to enable the
dockyard to refit and refuel the most recent classes of submarines employed by
the Royal Navy. The Ministry of Defense engaged Devonport to carry out these
works under a cost reimbursable contract with a target cost mechanism.
2
(2003) BLR 79
24
Devonport in turn engaged Carillion as subcontractor to carry out the
upgrading of one of the docks, which included replacing the dock walls and base
and constructing four new buildings. One of the new buildings was a
decontamination building which would contain apparatus for removing nuclear
contamination.
The contract between Devonport and Carillion included an ‘Alliance
Agreement’ which supplemented the provisions of the subcontract in order to
promote partnering and harmonious relations between thee parties. The Alliance
Agreement included a dispute resolution procedure which provided that disputes
would first be referred to the ‘Alliance Board’ and then to the incongruously
named ‘Star Chamber’. The original Star Chamber was an English court of law
active in the Tudor and early Stuart periods which was abolished by parliament
in the 1600’s, by which time its name had become synonymous with secret and
irresponsible court proceedings.
Nevertheless, neither the Alliance Agreement, the Alliance Board nor the
Star Chamber proved up to the task of maintaining harmonious relations between
the parties. The target cost, which was initially set at £56 million, rose by a
series of steps contained in amendments to the contract to approximately £96
million. This was well below the figure of £114 million that Carillion was arguing
for.
Furthermore, disputes existed concerning the reimbursable costs due
under the contract, including claims for defective works presented in a sum of
some £21 million. With nowhere left to turn under the terms of the Alliance
Agreement, Carillion served on Devonport a notice of adjudication in respect of
these disputes.
25
Faced with the unenviable task of resolving these differences within 42
days, the adjudicator wisely directed that the parties should provide written
summaries of their cases limited to four pages in length. The remaining referral
and response documents were considerably more extensive however. Each party
served numerous witness statements; expert reports and supporting documentation
which in all amounted to some 29 lever arch files.
In his determination, the adjudicator found substantially in favor of
Carillion and ordered an immediate payment to Carillion of a sum in excess of
£10 million. Unsurprisingly, Devonport declined to pay the sum due under the
adjudicator’s decision. In order to justify their respective positions, both parties
commenced proceedings in the Technology and Construction Court, Carillion
claiming an order enforcing the adjudicator’s decision and summary judgment
on its claim and Devonport claiming declarations that the adjudicator’s decision
be regarded as invalid.
The Honorable Mr. Justice Jackson carried out a very careful review of
recent case law and concluded by restating four simple principles which he
considered applied to any consideration of the enforcement of an adjudicator’s
decision:
1.
The
adjudication
procedure
does
not
involve
the
final
determination of anybody’s rights, unless all parties so wish;
2.
The Court of Appeal has repeatedly emphasized that the
adjudicator’s decisions must be enforced, even if they result
from errors of procedure, fact or law;
3.
Where an adjudicator has acted in excess of his jurisdiction or in
serious breach of the rules of natural justice, the court will not
enforce his decision; and
26
4.
Judges must astutely examine technical defenses with a degree of
skepticism consonant with the policy of the HGCRA 1996. Errors
of law, fact or procedure by an adjudicator must be examined
critically before the court accepts that such errors constitute excess
of jurisdiction or serious breaches of the rules of natural justice.
Based upon those four principles, Mr. Justice Jackson dealt with each of
the challenges put forward by Devonport to resist enforcement of the
adjudicator’s decision. Crucially, the fact that the adjudicator’s approach to the
assessment of target cost might have embodied errors of both fact and law was
insufficient to be characterized as an excess of jurisdiction. The evidence showed
that the adjudicator had not simply carried out a judgment of Solomon, but had
reviewed the material put forward by both parties in a manner that was perfectly
appropriate considering the constraints under which he was operating and the
sheer volume of evidence and intricate submissions which were thrust upon him.
Similarly, Mr. Justice Jackson was satisfied that the adjudicator had
properly considered and addressed Devonport’s claims for defects and whether
he was right or wrong in his decision, it could not be said that he had acted in
disregard of the rules of natural justice.
Finally, Mr. Justice Jackson held that paragraph 20(c) of the Scheme
for Construction Contracts provided a freestanding power to the adjudicator to
award interest whether or not there was an express term contained within the
contract for the payment of interest. In conclusion, Carillion obtained judgment in
respect of the entirety of the adjudicator’s decision.
27
3.3.1 Erroneous Decision
Long standing principles of law applicable to tribunals or third party
decisions show that a decision will be binding even though it may be
erroneous in fact, or possibly in law, and that a person charged with making
a decision is not authorized to do anything other than apply principles of law.
Therefore, in agreeing to adjudication, the parties have to accept that the
adjudicator may err. If the decision is one of fact and within the authority given
to the adjudicator then the courts cannot and will not interfere. In the case of
Mercury Communications Ltd v Director General of Communications 3 , Lord
Hoffmann J made this observation;
“This is because the court’s views about the right answer to the question
are irrelevant. On the other hand, the court will intervene if the decisionmaker has gone outside the limits of his decision-making authority.”
In Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd 4 , Lord Hope of
Craighead echoed what Lord Hoffmann J earlier statement;
“The powers of the architect or arbitrator, whatever they may be, are
conferred by the contract. It seems to me more accurate to say that the
parties have agreed that their contractual obligations are to be whatever
the architect or arbitrator interprets them to be. In such a case, the opinion
of the court or anyone else as to what the contract requires is simply
irrelevant. To enforce such an interpretation of the contract would be
something different from what the parties had agreed. Provisions of this kind
are common in contracts for the sale of property at a valuation or goods
which comply with a specified description. The contract may say that the
value of the property or the question of whether the goods comply with the
description shall be determined by a named person as an expert. In such a
3
4
(1996) 1 WLR 48
(1998) 2 All ER 778
28
case, the agreement is to sell at what the expert considers to be the value or
to buy goods which the expert considers to be in accordance with the
description. The court’s view on these questions is irrelevant.”
This principle is directly relevant to objections to the enforcement of
decisions which may be disguised as challenges to jurisdiction or authority. The
court will leave them to be decided by the ultimate tribunal as the decision is only
provisional and if wrong should then be put right. However, as Beaufort shows, a
court will otherwise be able to scrutinize an adjudicator’s decision to see if it is
within the authority given to the adjudicator.
The case of Bouyques (UK) Ltd v Dahl-Jensen (UK) Ltd 5 bears a striking
illustration. The Court of Appeal considered an adjudicator’s decision which was
wrong as it failed to make allowance for retention. As a result Bouygues was ordered
to pay £208,000 to Dahl-Jensen when Dahl-Jensen ought to have been ordered to pay
Bouygues £141,000. It held that the decision was nevertheless valid and enforceable
as it stood, since the adjudicator had acted within his jurisdiction. The Court
endorsed the principle summarized by Knox J in Nikko Hotels (UK) Ltd v MEPC
Plc 6 (a rent review case);
“If he has answered the right question in the wrong way his decision will be
binding. If he has answered the wrong question, his decision will be a
nullity.”
This statement has become somewhat of a talisman. It encapsulates what
Lord Hoffman said. There now seems general agreement that an adjudicator should
have express power to correct slips or mistakes but there is no implied power to do.
5
6
(1999) 70 ConLR 41
(1991) 2 EGLR 103
29
Mistakes of law might be considered separately, if only because an
adjudicator’s jurisdiction may be limited (e.g. to disputes under the contract, as in the
UK). If they are part of the question that was asked and about the contract little or
nothing can be done about them. A recent decision of the Court of Appeal in
England provides helpful guidance, C & B Concept Design Ltd v Isobars Ltd 7 ,
Sir Murray Stuart-Smith gave the judgment with which the other members agreed;
“22. The real question is whether this error on the part of the
Adjudicator went to his jurisdiction, or was merely an erroneous
decision of law on a matter within his jurisdiction. If it was the former
the Recorder was right to hold that summary judgment should not be
entered. If it was the latter, then in my judgment the proper course,
subject to any question of stay of execution, is that the Claimant is
entitled to summary judgment.
23. The whole purpose of s. 108 of the Act, which imports into
construction contracts the right to refer disputes to adjudication, is that
it provides a swift and effective means of resolution of disputes which is
binding during the currency of the contract and until final determination
by litigation or arbitration. s.108 (3). The provisions of s.109-111 are
designed to enable the contractor to obtain payment of interim payments.
Any dispute can be quickly resolved by the Adjudicator and enforced
through the courts. If he is wrong, the matter can be corrected in
subsequent litigation or arbitration.
24. In Northern Developments (Cumbria) Ltd v J & J Nichols, His
Honour Judge Bowsher QC cited with approval the following formulation
of principles stated by His Honour Judge Thornton QC in Sherwood &
Casson v Mackenzie(2000) 2 TCLR 418 ,
7
(2002) EWCA Civ 46
30
(i) a decision of an adjudicator whose validity is challenged as to its
factual or legal conclusions or as to procedural error remain a decision
that is both enforceable and should be enforced;
(ii) a decision that is erroneous, even if the error is disclosed by the
reasons, will still not ordinarily be capable of being challenged and
should, ordinarily, still be enforced;
(iii) a decision may be challenged on the ground that the adjudicator was
not empowered by the Act to make the decision, because there was no
underlying construction contract between the parties or because he had
gone outside his terms of reference;
(iv) the adjudication is intended to be a speedy process in which mistakes
will
inevitably
occur.
Thus,
the
Court
should
guard
against
characterizing a mistaken answer to an issue, which is within an
adjudicator’s jurisdiction, as being an excess of jurisdiction;
(v) an issue as to whether a construction contract ever came into
existence, which is one challenging the jurisdiction of the adjudicator,
so long as it is reasonably and clearly raised, must be determined by
the Court on the balance of probabilities with, if necessary, oral and
documentary evidence.
25. I respectfully agree with this formulation. I would also add, as I have
already pointed out, the provisional nature of the adjudication, which,
though enforceable at the time can be reopened on the final determination.”
In Malaysia and Singapore, the position that was adopted the courts here is
similar to that of United Kingdom. This can be seen in the case of VC Jacob v
Attorney-General 8 (High Court, Singapore), in this case Wee Chong Jin CJ referred
8
(1970) 2 MLJ 133
31
to the House of Lord’s case of Anisminic Ltd v Foreign Compensation Commission 9 ,
in which Lord Pearse at page 192 was found to have quoted the following;
“The courts have, however, always been careful to distinguish their
intervention whether on excess of jurisdiction or error of law from an
appellate function. Their jurisdiction over inferior tribunals is supervision,
not review.
That supervision goes to two points: one is the area of the inferiorjurisdiction and the qualifications and conditions of its exercise; the other is
the observance of the law in the course of its exercise.
It is simply an enforcement of Parliament’s mandate to the tribunal. If the
tribunal is intended on a true construction of the Act to inquire into and
finally decide questions within a certain area, the courts’ supervisory duty
is to see that it makes the authorized inquiry according to natural justice
and arrives at a decision whether right or wrong. They will intervene if the
tribunal asks itself the wrong question (that is, questions other than those
which Parliament directed it to ask itself). But if it directs itself to the right
inquiry, asking the right questions, they will not intervene merely because it
has or may have come to the wrong answer, provided that this is an answer
that lies within its jurisdiction.”
3.4
Determinations beyond the Stipulated Time Limits
The existing legislations have no express provision on the consequences of
the adjudicator’s determination if an adjudicator fails to deliver his determination
within the stipulated time limits or he delivers it beyond the stipulated time.
9
(1969) 2 WLR 163
32
The issue of late adjudicator’s determination was considered in the New
South Wales Supreme Court in the case of MPM Constructions Pty. Ltd. v Trepcha
Constructions Pty. Ltd. 10
In this case, the adjudicator formally accepted the
adjudication application on the 7th. January, 2004. Section 21(3)(a) of the New
South Wales Act stipulated that the adjudicator must delivers his determination
within 10 working days, that is 21st. January, 2004. However, the adjudicator only
delivers his determination on 25th. January, 2004, claiming that he mistakenly
calculated the relevant time limit.
The respondent deemed the determination invalid and obtained an
injunction to prevent the claimant from enforcing the determination. The court
upheld the adjudicator’s determination with the following reasons;
“(a)
This is confirmed because where a determination is not made within
the relevant time limit, the only relief that a claimant seems to have under
the Act is that for which section 26 of the NSW Act applies, namely, to
withdraw the application (within five business days after the claimant
becomes entitled to withdraw the previous adjudication application) and
make a new application, It would be anomalous if the effect of noncompliance with the period allowed by section 21(3) of the NSW Act results
in the claimants being unable to seek adjudication of the dispute, that would
not be an outcome consistent with the evident objects of the legislation.
(b)
Additionally, section 26 of the NSW Act provides that should an
adjudicator fail to determine the adjudication application within the time
allowed, the claimant may withdraw the application. However, if the effect
of non-compliance with section 21(3) of the NSW Act was to render it no
longer possible for the adjudicator to proceed to determination, or to
render any purported determination a nullity then it must be the case that
effectively, the adjudicator becomes funtus officio upon the expiry of the
10
(2004) NSWSC 103
33
relevant time limit under section 21(3) of the NSW Act. If that were the case
then there would be nothing for the claimant to withdraw.
(c)
Section 29(4) of the NSW Act is also significant, in that it disentitles
the adjudicator to payment of his fees if he does not comply with the section
21(3) of the NSW Act, but says nothing about the validity of any
determination or purported determination issued outside the time limit.
(e)
The position, therefore, is that the NSW Act provides in two specific
ways (section 26 and 29) for the consequences of non-compliance with the
section 21(3) time limits. The NSW Act does not provide specifically for the
further consequence for which the respondent contends, namely that the
determination (having been made out of time) was invalid.
(f)
In these circumstances, if one asks ‘whether it was the purpose of
the legislation that the determination was invalid’, those matters would
suggest that the answer should be ‘no’. Indeed, the contrary answer would
not be consistent with the stated purposes of the NSW Act.
The court in agreeing with the principles as set out in the case of Project
Blue Sky Inc. v Australian Broadcasting Authority 11 , concluded that it is unlikely
that the legislation intended that an act done in breach of the time set out in section
21(3) of the NSW Act would be invalid, therefore, he upheld the adjudicator’s
determination.
\
11
(1998) 194 CLR 355
34
3.5
Conclusion
In statutory adjudication, a frequently encountered concern is that, since an
adjudicator has to reach his decision under considerable time pressures, there is a
risk that the material aspects of the dispute may be overlooked and mistakes may
be committed by the adjudicator in arriving at his decision. While this concern may
be overstated, the existing legislations expressly retain the right of the aggrieved
party to challenge the adjudicator’s decision in arbitration or litigation.
However, it is important to note that a challenge is not necessary an appeal
against the decision of an adjudicator, it would follow that the court in determine
the case for a challenge does not have to theoretically revisit the matters dealt with
by the adjudicator with respect to both questions of fact and of law. Therefore, in
considering whether the adjudicator has exceeded his jurisdiction, it is necessary
for the court to launch into a review of those issues of fact and law which pertain to
jurisdiction.
While the premises on which an adjudication’s determination may be
challenge are ostensibly limited, experiences in jurisdictions such as United
Kingdom and Australia suggested that there remains sufficient incentive for
challenges to be aggressively formulated where the quantum of the sums involved
are substantial. One of the reasons which led the dispute in Transgrid v Siemens
Ltd 12 to be carried out all the way to the New South Wales Court of Appeal was, no
doubt, the fact that the payment claim in that instance was very close to A$17
million.
Decisions from the decided cases have clearly demonstrated that a challenge
should not be abused by a party who merely intends to defer the reckoning of the
12
(2004) NSWCA 395
35
adjudicated amount. It is obvious that the court will only likely to consider
intervening and refusing to give a judgment on enforcing an adjudicator’s decision
unless something has gone really wrong. In considering whether there are realistic
grounds for not enforcing an adjudicator’s decision, the courts do not look at the
merits of the dispute. Naturally if there were a palpable error then a court would be
sympathetic but sympathy itself is not enough. Therefore, the realistic ground to
challenge an adjudicator’s decision shall be that the adjudicator’s acted beyond his
jurisdiction or that he breached the principles of natural justice.
CHAPTER 4
NATURAL JUSTICE IN ADJUDICATION
CHAPTER 4
NATURAL JUSTICE IN ADJUDICATION
4.1
Introduction
The principles of natural justice are the minimum standards of fair decisionmaking imposed on persons or bodies acting in a judicial capacity. Where the
relevant person or body is required to determine questions of law or fact in
circumstances where its decisions will have a direct impact on the rights or legitimate
expectations of the individuals concerned, an implied obligation to observe the
principles of natural justice arises. In the event of a hearing taking place or a decision
being reached which breaches the principles of natural justice, the person charged
may seek a review of the hearing or decision in the courts. Therefore, in the case of
an adjudication process, if the adjudicator is in any doubt as to the procedure he is
proposing to adopted, he should seek legal advice on them.
The concept of ‘natural justice’ is formulated under two principles;
“Nemo judex in causa sua” - The first principle is that no man may be a judge
in his own cause or simply, the rule against bias; and
37
“Audi aiteram partem” - The second principle is the right of each party to be
heard or simply, the rule to ‘hear the other side’.
An adjudication determination may be challenged on the ground that the
adjudicators, in arriving at his determination, had breached the rules of natural
justice. Duties expressly imposed on the adjudicators under various legislations
varied, with UK scheme (paragraph 12) provides that:
The adjudicator shall-act impartially in carrying out his duties and shall do so
in accordance with any relevant terms of the contract and shall reach his decision in
accordance with the applicable law in relation to the contract; and shall avoid
incurring unnecessary expense.
The New Zealand Act section 41 provides that; an adjudicator must:
1.
Act independently, impartially, and in a timely manner; and
2.
Avoid incurring unnecessary expense; and
3.
Comply with the principles of natural justice; and disclose any
conflict of interest to the parties to an adjudication; and
4.
If paragraph (d) applies, resign from office unless those parties agree
otherwise.
The Singapore Act under section 16(3) is similar to the New Zealand Act
section 41(a)-(c). However, the Australia Acts do not deal with the question of the
adjudicator’s duties.
38
In the Guidance for Adjudicators, a publication by Construction Umbrella
Bodies Adjudication Task Group in United Kingdom accepts that;
“the adjudicator has to conduct the proceedings in accordance with the rules
of natural justice or as fairly as the limitations imposed by Parliament
permit”.
Since a decision cannot be challenged because, although authorized, it is only
natural that an aggrieved party might wish to say that he was not fairly treated and
accordingly question the decision. This has to be avoided if confidence in the system
is to be maintained. As the quotation by the Guidance for Adjudicators recognizes,
fairness is relative.
Obviously “audi alterem partem” that is, being given a
reasonably adequate opportunity to know and to be heard on the case against you.
That includes points taken by the adjudicators. If an adjudicator has been selected
for practical experience then the adjudicator is entitled to use it to assess what is
learned and to arrive at a decision but the adjudicator may also use it to supplement
other evidence. However if the practical experience could bear on the decision, the
parties (and certainly the party affected) ought to be told of it, if forms part of the
case to be met.
An adjudicator may be empowered, and indeed required, to ascertain both the
facts and the law. Arbitrators are frequently so empowered. However it is a mistake
to think that such powers, commonly but not entirely accurately called ‘inquisitorial’,
may be employed without regard to the rights of the parties to know the case they
have to meet and to be given an opportunity in dealing with it. Those used to
adversarial procedures and to the contractual and business practices based on dispute
being resolved in that way must be careful before embarking on exercises with which
they may not be familiar, even though they may have the best of intentions. Equally
it is a mistake to think that the full panoply of the rules of natural justice apply to a
procedure which is not final and which only binding provisionally.
39
4.2
Rule Against Bias
The two main aspects of this rule are that a person adjudicating on a dispute
must have no pecuniary or proprietary interest in the outcome of the proceedings and
must not reasonably be suspected, or show a real likelihood of bias. Therefore, in an
adjudication process, the adjudicator must be able to show that he has conducted a
full enquiry into the circumstances involved before making his decision as to
whether a breach has occurred, if so, what sanction should be imposed. There should
be no suggestion in his conduct of the hearing that prior to its commencement, he has
irrevocably decided on the outcome.
In the case of Reg v Gough 1 , the House of Lords made it clear that in English
law, the more stringent test of ‘real danger’ of bias should be applied in all
proceedings whether in Court or in other tribunals or in arbitration.
Lord Goff of Chieveley at page 669 considered cases concerning allegations
of bias on the part of an arbitrator and found that the test adopted:
“…has been whether the circumstances were such that a reasonable man
would think that there was a real likelihood that the arbitrator would not
fairly determine the issue on the basis of the evidence and arguments
adduced before him… Such a test is, subject to the introduction of the
reasonable man, consistent with the conclusion which I have reached,
provided that the expression ‘real likelihood’ is understood in the sense I
have described, i.e. as meaning that there is a real possibility or, as I would
prefer to put it, a real danger of bias.”
1
(1993) AC 646
40
The case was cited with approval in various local cases. The test was also
applied more recently by Judge Nik Hashim in Kuala Ibai Development Sdn Bhd v
Kumpulan Perunding (1988) Sdn Bhd 2 In the case the learned judge held that a
single telephone conversation to counsel of one party without the knowledge of the
other party constituted gross misconduct. Also in Kuala Ibai case, the arbitrator after
receiving the submission of counsel for the parties on an issue of law, went ahead to
obtain a legal opinion without the knowledge or consent of the parties. He then in an
interim award directed that two of the parties should be liable for the cost of the
opinion. Nik Hashim J held that the arbitrator had misconduct himself because he
was appointed to decide the dispute and therefore the arbitrator must make his own
decision and not delegate to another or adopts the legal adviser’s decision as his own.
The same test has also been applied by the Malaysian Court of Appeal in
Hock Hua Bank (Sabah) Bhd v Yong Liuk Thin 3 and Progressive Insurance Sdn Bhd
v Gaya Underwriting Services 4 . It is commonly perceived but in our erroneous view
often expressed that once one of the parties has lost or claims to have lost confidence
in an arbitrator, the arbitrator should stand down or be removed on the grounds that
‘justice should not only be done but seen to be done’. However the above pair of
Malaysian Courts of Appeal cases shows clearly that the arbitrator should take a
stronger and more robust position when he is personally satisfied that he is unbias
and able to do justice between the parties.
The Hock Hua Bank case did not involve an arbitrator but the principles
enunciated may be applied to the arbitration parties. In that case a High Court had
heard an interlocutory injunction application in a case and in ruling on that matter
had expressed strong views on the nature of evidence. When the case was up for trial,
one of the parties made an application to disqualify the Judge from hearing the trial
on the basis of the remarks made by him at the injunction stage. The Judge did not
find any substance in the grounds raised for the disqualification, but nevertheless
2
(1999) 5 MLJ 137
(1995) 2 MLJ 313
4
(1997) 3 MLJ 524
3
41
decided to disqualify himself for fear of accusations that he might be more
accommodating to that party at the trial to dispel the allegations of bias.
The Court of Appeal allowed the appeal and directed the same Judge to hear
the trial. The substance of their reasoning can be found in the judgment of Sri Ram
JCA at page 222H to 223B of the report;
“Secondly, a judicial must decide any question presented to him for decision
in the light of the objective facts and in accordance with settled principles.
On no account should his personal sentiment enter upon the scene. Criticism
of a judge is part of the territory in which he operates. So long as that
criticism is made bona fide, based on the fact and in conformity with the law,
none, least of all a judge, should mind: for there is no acquisition of
knowledge without criticism. Over-sensitivity to criticism may result in
ignorance, or much worse, intellectual arrogance. To decide a point in fear
of criticism is to abdicate duty. These are matters that form part of a wellrecognized judicial philosophy and should require no reiteration.
In my judgment the learned judge failed to act in accordance with these
principles. He decided upon disqualification, not on grounds argued before
him. The record makes no mention of the grounds relied upon by him as ever
having been put to either side. His fear that an allegation may later be made
against him is a non sequitur. In his carefully reasoned judgment, the learned
judge was at pains to points out his lack of prejudice. Yet he was not
prepared to bear the case. That to my mind is wrong”.
In the Progressive Insurance case, the arbitrator took a stronger stand. One of
the parties requested the arbitrator to stand down as the arbitrator on the grounds of a
rather tenuous connection between a company of which the arbitrator was a director
and the other to the arbitration. The arbitrator rejected the request holding that there
was no conflict or bias and no question of his discharge. After that, the party making
the application informed the arbitrator that it did not intend taking any further part in
42
the proceedings, and the arbitrator proceeded to make his award. That party then
moved to have the award set aside on the ground of the arbitrator’s misconduct.
The High Court granted an application to set aside the award, but on appeal,
the decision was reversed and the award reinstated. The approach taken by Mahadev
Shanker JCA in the Court of Appeal is instructive. After stating at page 529C that it
was ‘a serious thing to allege bias against an arbitrator’ and finding the objection
devoid of any merit, went on to say at page 530 B-F;
“In Hock Hua Bank (Sabah) Bhd v Yong Liuk Thin & Ors (1995) 2 MLJ 213,
this court dealt in some depth with the test for a real likelihood of bias. We
only need to repeat a passage from R v Camborne Justices, ex p Pearce
(1955) 1 QB 41 at page 51-52 (also at (1954) 2 All ER 850 at page 855)
where Slade J formulates the test prescribes by Blackburn J in R v Rand
(1866) LR 1 QB 230 at page 232 thus:
Mahadev Shanker JCA on quoting the words of Lord Hewart in R v Sussex
Justices, ex p McCarthy 5 continued:
“The frequency with which allegations of bias have come before the courts in
recent time seems to indicate that Lord Hewart’s reminder in R v Sussex
Justices, ex p McCarthy (1924) 1 KB 256 at page 259, that it ‘is of
fundamental importance that justice should not only be done, but should
manifestly and undoubtedly be seen to be done’ is being urged as a warrant
for quashing convictions, or invalidating orders upon quite unsubstantial
grounds and, indeed, in some cases upon the flimsiest pretexts of bias. Whilst
endorsing and fully maintaining the integrity of the principle reasserted by
Lord Hewart, this court feels that the continued citation of it in cases to
which it is not applicable may lead to the erroneous impression that it is
more important that justice should appear to be done than that it should in
5
(1924) 1 KB 256
43
fact be done. Mr. Sinsua’s pretexts were intended to create a sinister
impression which the facts do not support.”
The message from a reading of these two important cases is clear. The
emphasis should be on substance over appearance. An arbitrator should not step
down although it may be attractive for him to do so on the grounds that ‘justice
should be seen to be done’ just because one party claims to have lost confidence in
him, if he himself feels he can proceed without danger of bias.
One of the reasons for this is obvious. If a party or his counsel can easily
bring about the resignation or removal of an arbitrator by simply alleging loss of
confidence when he perceives that the case is not going well for him, then justice
will be frustrated. If arbitrator A resigns or is removed from the office on such basis,
what is to stop the same party making a similar complaint in respect of the
replacement arbitrator?
One often hears complaints by claimants in arbitration that the arbitrator is
biased because he has made open comments tending to be dismissive of that
claimants case. To avoid such complaints some arbitrator play safe by retaining a
studious silence during the hearing; this is a tendency which is more common in the
local environment than in the western world, where arbitrators are more likely to be
vocal. It should be clear that an arbitrator is not biased or in danger of showing bias
merely because he expresses strong views as the case proceeds. He is perfectly at
liberty to do so.
In Glencot Development and Design Co. Ltd. v Ben Barrett & Son
(Contractors) Ltd. 6 , both parties actually invited Mr. Talbot, the adjudicator, to act as
a mediator and as a result to his effort, the parties managed to agree on the valuation
6
(2001) BLR 207
44
of a particular claim but not the rest of the disputes. Mr. Talbot was again appointed
the adjudicator for the rest of the disputes. The real issue here is the test of
impartiality, namely whether the circumstances would lead a far-minded and
informed observer to conclude that there was a real possibility of or a real danger that
the adjudicator was biased. The court ruled that an adjudicator has to conduct the
adjudication proceedings in accordance with the principles of natural justice or as
fairly as limitations imposed by the Parliament.
In the course of his judgment, Humphrey Lloyd QCJ emphasized that there
was no question of actual bias on the part of the adjudicator, however, this was a case
of apparent bias and this is considered sufficient to raise the prospect of bias on the
adage that justice must not only be done but must be seen to be done. Therefore, the
court held that there were real prospects that the adjudicator in this situation was no
longer impartial as a result of his role as a mediator and consequently, it was held
that the adjudicator’s decision was not enforceable. The learned observed the
following:
“Accordingly is Mr. Talbot’s conduct such as to be regarded as ‘impartial’?
It must be emphasized that there is not a question of actual bias. It is a case
of ‘apparent bias’…Hence there is a need for an objective test. The views of
the person involved are either irrelevant or not determinative. The test is
whether the ‘Circumstances would lead a fair-minded and informed observer
to conclude that there was a real possibility or real danger, the two being the
same, that the tribunal was biased’.
In the case of Disdain Project Services Ltd. v Opecprime Development Ltd. 7 ,
Bowsher J held that the court would refuse to enforce an adjudicator’s decision if
there had been a serious and substantial breach of the principles of natural justice. In
this case, the adjudicator had failed to afford the other party an opportunity to deal
with the submissions from its opponent. Having considered all the witnesses
7
(2001) CILL 1698
45
evidence, the judge found that there were serious risk of appearance of bias in the
adjudicator’s failure to consult one party on the submissions made by the other party
and consequently, the judge refused to enforce the award. This case concerned the
conduct of the adjudicator in the adjudication proceeding. There were allegations that
the adjudicator received telephone calls from the claimant’s surveyor, who was
representing the claimant in the adjudication proceeding and this was confirmed at
the trial. The respondent therefore applied to the court to invalidate the award
because they were not informed of the contents of the conversation. The learned
judge held that there was a breach of the principles of natural justice that:
“…in my view, the adjudicator did not act in accordance with the rules of
natural justice nor, in the words of Humphrey Lloyd QC did he conduct the
proceedings ‘as fairly as the limitations imposed by the Parliament permit’.
The limitations imposed by Parliament did not require the telephone
conversations of which the complaint is made.”
But in the case of Turner (East Asia) Pte Ltd v Builders Federal (HK) Ltd 8
the Singapore High Court applied the test of ‘reasonable suspicion’ i.e. would a
reasonable and fair minded person sitting in court and knowing all the relevant facts
have a reasonable suspicion that a fair trial for the applicant was not possible. This
case is an instructive example of a case where the arbitrator has become too vocal in
his constant criticism of one party and ended up on being removed for misconduct.
While an arbitrator is certainly free to comment on the merits of any point in the
arbitration, he should be careful to avoid giving the appearance to the parties that he
has already made up his mind that the case is as good as over.
8
(1988) 2 MLJ 503
46
4.3
Rule to ‘hear the other side’
In respect of the rule to ‘hear the other side’, the adjudicator should refrain
from making a particular determination on a ground for which neither party has
contended without affording the parties notice of the same and an opportunity to
respond. Each party must be afforded an opportunity to advance his case before the
tribunal and to adduce evidence in support of his case.
In Malaysia, the governing Article of the Constitution on this point is article
135(2) which came into operation on the Merdeka Day (31 August 1957):
“135(2) No member of such a service as aforesaid (the police service is one of
(these) shall be dismissed or reduced in rank) without being given a reasonable
opportunity of being heard.”
In the case of Interbulk Ltd v Aiden Shipping Co Ltd (‘The Vimeira’) 9 , the
UK Court of Appeal was concern with an arbitrator’s decision, made on the basis of
a point which was never raised as an issue or argued before the arbitrators. In
concluding that there was technical misconduct on the part of the arbitrators which
resulted in unfairness to the chatterer in that instance, Judge Goff confirmed that:
“…(t)here is plain authority that for arbitrators so to decide a case, without
giving a party any warning that the point is one which they have in mind and
so giving the party no opportunity of dealing with it, amounts to technical
misconduct and renders the award liable to be set aside or remitted.”
9
(1984) 2 Lloyd’s Rep 66
47
In Musico & Ors v Davenport & Ors 10 , Judge McDougall put the matter
simply as follow:
“If an adjudicator is minded to come to a particular determination on a
particular ground for which neither party has contended then, in my opinion,
the requirements of natural justice require the adjudicator to give the parties
notice of that intention so that they may put submissions on it.”
In the case of Balfour Beatty Construction Ltd v Lambeth Borough Council 11 ,
in a dispute involving delay claims, neither party furnished the adjudicator with a
proper delay analysis to support their position. The adjudicator took it upon himself
to conduct a delay analysis and there upon apply the result of the analysis to the
adjudication without the consent from the parties. It was held that the adjudicator had
committed a breach of the principles of natural justice because, when he did this, the
adjudicator did not afford the parties an opportunity to review and address their
position as to the adjudicator choice of method and analysis. In effect, the adjudicator
simply denied the parties the opportunity from being heard.
In RSL (South West) Ltd v Stansell Ltd 12 , the adjudicator in this case with the
consent of the parties, engaged a planning expert to assist him with a dispute
involving claim of extension of time to a construction contract. The parties consented
the employment of the expert was subject to the condition that they would be given
the opportunity to review the expert’s finding. However, when the expert’s
preliminary advice was forwarded to the parties, Stansell found that the preliminary
advice was to their favor and thereby decided that there was no need to ask for the
final report. Stansell was completely shocked when they received the adjudicator’s
decision, which was based on the expert’s final report, which turned out to be against
them. The Court held that the adjudicator had breach the principles of natural justice
10
(2003) NSWSC 977
(2002) EWHC 597
12
(2003) CILL 2012
11
48
by not extending a copy of the expert’s final report to Stansell and therefore, he did
not afford Stansell the opportunity to review and comment on the final report.
The principles of natural justice demand that a party in any judicial or
tribunal proceedings is entitled to address the evidence and submissions made by the
other party. In Mohan Lal Mirpuri v Amarjit Singh Jass 13 , an arbitrator in a
“document only” arbitration made an award notwithstanding that he was aware that
one party had not received the other party’s document. In fact the solicitor for the
aggrieved party knew about the documents but made no effort to obtain them. The
Court held that this did not excuse the arbitrator’s failure to ensure that parties right
to be heard and thereby, the award was remitted. In Government of Ceylon v
Chandris 14 , Megaw LJ stated the principles as follows:
“It is…a basic principle…that no one with judicial responsibility may receive
evidence, documentary or otherwise, from one party without the other party
knowing that the evidence is being tendered and being offered an opportunity
to consider it, object to it, or make submissions on it. No custom or practice
may over-ride those basic principles.”
An adjudicator is duty bound to ensure that all copies of reports and
submissions submitted by one party must be extended to the other party. Similarly,
copies of correspondence and exchanges between an adjudicator and any parties
should be likewise extended to the other parties. Where one party seeks the audience
of the adjudicator, the other party should be notified and afforded an opportunity to
attend.
13
14
(1977) 56 ConLR 31
(1963) 2 QB 327
49
4.4
Conclusion
Where an adjudicator takes upon himself to conduct investigation or direct
questions at the witnesses, he must do so in a manner which leaves the parties in no
doubt that he has taken a balanced and fair approach to the adjudication process.
Thus if the adjudicator received information from whatever source and if such
information might have some bearing on his decision, both parties must be informed
of this so that they are afforded the opportunity to comment or respond. This
requirement to take a balanced approach is similar to that which is expected of an
arbitrator.
Nevertheless, while the idea of extending the criteria of impartiality or simply
the principles of natural justice may appear to be essential, then again it must be
noted that the principle behind the adjudication legislation intends the adjudication
process to be exceptional and summary procedure, offering only an interim
determination of a dispute.
Furthermore, the inquisitorial character of adjudication as opposed to the
adversarial nature of arbitration proceedings and the fact that the proceedings have to
be compressed within a truncated time frame are factors which must invite a different
perspective on the principles of natural justice are to be projected. While an
arbitrator’s conduct is confined largely to the receiving of submissions and
applications, presiding at hearings and making rulings, in appropriate circumstances,
nevertheless, the adjudicator has to take the initiative to investigate the facts
surrounding the dispute and direct questions at witnesses and experts. In particular, it
is almost impossible for adjudicators to permit parties unfettered latitude to present
their full arguments on every conceivable issue within the limited time frame.
50
The better view, therefore, as also being rightfully interpreted by the courts is
that, whilst both the adjudicators and arbitrators are required to observed the
principles of natural justice in the conduct of their respective dispute resolution
proceedings, the extend of compliance which an adjudicator is expected to display
must necessarily take into account the different circumstances of adjudication as
compared to arbitration.
CHAPTER 5
BREACH OF THE PRINCIPLES OF
NATURAL JUSTICE
CHAPTER 5
BREACH OF THE PRINCIPLES OF NATURAL JUSTICE
5.1
Introduction
An adjudication determination may be challenged on the ground that the
adjudicator, in arriving at his determination, breached the principles of natural
justice. It is interesting to note that only the New Zealand and Singapore Act which
came in force in year 2002 and 2005 respectively provided an express provision on
the principles of natural justice. The Housing Grants Regeneration and Construction
Act 1996 which was enacted in 1998 only address the adjudicator’s duties, whereas,
there is no equivalent provision extending the principles of natural justice to
adjudications under the Australia Acts. The probable explanation would be that New
Zealand and Singapore being the latest jurisdictions to have enacted adjudication
found the need for the specific provision due to the high number of cases being
challenged in court on the subject of principles of natural justice. The principles of
natural justice have been considered in many English decisions in the context of
adjudication.
52
5.2
The Position of Various Jurisdictions
Although the New Zealand and Singapore Acts expressly required the
adjudicators to comply with the principles of natural justice, it is not readily apparent
that non-compliance to the principles of natural justice would render adjudication’s
determination void. Nevertheless, the Acts also did not specify the ground in which
the enforcement of the adjudication’s determination may be overturn by the Court.
The British authorities through the numerous court decisions appear to suggest that
the results of any breach of natural justice would depend on whether the breach
relates to “a point or issue which is decisive or of considerable potential importance
to the outcome”. In the British case of Balfour Beatty Construction Ltd v Lambeth
London Borough Council 1 , the English Technology and Construction Court (TCC)
basically set the tone of the English authority when Judge Humphrey Lloyd
considered that;
“the principles of natural justice applied to adjudication may not require a
party to be aware of the case that it has to meet in the fullest sense.”
The position of New South Wales, despite the absent of the express provision
on the principles of natural justice, was largely re-stated as a result of two Court of
Appeal’s decision in Brodyn Pty Ltd v Davenport 2 and Transgrid v Siemens Ltd3 . In
his judgment in Brodyn Pty Ltd v Davenport 4 , Judge Hodgson considered that in
order for an aggrieved party to resist the enforcement of an adjudicator’s decision,
the respondent has to show that the determination did not satisfy the conditions laid
down by the Act, in which he called, ‘the basic and essential requirements’ as
opposed to, ‘more detail requirements’, which require exact compliance. In addition
to the ‘the basic and essential requirements’, the judge insisted that there must have
been ‘a bona fide attempt by the adjudicator to exercise the relevant power relating to
the subject matter of the legislation’ and there must be ‘no substantial denial of the
1
(2002) EWHC 597
(2004) NSWCA 394
3
(2004) NSWCA 395
4
(2004) NSWCA 394
2
53
measure of natural justice that the Act requires to be given’. Therefore, a breached of
the principles of natural justice, at least to the extent demanded by the Act, could
render the adjudication’s determination void. The recourse available to an aggrieved
party when faced with the adjudicator who had breached the principles of natural
justice would be to seek an injunction from the Court to establish that the
determination is void.
The rules of natural justice have been considered in a number of English
decisions in the context of adjudication which can be taken as a useful guide.
5.2.1 Discain Project Services Ltd v Opecprime Development Ltd 5
In Discain Project Services Ltd v Opecprime Development Ltd 6 , Bowsher J
held that the court would refuse to enforce an adjudicator’s decision if there had been
a serious and substantial breach of the rules of natural justice. In that case, the
adjudicator had failed to afford the other party an opportunity to deal with
submissions from its opponent. Having considered all the witness evidence, the judge
found that there had been a serious risk of the appearance of bias in the adjudicator’s
failure to consult with one party on the submissions made by the other party and,
consequently, refused to enforce the award.
The case concerned the conduct of the adjudicator in the adjudication
proceedings. There were allegations, which were subsequently confirmed at trial, that
the adjudicator received telephone calls from the claimant’s surveyor, who represent
the claimants in the adjudication. The respondent applied to court to invalidate the
adjudicator’s decision, as they were not fully informed of the contents of the
5
6
(2001) BLR 285
Ibid
54
communications, which were initiated in most cases by the claimant’s representative.
The learned judge held in concluding that there was a breach of natural justice that:
“... in my view, the adjudicator did not act in accordance with the rules of
natural justice nor, in the words of Judge Humphrey Lloyd QC did he
conduct the proceedings ‘as fairly as the limitations imposed by Parliament
permit’. The limitations imposed by Parliament did not require the telephone
conversations of which complaint is made.”
5.2.2 Glencot Development and Design Co Ltd v Ben Barrett & Son
(Contractors) Ltd 7
In Glencot Development and Design Co Ltd v Ben Barrett & Son
(Contractors) Ltd 8 , Humphrey Lloyd QC J reviewed authorities on the meaning of
bias. The learned judge guidance in the case of Re Medicament and Related Classes
of Goods (2001) 1 WLR 700, on the meaning of bias:
“83
We would summarize the principles to be derived from this line of
cases as follow of cases as follows.
(1)
If a judge is shown to have been influenced by the actual bias,
his decision must be set aside by actual bias.
(2)
Where actual bias has not been established the personal
impartiality of the judge is to be presumed.
7
8
(2001) 80 ConLR 14
Ibid
55
(3)
The court then has to decide whether, on an objective
appraisal, the material facts give rise to a legitimate fear that
the judge might not have been impartial. If they do the
decision of the judge must be set aside.
(4)
The material facts are not are ascertained were apparent to
the applicant. They are those which are ascertained upon
investigation by the court.
(5)
An important consideration in making an objective appraisal
of the facts is the desirability that the public should remain
confident in the administration of justice.
84
This approach comes close to that in R v Gough 9 . The difference is
that, when the Strasbourg court considers whether the material
circumstances give rise to a reasonable apprehension of bias, it
makes it plain that it is applying an objective test to the
circumstances, not passing judgment on the likelihood that the
particular tribunal under review was in fact biased.
85
When the Strasbourg jurisprudence is taken into account, we believe
that modest adjustment of the test in R v Gough 10 . is called for, which
makes it plain that it is, in effect, no different from the test applied in
most of the Commonwealth and in Scotland. The court must first
ascertain all the circumstances which have a bearing on the
suggestion that the judge was biased. It must then ask whether those
circumstances would lead a fair minded and informed observer to
conclude that there was a real possibility, or a real danger, the two
being the same, that tribunal was biased.
86
The material circumstances will include any explanation given by the
judge under review as to his knowledge or appreciation of those
9
[1993] 2 All ER 724, [1993] AC 646
[1993] 2 All ER 724, [1993] AC 646
10
56
circumstances. Where that explanation is accepted by the applicant
for review it can be treated as accurate. Where it is not accepted, it
becomes one further matter to be considered from the viewpoint of the
fair-minded observer. The court does not have to rule whether the
explanation should be accepted or rejected. Rather it has to decide
whether or not the fair-minded observer would consider that there
was a real danger of bias notwithstanding the explanation advanced.
Thus in R v Gough 11 , had the truth of the juror’s explanation not been
accepted by the defendant, the Court of Appeal would correctly have
approached the question of bias on the premise that the fair-minded
onlooker would not necessarily find the juror's explanation credible.”
5.2.3
Balfour Beatty Construction Ltd v Lambeth London Borough Council 12
The observations of Humphrey Lloyd QC J with respect to breaches of the
principles of natural justice in the context of adjudication in the English case of
Balfour Beatty Construction Ltd v Lambeth London Borough Council 13 also shed
light on this subject. Although the case was decided in the context of a JCT contract,
the honorable judge held at paragraph 29 of his decision that:
“...in my judgment, that which is applicable in arbitration is basically
applicable to adjudication but, in determining whether a party has been
treated fairly, Or if) determining Whether all adjudicator lids acted
impartially, it is very necessary to bear in mind that the point or issue which
is to be brought to the attention of the parties must be one which is either
decisive or of considerable potential importance to the outcome and not
peripheral or irrelevant. It is now clear that the construction industry regards
11
[1993] 2 All ER 724, [1993] AC 646
(2002) EWHC 597
13
Ibid
12
57
adjudication not simply as a staging post towards the final resolution of the
dispute in arbitration or litigation but as having in itself considerable weight
and impact that in practice goes beyond the legal requirement that the
decision has for the time being to be observed. Lack of impartiality or of
fairness in adjudication must be considered in that light. It has become all the
more necessary that, within the rough nature of the process, decisions are
still made in a basically fair manner so that the system itself continues to
enjoy the confidence it now has apparently earned. The provisional nature of
the decision also justifies ignoring non-material breaches. Such errors, if
apparent (as they usually are), will be rectified in any negotiation and
settlement based upon the decision. The consequence of material issues and
points is that the dispute referred to adjudication will not have been resolved
satisfactory by any fundamental standard and the chances of it providing the
basis for a settlement are much less and the chances of it proceeding to
arbitration or litigation are much greater. However the time limits, the nature
of the process and the ultimately non-binding nature of the decision, all mean
that the standard required in practice is not that which is expected of an
arbitrator. Adjudication is closer to arbitration than an expert determination
but it is not the same.”
The learned judge had to consider whether the adjudicator was obliged to
inform the parties of the information obtained from his own knowledge and
experience or from other sources and of the conclusions which he might reach,
taking those sources into account. The judge ruled that the adjudicator was so
obligated and there as a breach of natural justice, holding that reason lay, at least in
part, in the requirement that:
“... the adjudicator should act impartially. That must mean that he must act
in a way that will not lead an outsider to conclude that there might be an
element of bias, I.e. that a party has been treated fairly. In addition
impartiality implies fairness although its application may be trammeled by
the overall constraints of adjudication. Lack of impartiality carries with it
overtones of actual or apparent bias when in reality the complaint may be
58
characterized as lack of fairness. Judge Bowsher QC put it very well in
Disdain Project Services Ltd v Opecprime Development Ltd (2001) BLR 285,
when he said at page 405:
‘I do understand that adjudicators have great difficulties in operating
this statutory scheme, and I am not in any way detracting from the
decision of Macob. It would be quite wrong for the parties to search
around for breaches of the rules of natural justice. It is a question of
fact and degree in each case, and in this case the adjudicator
overstretched the rules.
That scheme makes regard for the rules of natural justice more rather
than less important. Because there is no appeal on the fact or law
from the adjudicator’s decision, it is all the more important that the
manner in which he reaches his decision should be beyond reproach.
At the same time, one has to recognize that the adjudicator is working
under intense pressure time and circumstances which makes it
extreme difficult to comply with the rules of natural justice in the
manner of a court or an arbitrator. Repugnant as it may be to one’s
approach to judicial decision-making, I think that the system created
by the HGCRA can only be made to work in practice if some breaches
of the rules of the natural justice which have no demonstrable
consequence are disregarded.’”
The judge further held at paragraphs 33 and 36, that:
“… 33 An adjudicator is of course entitled to use the power available to him
but he may not of his own volition use them to make good fundamental
deficiencies in the material presented by one party without first giving the
other party a proper opportunity of dealing both with that intention and with
the results. The principles of natural justice applied to an adjudication may
not require a party to be aware of ‘the case that it has to meet’ in the fullest
59
sense since adjudication may be 'inquisitorial' or investigative rather than
‘adversarial’. That does not however mean that each party need not be
confronted with the main points relevant to the dispute and to the decision…”
36….. an adjudicator does not act impartially or fairly if he arrives at a
decision without having given a party a reasonable opportunity of
commenting upon the case that it has to meet (whether presented by 'the other
party or thought to be important by the adjudicator) simply because there is
not enough time available. An adjudicator, acting impartially and in
accordance with the principles of natural justice, ought in such
circumstances to inform the parties that a decision could not properly
reasonably and fairly be arrived at within the time and invite the parties to
agree further time. If the parties were not able to agree more time then an
adjudicator ought not to make a decision at all and should resign.”
5.3
Does Limitation of Documentations Constituted a Breach?
As noted earlier in the discussion, the adjudicators are empowered to limit the
amount of documentations submitted. This empowerment is evidence in the express
provisions of the various legislations in specifying the duties of the adjudicators. In
the Singapore Act, section 16(4) (a), expressly provides that an adjudicator may
‘conduct the adjudication in any manner he thinks fit’. And parties in adjudication
are required, under section 16(6) in the Singapore Act, to ‘comply with any
requirement made or direction issued by the adjudicator pursuant to the exercise of
this power’.
Having said that and taking into account of the practices in Malaysian which
are more familiar to that of arbitration or litigation, parties are accustomed to make
60
elaborated submission in presenting their detail evidence. This could pose a big
problem in adjudication as the issue may arise as to whether the adjudication
procedural dateline should that precedence in cases where parties demanded that they
would require more time to present their case fully. This insistence if refused would
seem to deny the right for each party to be heard (the second pillar of the principles
of natural justice). In the other hand, elaborated submission if allowed may give rise
to tendency for claimant to ‘ambush’ the respondent in the actual adjudication
proceeding.
The other scenario which could pose a major problem in the adjudication
proceedings is when a party argues his case without his legal representative (unlike
litigation, legal representative is not compulsory in adjudication tribunal) may expect
the tribunal to extend some latitude in presenting his case. This may result the
adjudicator and the other party having to put up with more time taken by the
unrepresented party and again the arguments and evidences presented could be of
little relevance to the dispute at hand.
Legislation in various jurisdictions demanded that no parties have the right to
present submission or evidence in disregard of the tribunal’s directions. However, in
issuing the direction to the parties, the adjudicator should ensure that all directions
are formulated in a manner which will operate fairly as between the parties and at the
same time comply with the time requirement as stipulated by the Act. In Carrillion
Construction Ltd v Devonport Royal Dockyards Ltd 14 , facing with the unenviable
task of resolving the differences within 42 days, the Honorable Mr. Justice Jackson
ordered that all submission shall be limited to four pages of written summaries.
A landmark decision on this point is provided in the decision of the UK TCC
court in London and Amsterdam Properties Ltd v Waterman Partnership Ltd 15 . In
14
15
(2005) EWHC 778
(2004) BLR 179
61
this case, the terms for the appointment of the adjudicator had provided that the
Referral Notice should not exceed 20 pages.
The claimant in the case ignored this and served a Referral Notice in excess
of 1,000 pages. The adjudicator accepted that the reference did not comply with the
appointment terms. However, he decided that he would receive the first 20 pages as
‘the Referral’ so as to found his jurisdiction and then directed the respondent to limit
its response to 20 pages. However, he then proceeded to receive in evidence the
balance of the claimant’s non-compliant referral material amounting to 975 pages.
The court held that the adjudicator was entitled to regard the shortened Referral
received by him to be sufficiently compliant with the Scheme in the UK Act and that
he was entitled to receive the other documentation in the manner that he did.
However, the court took exception to that part of the adjudicator’s conduct where he
subsequently received additional evidence from the claimant very late in the
adjudication process and did not afford the respondent an opportunity to deal with
this evidence. This was evidence which the claimant chose not to reveal until the
adjudication commenced and the court found that the decision to serve the
considerable body of evidence at the time of referral was ‘clearly deliberate’. Judge
Wilcox, in the course of his judgment, considered the recourse available to the
adjudicator in the situation posed before him:
“Mr. Juniper [the adjudicator] did not appear to appreciate that in
accordance with the rules of natural justice; he should either have excluded
Mr. Baker’s supplemental statement, or should have given Waterman a
reasonable opportunity of dealing with it. Under the applicable rules he was
precluded from taking the latter course because LAP declined to agree to the
necessary extension of time. He should therefore have excluded the evidence
... In fact he, avoided a decision as to whether or not the evidence should be
admitted and then based his decision upon Mr. Baker’s evidence without
giving Waterman a proper opportunity to deal with it. That was a substantial
and relevant breach of natural justice.”
62
The decision suggests that had the respondent’s complaint was merely that he
had been ambushed by an avalanche of evidence the court would still be compelled
to enforce the adjudicator’s decision. The premise which justified the dismissal of the
application for summary judgment in this case was the adjudicator’s failure to afford
the respondent an opportunity to deal with the additional evidence when this was
received. In an earlier part of his judgment, the learned judge had said:
“I agree with the submissions of Mr. Akenhead that mere ambush however
unattractive does not necessarily amount to procedural unfairness. It depends
upon the case. It may be an important part the context in which the
adjudicator is required to operate and in which his conduct may fall to be
judged in the light of the fundamental common law requirements statutorily
underpinned in... the Act.”
Notwithstanding the powers of the adjudicator as set out in the various
legislations, if an application and the response contain sufficient information, an
adjudicator can in fact determine the application purely based on the application and
response lodged, without the need for any further submission, inspection or
conference. In alternative, an adjudicator can in fact determine the application based
on additional submissions or documents which he can request from the parties.
However, the danger in adjudication process is that whether with or without the
additional submissions or documents, it must be highlighted to all parties and in his
decision.
In Pacol Ltd v Joint Stock Co Rossakhar 16 , when the matter came before the
arbitrator, the issues between the parties had been defined, the arbitrators were in a
position to decide as the only matters remained to be determined were related to the
quantum and as for the liability, there were no doubts as the respondent had admitted
liability. The arbitrators dealt with the matter as a document only arbitration.
Notwithstanding the clear admission of liability on the part of the respondent, the
16
(2000) 1 Lloyd’s Rep 109
63
arbitrators went on to find that the respondent was not in breach of its payment
obligations and dismissed the claimant’s claim in its entirety.
In holding that there was serious irregularity within the meaning of the
Arbitration Act 1996, Colman J accordingly set aside the award and cautioned:
“It is particularly important in arbitrations which are conducted on
documents alone that arbitrators should be alive to the dangers of
introducing into their awards matters which have never been, or have ceased
to be, matters in issue between the parties. This case is a particularly glaring
example of the arbitrators simply ignoring the definition of issues which had
been arrived at prior to the time when they had to determine the issues then
referred to them.
In a paper arbitration, the temptation to arrive at a conclusion which may not
have been envisaged by either party by reference to matters upon which the
parties have not had the opportunity of addressing the arbitrators or in
respect of which they have not had an opportunity of adducing further
evidence, may be a particular temptation which arbitrators should be careful
to avoid.”
The case of CIB Properties Ltd v Birse Construction 17 was one of the more
extraordinary examples of adjudications and as far removed from the intention
behind the HGCRA 1996 as one might get. In the case, CIB’s costs of two
adjudications, one relatively short and the other lasting 100 days by agreement of the
parties, amounted to £973,732.41 and Birse’s costs amounted to £1,161,341.
The claim was from some £14m, and an award of over £2m was made by Mr.
John Uff QC. There was a hearing in front of HHJ Toulmin QC on 19th October 2004
17
(2005) BLR 173
64
raising a number of issues. The key issue is that Birse argued that the size and
complexity of the dispute meant that it could not be resolved fairly by adjudication.
The starting point for the analysis of HHJ Toulmin QC was section 108 of the
HGCR Act;
Section 1 - gives a party a right to refer a dispute or difference adjudication.
Section 2 - requires the Adjudicator to reach a decision provided the
conditions in the clause could be met.
This meant that the Adjudicator must be able to discharge his duty to reach a
decision impartially and fairly within the time limit stipulated in section 2(c) and (d).
As is well known, the time limit is 28 days, extended by 14 days with consent of the
referring party or (implicitly) such other time as may be agreed.
The Judge endorsed the approach of John Uff, who in turn had met the
submissions of Birse by reference to the judgment of Judge Wilcox in London &
Amsterdam v Watermans Partnership 18 , in which he said:
“This scheme does not envisage that there should be a provisional resolution
of a dispute by an Adjudicator at all costs. That would be far greater an
injustice than that which the HGCRA Act was enacted to remedy”.
Mr. Uff QC set himself some tests which could be transposed into questions
which an adjudicator must be able to answer in the affirmative before he is capable
of giving a decision compliant with the requirements of natural justice.
18
(2004) 94 Con LR 154
65
1. Have I sufficiently appreciated the nature of each issue referred to me so
that I can give a decision on that issue?
2. Have I understood the case of each party in relation to the principal
issues?
3. In relation to quantum, am I able to do substantial justice between the
parties and arrive at an overall figure which reflects the merits of the case
as I find them?
The conclusion of John Uff was that if he had not been able to satisfy these
conditions, he would not have reached a decision in the adjudication on some or all
of the issues referred to him. In the event, Birse had agreed to a number of extensions
throughout the adjudication amounting to 100 days. In the time period in fact
allowed, and on the basis of the hearing as it proceeded and the written submissions,
Mr. Uff considered that he could answer the questions in the affirmative and
therefore decided the matters before him.
The crucial finding of the judge was that a respondent is not bound to agree to
any extensions of time, even if the refusal renders the task of the adjudicator
impossible in relation to the dispute in the form in which it is referred to him.
The recent decision of the Court of Session in the case of Ardmore
Construction Limited v Taylor Woodrow Construction Limited is a useful to all
practitioners that while it remains the courts’ stated policy not to interfere with
adjudications’ decisions but in cases where there has been a clear breach of natural
justice, they will refuse to enforce the decisions.
Ardmore and Taylor Woodrow entered into a contract for the carrying out of
certain ground works at a site in Glasgow. In May 2004 Ardmore made an
66
application to Taylor Woodrow for payment in respect of various heads of claim.
There were five heads of claim, one of which related to overtime. Taylor Woodrow
refused to make payment in respect of these items and the resulting dispute between
parties was referred to adjudication. On 8 October 2004, having received written
submissions from the parties and having held a hearing on 10 September 2004, the
adjudicator issued a decision ordering that Taylor Woodrow make payment to
Ardmore in respect of each of the various heads of claim.
The claim in relation to overtime was based on an argument that a letter
issued by Taylor Woodrow dated 2 July 2003 amounted to an instruction to
accelerate which had been issued in accordance with the parties’ contract. This was
the sole basis of Ardmore's claim for overtime. Taylor Woodrow, in response, argued
that the letter did not amount to a valid instruction, but if it did, then it was limited in
relation to its scope and it did not amount to an instruction that would allow Ardmore
to be paid for all extra hours worked by them.
The adjudicator, in his decision, said the following in relation to overtime:
“The referring party’s working of weekend overtime was referred to in the
respondent’s letter of 2 July 2003 to the referring party. The respondent
contends that this was not an instruction, but on the plain reading of the
letter, I find an acceptance of a proposal is an instruction. I find the
instruction was limited to the areas for which the programmes had been
prepared, at that time. I also find that there was sufficient evidence thereafter
by way of correspondence, further programmes, Minutes of Meetings and
respondent’s interim payment notices, that the respondent either verbally
instructed the referring party to continue working weekends and other areas
or acquiesced and agreed to that additional weekend working in other
areas.”
67
Ardmore issued proceedings in the Court of Session to enforce the
adjudicator’s decision. This action was defended by Taylor Woodrow on the basis
that no submissions had been made to the adjudicator either in writing or at the
hearing on 10 September to the effect that they had either acquiesced in the working
of overtime or issued verbal instructions. Taylor Woodrow argued that to decide the
dispute on either of these two alternative bases, without having heard submissions,
amounted to a breach of natural justice by the adjudicator, rendering the whole
decision unenforceable.
The alleged breach of natural justice related only to that part of the decision
on overtime and in January 2005 Ardmore successfully persuaded Lord Clarke that
even if there were an issue regarding the overtime part of the award the other aspects
of the decision were severable and that they could be enforced notwithstanding any
issues regarding overtime. The court accepted these submissions (although no written
judgment was issued) so the remaining issue between the parties related to the part of
the award in respect of overtime.
The case proceeded to a hearing with evidence at which the important issue
for the court was whether or not submissions had been made to the adjudicator
regarding either the issuing of verbal instructions or acquiescence on the part of
Taylor Woodrow. It was accepted by Senior Counsel for Ardmore that unless the
evidence showed that such submissions had been made the adjudicator would have
been guilty of a breach of natural justice and that part of the decision relating to
overtime would be unenforceable.
Taylor Woodrow called as witnesses the people who had attended the
meeting with the adjudicator on 10th. September, 2004. Their evidence was that there
had been no discussion of either acquiescence or verbal instructions. They said that
had such matters been raised then they would have objected and had that objection
not been sustained they would have required an opportunity to investigate the new
claim which was being made.
68
Ardmore called as witnesses the solicitor who had represented them at the
hearing and the adjudicator himself. The adjudicator’s evidence was to the effect that
the word ‘acquiescence’ had not been used at the hearing but that he had understood
the general tenor of the Ardmore submission to be that because Taylor Woodrow had
made payment in respect of overtime there had been ‘passive assent’ on their part
which he took to be akin to acquiescence. He considered that this was a running
feature of the submissions made by Ardmore at the hearing although he did not have
any notes to confirm this. The solicitor who had acted for Ardmore at the hearing
gave evidence to the effect that he had made submissions based upon personal bar at
the hearing (such that Taylor Woodrow, by their words or conduct, were barred from
asserting that they had not instructed or agreed to Ardmore working weekend
overtime) and that he was confident they had been understood by the adjudicator.
The court preferred the evidence of Taylor Woodrow’s witnesses and found
that submissions of the sort described by the adjudicator and the solicitor acting for
Ardmore had not been made at the hearing and, having formed that view, refused to
enforce that part of the decision relating to overtime.
In refusing to enforce the adjudicator’s decision on overtime Lord Clarke said
the following:
“I would like to stress, in conclusion, that I very much hope that this is a rare
case, peculiar to its facts. I need no persuasion that, on the whole, the courts
should be generally resistant to invitations to pick over adjudicator's
decisions and to analyze over closely, and critically, their procedures.
Nevertheless elementary and basic principles of natural justice have to be
observed by adjudicators…and if they behave, in reaching their decisions, in
a manner which, on an objective basis, involves a disregard of fair play, the
consequences of which appear to have had a substantial and material effect
on the adjudicator's decision, then the court should be prepared to intervene.
The present case is, in my judgment, on the facts, one such situation. It
69
involves a clear and substantial breach of natural justice in relation to
matters which were determinative of the adjudicator's decision.”
As Lord Clarke indicated, this was an unusual case given that the adjudicator
himself gave evidence and that there was such a stark difference between the parties’
evidence regarding what had been said at the hearing.
The case serves to remind us that notwithstanding the less formal nature of
the adjudication process (at least when compared to court or arbitration) there may be
a limit to which a less formal approach is appropriate. However, it will be interesting
to observe whether, in light of this case, adjudicators move towards more formal
hearings where, for example, submissions and evidence are transcribed or minutes of
the meeting are circulated for agreement.
5.4
Conclusion
The English position was clearly established by the judgment of Humphrey
Lloyd QCJ in the case of Balfour Beatty Construction Ltd v Lambeth London
Borough Council 19 in which he noted with authority that the result of any breach of
natural justice would depend on whether the subject breach relates to ‘a point or
issue which is decisive or of considerable potential importance to the outcome’. The
judgment also considered that the ‘principles of natural justice applied to an
adjudication may not require a party to be aware of the case that it has to meet in the
fullest sense’.
Nevertheless, the New South Wales’s position was established by two Court
of Appeal decisions of Brodyn Pty Ltd v Davenport 20 and TransGrib v Siemens
19
20
(2002) EWHC 597
(2004) NSWCA 394
70
Ltd 21 . The compliance with the principles of natural justice on both cases was
envisaged to be higher that those propounded by the English Court. In his judgment,
Hodgson JA considered that there must been ‘a bona fide attempt by the adjudicator
to exercise the relevant power relating to the subject matter of the legislation’ and
there must be ‘no substantial denial of the measure of natural justice that the Act
requires to be given’.
The recourse available to an aggrieved party in the face of the adjudicator’s
failure to observe the principles of natural justice shall be to seek a court injunction
and declaration that the adjudicator’s decision is void.
Breach would therefore include dealing with one party in the absence of the
other, an unjustified refusal to hear evidence, not giving opportunity to a party to be
heard, having shown bias or the potential for bias against a party in the arbitration or
adjudication, giving parties grounds to suspect that the arbitrator or adjudicator may
not be able to act fairly in the resolution of the dispute.
21
(2004) NSWCA 395
CHAPTER 6
CONCLUSION AND RECOMMENDATIONS
CHAPTER 6
CONCLUSION AND RECOMMENDATIONS
6.1
Introduction
The experience from United Kingdom and Australia with adjudication show
that statutory adjudication does provides a quick determination or decision of a
dispute on a provisional interim basis, a decision which intended to be readily
enforceable pending the final determination of the disputes by arbitration or
litigation. It is envisaged that adjudication would be less formal than arbitration with
the adjudicator taking a somewhat more inquisitorial role as opposed to the
arbitration which is more adversarial. Furthermore, while the adjudicator has to
conduct himself fairly and impartially between the parties, the courts appear to
countenance some flexibility in the application of the principles of natural justice.
During the initial stage of operation of the Housing Grants, Construction and
Regeneration Act 1996 in the United Kingdom, one English judge anticipated that
the very essence of the adjudication as a fast-track approach to dispute resolution
may unsettle, at least in the initial stage, members of the bar who have been
72
accustomed to the more gradual process in arbitration or litigation. Dyson J in Macob
Civil Engineering Ltd v Morrison Construction Ltd 1 stated that:
“It is clearly Parliament’s intention that the adjudication should be
conducted in a manner which those familiar with the grinding detail of the
traditional approach to the resolution of construction disputes apparently
find it difficult to accept.”
Einstein J of the New South Wales (NSW) Supreme Court concurred with the
sentiment and in Brodyn Pty Ltd v Philip Davenport & Ors 2 , he conceded with
undiluted candor the difficulties posed by the constraints within which an adjudicator
has to arrive at his decision:
“What the Legislature has effectively achieved is a fast track progress
payment adjudication vehicle. That vehicle must necessarily give rise to many
adjudication determinations which will simply be incorrect. That is because
the adjudicator in some instances cannot be brought down; give the type of
care and attention to the dispute capable to being upon a full curial
hearing.”
There is this understandable anxiety that in the attempt to provide a quick
determination of a dispute, an adjudication process may not afford sufficient scope
for the careful analysis of evidence and facts. However, adjudication is only intended
as a fast track dispute resolution to ease the cash flow in the construction industry
and is not intended to provide the final word on a dispute.
1
2
(1999) BLR 93
(2003) NSWSC 1019
73
6.2
Research Findings
This research was conducted to determine the extend to which an
adjudication process conducted under the intense time constraint and within the
limitations envisaged for the process under the respective regimes can be expected to
observed the principles of natural justice or simply regarded as the principles of fair
play. While the manner by which the principles of natural justice apply to
arbitrations and litigations have been well established, it has been suggested that it
may be unrealistic to expect the adjudication process to adhered to the principles to
the same extend considering that adjudicators were acting under severe time
constraint. This was indeed the view gathered from the decisions of case law
following the enactment of the Housing Grants, Construction and Regeneration Act
1996 which was enforced in 1998.
In Macob Civil Engineering Ltd v Morrison Construction Ltd 3 , an adjudicator
without inviting parties to make representations on the payment mechanism of the
contract, decided that a notice to withhold payment was out of time. This essentially
undermined the respondent’s defense to the payment claim and appeared to be in
breach of the principles of natural justice. Nevertheless, the court held that this did not
prevent the decision of the adjudicator from being enforced. In arriving at his
decision, Dyson J considered that the courts should be prepared to tolerate a breach
of the principles of natural justice so long as these relate to procedural errors.
Subsequently, in Discain Project Services Ltd v. Opecprime Development Ltd 4 ,
Judge Bowsher QC construed the views expressed in Macob as suggesting that the
court may disregard breaches of the rules of natural justice as long as they produce
‘no demonstrable consequence’ on the outcome of the decision.
These views were roundly criticized by a number of writers. In particular,
Duncan Wallace wrote scathingly that they attribute to Parliament a highly
3
4
(1999) BLR 93
(2002) BLR 402
74
improbable intention that ‘an adjudicator’s decision, if arrived at in serious breach of
a principle of natural justice, must as a matter of law nevertheless be enforced in
circumstances where payment under an invalid decision could turn out to be
irretrievable and precipitate the insolvency of the party affected.’
Subsequent decisions in Scotland and the English Technology and
Construction Court sought to distance themselves from the position taken in Macob.
In Homer Burgess Ltd v Chirex (Annan) Ltd 5 the Outer House of the Scottish
Court of Session expressly doubted the position taken in Macob while Judge
Humphrey Lloyd, QC in Glencot Development and Design and Co Ltd v Ben Barrett
& Son6 was to rule that an adjudicator ‘has to conduct the proceedings in accordance
with the rules of natural justice or as fairly as the limitations imposed by Parliament
permit’. The subject was considered further by Judge Lloyd in Balfour Beatty
Construction Ltd v. Lambeth Borough Council7. In the course of his judgment in
that case, the learned judge suggested that the basic principles relating to natural
justice which are applicable in arbitration are basically applicable to adjudication.
However, as to the significance of the breach, he thought that this would depend on
whether it relates to a point or issue which ‘is either decisive or of considerable
potential importance to the outcome’ or whether it is confined to a matter which is
merely ‘peripheral or irrelevant’.
It might be speculated that, from policy considerations, the early pronouncements on
this issue proved quite untenable as experience with adjudication increases within the
United Kingdom construction industry. Although adjudication was contemplated by
Parliament as a temporary ‘staging post towards final resolution’ of a dispute, it
turned out to be more than that. In Balfour Beatty, Judge Lloyd stated in his decision
that it is clear that adjudication is recognized as ‘having in itself considerable weight
and impact’ the effect of which goes beyond the originally intended result that it was
merely a decision which has to be observed for the time being. In effect, in a vast
5
(2000) BLR 124
(2001) BLR 207
7
(2002) EWHC 597
6
75
majority of the cases, parties were prepared to accept the position as determined by
the adjudicator despite the rough nature of the process. An adjudication process
which is founded on the principles of natural justice enhance the opportunities for
parties to use the adjudicator’s decision as a basis for the satisfactory resolution of
the basic dispute and improve the chances that the subject dispute would not have to
proceed to arbitration or litigation.
As a consequence, after some initial uncertainty, it has been suggested that
the position in the United Kingdom is that, in relation to the principles of natural
justice, “that which is applicable in arbitration is basically applicable in
adjudication”. The New Zealand and Singapore Acts affirm this position. They
provide expressly that an adjudicator has to apply the principles of natural justice in
the determination of the dispute before him. However, given that adjudication is but
an imperfect mirror of arbitration in terms of objectives and hence the very nature of
the processes involved, the question remains as to whether the standard required in
practice is that which is expected of an arbitrator. In Balfour Beatty Construction Ltd
v Lambeth London Borough Council 8 , Judge Humphrey Lloyd QC considered that
the “principles of natural justice applied to an adjudication may not require a party to
be aware of the case that it has to meet in the fullest sense since adjudication may be
inquisitorial or investigative rather than adversarial.” In the same passage of his
judgment, he further suggested that what the application of the principles of natural
justice amount to is simply that each party should be confronted with “the main
points relevant to the dispute and to the decision”.
8
(2002) EWHC 597
76
6.3
Recommendations
Whilst Malaysia is presently contemplating the idea of adopting statutory
adjudication, one very important issue that require great attention would be whether
the Malaysian court will be able to compliment the new legislation when it come in
force by ensuring that the enforcement of the decisions of adjudicators can be done
very quickly, otherwise the objective of the legislation will be defeated.
Considering the fact that the Malaysian judiciary system is faced with a
humongous back-log of cases, it will be a tall order to expect the Malaysian court to
swiftly enforce an adjudicator’s determination. Therefore, its essential for Malaysian
Courts to resolve their present problems and be prepare to embrace the proposed
legislation in order that confidence can be maintained in the system.
Dr. Thomas E. Uher, in his paper presented in the international forum in
Kuala Lumpur, 2005, indicated that the utilization of the Act for the initial five years
in New South Wales has been slow and he attributed this mainly to the lack of
awareness and knowledge of the Act. It is therefore essential for the Malaysian
construction industry to promote the proposed Act vigorously through a range of
programs among organizations and practitioners within the construction industry.
Knowledge and awareness of the Act will be essential to ensure the success of the
Act and the Malaysian construction industry achieving its quest for zero payment
default.
77
6.4
Conclusion
Hence, by looking at the decisions in UK and Australia on the subject of
adjudication and the principles of natural justice, the level compliance with the
principles of natural justice in adjudication although not comparable to litigations or
arbitrations, but only on issues that are fundamentally important where the principles
of natural justice will have to be strictly adhered despite its rough nature of the
process in adjudication. While both adjudicators and arbitrators are required to be
impartial in the conduct of the respective dispute resolution proceedings, the
impartiality take into account the different circumstances of adjudication as
compared to arbitration.
This principle was clearly illustrated in the cases shown: Balfour Beatty
Construction Ltd v Lambeth London Borough Council 9 ; Glencot Development and
Design Co Ltd v Ben Barrett & Son (Contractors) Ltd 10 and the New South Wales
case of Musico v Davenport 11 .
Judges of the Technology and Construction Court have rightly been astute to
examine technical defenses to such applications with a degree of skepticism
consonant with the policy of the Act, aptly described by Ward LJ in R J T Consulting
Engineers Limited v D M Engineering (Northern Ireland) Limited 12 as "pay now,
argue later”. This will undoubtedly clear the fear in some practitioners that if strict
adherence to the principles of the natural justice, it will lead cases of ‘ambush’.
9
(2002) EWHC 597
(2001) BLR 207
11
(2003) NSWSC 977
12
(2002) EWCA Civ 270; (2002) 1 WLR 2344
10
78
The experience from the United Kingdom as observed by Dr Robert Gaitskell
QC in the recently concluded international forum in Kuala Lumpur, have suggested
that even where a party feels that an adjudicator is quite wrong in the determination,
there is a general reluctance to pursue the matter in arbitration unless the difference
involved is of an intolerable level. He went on to conclude that statutory adjudication
in United Kingdom is an overwhelming success.
Although the critics’ main concern on adjudication is that being a fast track
process, it can lead to an injustice. Whilst adjudication cannot be said to deliver
‘perfect’ justice, at least it overcomes some of the injustice and bias in the
construction industry. It does provide justice for many who would not otherwise
receive justice. Therefore, the critics should be directing their criticism to the
injustices inherent in the legal system. If only the courts could deal with the issues in
the construction industry inexpensively and expeditiously as the adjudicators do, then
they would be no scope for the legislation. As it is often quoted, ‘Delayed Justice can
be Justice Denied’.
REFERENCES
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APPENDICES
A
Housing Grants, Construction and Regeneration Act 1996,
United Kingdom
B
Building and Construction Industry Security of Payment Act
1999, New South Wales
APPENDIX A
A
Housing Grants, Construction and Regeneration
Act 1996, United Kingdom
83
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
84
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
85
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
86
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
87
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
88
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
89
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
90
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
91
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
92
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
93
APPENDIX A
Housing Grants, Construction And Regeneration Act 1996, United Kingdom
APPENDIX B
B
Building and Construction Industry Security of
Payment Act 1999, New South Wales
94
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
95
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
96
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
97
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
98
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
99
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
100
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
101
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
102
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
103
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
104
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
105
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
106
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
107
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
108
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
109
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
110
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
111
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
112
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales
113
APPENDIX B
Building And Construction Industry Security Of Payment Act 1999,
New South Wales