Enforcement of adjudicator’s decisions: lack of jurisdiction

The principles in relation to enforcement of adjudicators’ decisions may be summarised as follows:  

  • Adjudicators’ decisions are binding: courts will enforce adjudicators’ decisions, regardless of whether they are correct or not (whether on points of law or fact). Where an adjudicator has jurisdiction, his substantive decision is binding. An unsuccessful party in an adjudication is required to pay up: its recourse will be to initiate arbitration or legal proceedings to have the adjudicator’s decision overruled.
  • Whilst the substance of an adjudicator’s decision is binding, an adjudicator cannot determine his own jurisdiction in a binding way (unless the parties have given the adjudicator power to do so). If the adjudicator’s decision in relation to his jurisdiction is incorrect, then the adjudicator’s decision cannot stand.
  • Challenges to an adjudicator’s decision on the basis of a lack of jurisdiction are generally successful in only the plainest of cases.  

When ‘substance’ and ‘jurisdiction’ overlap

What is the position where:  

  • the adjudicator has jurisdiction to make a decision on the substance of the dispute (such as the scope of the contract which contains the adjudication clause under which he is appointed);
  • the adjudicator determines (as he has jurisdiction to do) that the contract was subsequently varied and enlarged in scope by the parties; and
  • it automatically follows from his substantive decision (that the scope of the contract has been enlarged) that the adjudicator has jurisdiction to determine all of the disputes which have been referred to him?  

Can the adjudicator (by his substantive decision, which is binding on the parties) determine his jurisdiction?  

This issue was raised in the following case:  

Air Design (Kent) Limited and Deerglen (Jersey) Limited [2008] EWHC 3047 (TCC)

The contractor and sub-contractor entered into a sub-contract which contained an adjudication clause. The sub-contractor subsequently undertook various other works, pursuant to three letters of intent. Disputes arose which the sub-contractor referred to adjudication.  

The adjudicator issued his decision in favour of the sub-contractor; the contractor refused to pay; and the sub-contractor brought proceedings to enforce the adjudicator’s decision.  

The contractor raised a jurisdictional challenge during the proceedings, and then resisted the enforcement proceedings on the basis that the adjudicator had no jurisdiction.  

The contractor’s arguments

The contractor argued that the adjudicator had no jurisdiction because:  

  • there were four contracts between the parties; disputes arose out of three, if not four, of those contracts;
  • only the sub-contract contained an adjudication clause, so the adjudicator had no jurisdiction over the disputes which arose under the other three contracts.  

The adjudicator’s decision on his jurisdiction

The adjudicator rejected the argument that the parties had entered into four separate contracts, finding that the works in question were all instructed and carried out as part of a single contract (as varied by the three letters of intent).  

The adjudicator therefore determined (in a non-binding manner) that he had jurisdiction to determine all the disputes referred to him (which he proceeded to do).  

Did the adjudicator have jurisdiction?

The court found that the adjudicator did have jurisdiction:  

  • It was within the adjudicator’s substantive jurisdiction to decide whether there had been variations to the contract pursuant to which he had been appointed as adjudicator.  
  • The contractor could not validly challenge the adjudicator’s decision on the grounds that the adjudicator was wrong, as a matter of fact or law, in determining (as he had done) that there was only one contract (which had been varied), as opposed to a series of later legally unconnected contracts.  
  • It was immaterial whether the adjudicator was right or wrong in finding that there was effectively one contract (which had been varied). Any such error did not mean that the adjudicator did not have jurisdiction.  
  • Even if (contrary to the court’s view) it did matter whether the adjudicator was right or wrong in finding that there was one contract (which had been varied) the adjudicator still had jurisdiction because the court agreed with the adjudicator’s decision that the three letters of intent were simply variations of the original sub-contract. The adjudicator therefore had jurisdiction to determine the disputes referred to him.  

Stays of execution: claimant financially insecure

The adjudicator had made an award in favour of the sub-contractor for approximately £145,000.  

Having failed in its attempt to resist enforcement, the contractor then sought a stay of execution on the basis that the sub-contractor would not be able to repay any sum paid to it (pursuant to the adjudicator’s decision) if it was subsequently determined (by arbitration or legal proceedings) that the sub-contractor was not entitled to all or part of it.  

The contractor based his argument on the fact that the latest available accounts of the sub-contractor (for the year ended 2007) disclosed net assets of £831. Moreover, the accounts of the sub-contractor revealed a considerable reduction in net assets over recent years: from (approximately) £75,000 to £21,000 to £831 (for the years ending 31 January 2005, 2006 and 2007 respectively).  

Will the court grant a stay of execution in adjudication proceedings where there are concerns regarding the claimant’s financial standing and its ability to repay any amount of an adjudicator’s award which it is subsequently determined it was not entitled to?  

Stay of execution: legal principles

The court applied the principles set out in Wimbledon Construction Co 2000 v Derek Vago [2005] BLR 374:  

  • The probable inability of a claimant to repay the amount awarded by the adjudicator may constitute special circumstances rendering it appropriate to grant a stay.
  • However, no stay would usually be justified if:
    • the claimant’s financial position was the same or similar to its financial position at the time the relevant contract was made; or
    • the claimant’s financial position was due, wholly or in significant part, to the defendant’s failure to pay the sums which had been awarded by the adjudicator.  

Applying the legal principles

The court rejected the application for a stay of execution on the following grounds:  

  • The onus was on the contractor to establish that the sub-contractor was insolvent, and it had not done so.
  • The court would not speculate as to what the next set of accounts (which were not yet available) would or might show.
  • Even assuming that the sub-contractor’s assets were currently no more than £800, the sub-contractor was in no worse a financial position than it had been in April 2007 (when it entered into the sub-contract).
  • The fact that the contractor had no access to the accounts for the year ended 2007 when it entered into the sub-contract in April 2007 did not alter the position.  

Editors’ comments

Parties entering into contracts during these challenging economic times take note!  

If a party’s financial position is precarious when the relevant contract is entered into, obtaining a stay of execution of an adjudicator’s award in favour of that party may not be possible, even where the defendant had no access to the claimant’s accounts (to ascertain the claimant’s financial position) at the time the relevant contract was entered into.  

It is interesting that, in this case, the last accounts available before the relevant contract was entered into revealed a significantly healthier financial position than the accounts available at the time the relevant contract was entered into. (The last available accounts disclosed net assets of approximately £20,000 and the accounts at the time that the contract was entered into showed net assets of approximately £800). This did not affect the court’s decision.  

In the context of an adjudication award of approximately £145,000, it perhaps made relatively little difference to the court whether the sub-contractor’s net current assets were £830 or £20,000. In either case, the sub-contractor would probably be unable to repay a significant part of the adjudicator’s award.  

It would be interesting to know what the position would have been if (on different facts) the last accounts available before the relevant contract was entered into disclosed a much healthier balance (of say £200,000). Would the court have taken the same view?  

Can parties protect themselves against the risk that they may be required to pay out under an adjudication award to an impoverished party, who may be unable to repay any part of an adjudicator’s award which it is subsequently determined the impoverished party was not entitled to?  

One possibility may be to include a warranty in the relevant contract relating to the financial standing of each party (particularly where recent financial information about the contracting parties is not available at the time the contract is entered into). A court may be more likely to grant a stay of execution if a party had been misled as to the financial standing of the other party at the time the contract was entered into.  

Another possibility may be to provide in the adjudication provisions that any amounts awarded are to be placed in a trust account in joint names. It is a moot point as to whether or not such a provision is compliant with the Construction Act. Whilst trustee accounts would seem to run counter to the whole purpose of a quick and effective interim dispute resolution procedure, it is interesting that (when the Government considered whether to amend the Construction Act expressly to outlaw trustee accounts) it took the decision not to do so, instead preferring to rely on case law (which currently suggests that such provisions are not Construction Act compliant). 

View: Air Design (Kent) Limited and Deerglen (Jersey) Limited [2008] EWHC 3047 (TCC)