The High Court decision in AECOM Design Build Ltd v Staptina Engineering Services Ltd [2017] EWHC 723 (TCC) provides judicial guidance on the scope of an adjudicator’s jurisdiction, where AECOM appears to have accidentally extended the scope of the adjudication in Response. The case serves as a powerful reminder that courts will adopt a broad, practical approach in defining a ‘dispute’ and will be slow to interfere with an adjudicator’s decision, reinforcing the high threshold required for challenges based on alleged breaches of natural justice.

Factual Background

AECOM engaged Staptina for works associated with a mechanical installation sub-contract at the Long Reach treatment works for Thames Water. The agreement was based on an amended NEC ECSS form from June 2005. It appears relationships started turning acrimonious after a smash and grab adjudication and on 30 March 2016, AECOM terminated the sub-contract pursuant to ‘Clause 90.3 – Reason 5’ – a no-fault termination for convenience.

Staptina submitted an application for the amount it considered due and AECOM responded by asserting an entitlement to deduct significant sums from Staptina’s termination account, claiming costs of engaging third parties to rectify alleged defects. This fundamental disagreement over AECOM’s right to make deductions following a no-fault termination formed the basis of the third adjudication.

Staptina issued its Notice of Adjudication on 24 November 2016 with the relief sought: “a declaration that following termination pursuant to Reason 5… [AECOM] was/is not entitled to make any deductions against [Staptina’s] termination account for alleged Defects not rectified or at all.” The redress also included the phrase “or such declaration as the Adjudicator deems proper.”

The adjudicator decided that AECOM was, in principle, entitled to make deductions from Staptina’s termination account for proven defects. However, she imposed a crucial qualification on this right that any such deduction must be confined to the sum it would have cost Staptina to remedy the relevant defect. Her reasoning was that AECOM, by terminating for convenience, had itself prevented Staptina from returning to site to correct the defects, and therefore could not recover the cost of having a third party do the work.

AECOM disagreed with the qualification of its right to make deductions, prompting it to issue a Part 8 claim in the TCC to have the decision severed and the qualification declared unenforceable.

Jurisdiction

AECOM argued that the dispute was a binary question on the principle of deductions, either “AECOM are entitled to make deductions for defects or … AECOM are not entitled to make deductions for defects” and the adjudicator had no power to decide how deductions should be calculated. Staptina argued that the dispute was a “wide point of principle” concerning the cost of defects, implicitly raising the valuation method and, in any event, AECOM expanded the scope of the dispute with its comment in the Response: “…the Contractor is entitled to make its assessment by reference to the cost of third-party correction”.

The court referred to Stellite Construction Limited v Vascroft Contractors Limited [2016] EWHC 792 (TCC), where Carr J stated:

“52. To determine whether an adjudicator’s decision is responsive to the dispute referred to him it is necessary to:  a) Determine from the adjudicator’s decision what he actually found… b) Analyse what claims and assertions were made by the referring party prior to adjudication broadly, and in the round… Thus, a dispute somewhat like a snowball rolling downhill gathering snow as it goes, may attract more issues and nuances as time goes on… c) Analyse whether the whole of the pre-adjudication claims and assertions were referred to adjudication…d) Consider the pleadings in the adjudication to determine what the dispute encompassed, or through the response and the reply and the evidence deployed by both parties during the adjudication became.”

The court comprehensively rejected AECOM’s narrow and overly legalistic interpretation of the dispute referred to adjudication. Mr. Justice Fraser’s found that AECOM’s argument that the adjudicator was confined to a simple “yes” or “no” answer to be conceptually flawed. He stated that a dispute cannot be defined by its potential answers, as this would be a circular and an adjudicator answering the question in the wrong way is not a matter of jurisdiction.

Further, the court held that the Notice’s reference to “deductions for the cost of Defects” was broad enough to encompass the principle of how such costs were to be calculated and it was not limited to a simple question of whether deductions were permitted at all. In any event, the court held that, even if the original scope had been narrow, AECOM’s own Response had widened the adjudicator’s jurisdiction.

Obiter, Mr. Justice Fraser briefly commented on the effect of “catch-all” wording in a Notice where the adjudicator had relied on the wording of “such declaration as the Adjudicator deems proper.” He stated that while such wording forms part of the material to be considered when determining the scope of a dispute, it is “unlikely to be determinative on its own” and does not give an adjudicator “carte blanche” to decide matters wholly outside the dispute referred.

Natural Justice

AECOM argued that even if the valuation principle was within the adjudicator’s jurisdiction, this was one of those cases where a central finding by the adjudicator was made by her going off on a frolic of her own, and she should have canvassed the parties. Staptina argued that the adjudicator did not introduce a new issue and the underlying issues were fully canvassed, and an adjudicator is not bound to choose only between the two positions argued by the parties.

The court was dismissive of the argument that the adjudicator had breached the rules of natural justice. Referencing the principles established in cases such as Cantillon v Urvasco and Roe Brickwork v Wates, the judge concluded that the adjudicator did not go on a frolic of her own but decided a point of contractual construction based on the material that was fully before her. Further, the judge explained that: “questions of contractual interpretation in particular will often be capable of more than two possible answers, and so the correct answer may not have been expressly proposed by either one of the parties. That does not mean that by choosing a different answer, the adjudicator is breaching natural justice by failing to notify the parties of this and inviting further submissions.”

Takeaway

Even though the court held that the scope of the Notice was broad enough to include the calculation of deductions, it is likely that had AECOM not stated its intention to deduct the costs of others to rectify the defects – an intention that was so brief to seemingly not have registered with Staptina – the adjudicator would have likely not decided on that point. As was said in Urvasco, it would offend reason if one could run a defence and avoid the consequences – it would appear that such defence need not be deliberate.