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Monday, 11 January 2021

Global Switch Estates 1 Ltd v Sudlows Ltd

[2020] EWHC 3314 (TCC)  

GSEL sought summary enforcement of an adjudication decision in the sum of just over £5 million plus the adjudicator’s costs of £80k. Sudlows said that the adjudicator:

(i) had failed to consider matters of loss and expense relied on as defences to GSEL’s claim which was a breach of the rules of natural justice;

(ii) had failed to consider and deal with an allegedly fraudulent call on a bank guarantee, again a breach of the rules of natural justice; and 

(iii) had wrongly came to decisions contrary to the decision of a previous adjudicator, thereby acting in excess of jurisdiction.

The dispute arose out of a fit-out project at a specialist data centre in London. The contract was a JCT Design and Build 2011 with amendments. Mrs Justice O’Farrell emphasised that the courts take a robust approach to adjudication enforcement, observing that:

“i) A referring party is entitled to define the dispute to be referred to adjudication by its notice of adjudication. In so defining it, the referring party is entitled to confine the dispute referred to specific parts of a wider dispute, such as the valuation of particular elements of work forming part of an application for interim payment.

ii) A responding party is not entitled to widen the scope of the adjudication by adding further disputes arising out of the underlying contract (without the consent of the other party). It is, of course, open to a responding party to commence separate adjudication proceedings in respect of other disputed matters. 

iii) A responding party is entitled to raise any defences it considers properly arguable to rebut the claim made by the referring party. By so doing, the responding party is not widening the scope of the adjudication; it is engaging with and responding to the issues within the scope of the adjudication.

iv) Where the referring party seeks a declaration as to the valuation of specific elements of the works, it is not open to the responding party to seek a declaration as to the valuation of other elements of the works.

v) However, where the referring party seeks payment in respect of specific elements of the works, the responding party is entitled to rely on all available defences, including the valuation of other elements of the works, to establish that the referring party is not entitled to the payment claimed.

vi) It is a matter for the adjudicator to decide whether any defences put forward amount to a valid defence to the claim in law and on the facts. 

vii) If the adjudicator asks the relevant question, it is irrelevant whether the answer arrived at is right or wrong. The decision will be enforced.

viii) If the adjudicator fails to consider whether the matters relied on by the responding party amount to a valid defence to the claim in law and on the facts, that may amount to a breach of the rules of natural justice. 

ix) Not every failure to consider relevant points will amount to a breach of natural justice. The breach must be material and a finding of breach will only be made in plain and obvious cases.

x) If there is a breach of the rules of natural justice and such breach is material, the decision will not be enforced.”

GSEL said that, in the adjudication GSEL claimed payment of the balance due to it from Sudlows based on a true valuation of Interim Applications 27. 

In its defence, Sudlows relied on its claims for loss and expense as part of its true valuation case. This included claims in respect of the high voltage cables and overloading of the roof. GSEL’s position was that the adjudicator could proceed on the assumption, in Sudlows’ favour, that the high voltage cable was not installed defectively by Sudlows and that it had not overloaded the roof. On that basis, questions of liability for these defective works were excluded from the scope of the adjudication. 

The Judge agreed that this addressed any claims that might be made by GSEL for contra charges in respect of the defective works but it did not address the claims made by Sudlows for additional payment in respect of the rectification costs and consequential loss and expense. These claims raised a potential defence to GSEL’s claim for payment in the adjudication. The adjudicator was required to determine whether, as submitted by GSEL, the loss and expense claims were unsubstantiated and invalid, or whether, as submitted by Sudlows, they amounted to a defence to the sum claimed by GSEL. 

Unfortunately, as the Judge said, the adjudicator did not consider these arguments because he assumed, wrongly, that he did not have jurisdiction to do so. 

The Judge accepted that the adjudicator was entitled to limit the declaratory relief to the issues of valuation identified by GSEL but the determination of the claim for payment required the adjudicator to consider all of the matters raised by Sudlows in support of its case that it was entitled to additional sums as part of the valuation. The failure to take into account Sudlows’ defence based on its additional claims for loss and expense amounted to a breach of the rules of natural justice. 

This plain and obvious breach of natural justice arose as a result of GSEL’s erroneous submission that the adjudicator did not have jurisdiction to consider Sudlows’ claims for loss and expense. GSEL’s position was that Sudlows should pay to it the sum of £6.8 million; Sudlows’ position in the adjudication was that GSEL should pay the sum of £5.5 million. The adjudicator awarded GSEL £5 million. The adjudicator’s jurisdictional error precluded any consideration of a very substantial part of the defence. In those circumstances, that amounted to a material breach of the rules of natural justice and rendered the decision unenforceable. 

In respect of the bank guarantee issue, the adjudicator did consider the substance of Sudlows’ claims, holding that the material presented by Sudlows in the adjudication did not demonstrate that the call on the guarantee was illegitimate. That was a finding of fact that he was entitled to make on the evidence before him. It was irrelevant whether that  finding was right or wrong because the adjudicator asked the right question. It follows that this issue would not render the decision unenforceable.

Sudlows also said that the adjudicator wrongly came to decisions that were contrary to the decisions of a previous adjudicator and so exceeded his jurisdiction. Once an adjudicator has reached their decision then, unless and until challenged in arbitration or the courts, it is binding on the parties: it is the decision that binds the parties; that includes the essential components or basis of the decision but not the adjudicator’s reasoning for the decision.

This was not a case in which the adjudicator “trespassed” on an earlier decision. The second adjudication was solely concerned with determining Sudlows’ entitlement to extensions of time in respect of the main fit-out works. The adjudicator did not consider or adjudicate on Sudlows’ entitlement to loss and expense. In the current adjudication, the adjudicator valued Sudlows’ claims for loss and expense in respect of the extensions of time, rejecting most of them. 

The Judge stressed that those findings were ones that the adjudicator was entitled to make on the evidence. Even if he was wrong in the contractual analysis or assessment of the evidence, those errors would amount to errors of law and/or fact which on their own would not render the decision unenforceable. 

In conclusion, the Judge held that the adjudicator was misled by GSEL and wrongly failed to consider and deal with matters relied on by Sudlows as defences which amounted to a breach of the rules of natural justice. Crucially, this jurisdictional error was critical to the determination of the dispute as it led to the exclusion of loss and expense claims which were material to the true valuation of Interim Applications 27 and the amount of any payment due between GSEL and Sudlows. 

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