Out-Law Analysis 6 min. read
15 Oct 2021, 1:45 pm
South Africa’s Supreme Court of Appeal (SCA) has reinforced the purpose of adjudication in settling disputes under construction contracts, confirming that an adjudicator’s decision which has not been revised by a tribunal remains binding and enforceable.
The ruling, which dealt with an adjudicator’s decision under the NEC3 Engineering Construction Contract, is another example of the court’s position on the enforcement of adjudication awards. The court takes a firm stance on unsuccessful parties attempting to circumvent their payment obligations under a binding and enforceable adjudication award which has not been revised by an arbitrator or the courts. An unsuccessful party to an adjudication should follow the due and proper processes, as provided in the contract, when dissatisfied with the award.
In September 2014 Eskom, as employer, entered into an NEC3 Engineering Construction Contract with Areva NP for the replacement of the steam generators at the Koeberg nuclear power station in Cape Town (‘the contract’). Areva, the contractor, later ceded the contract to Framatome.
The contract envisaged that the employer would appoint a project manager to manage and administer the contract, with the ability to make decisions on behalf of the employer. The project manager also had a role to play in respect of assessing ‘compensation events’ under the contract, allowing the contractor to claim additional payment and extra time from the employer for events not arising from the contractor’s own fault.
On 29 May 2017, the project manager notified Eskom of a compensation event after the parties agreed there was a need to redefine certain key dates under the contract. A dispute arose between the parties as to whether the project manager’s notification amounted to a compensation event and the consequences of the changed key dates. Framatome referred the dispute to adjudication (‘adjudication 7’), including its own assessment of the impact of the revised key dates on the remaining dates, sectional completion and completion dates as well as the prices. The adjudicator found that the project manager’s instruction constituted a compensation event and held that the dispute concerned “the manner in which [the] compensation event was implemented which needs to be evaluated”. Eskom did not submit any notice of its dissatisfaction with the decision.
The court takes a firm stance on unsuccessful parties attempting to circumvent their payment obligations under a binding and enforceable adjudication award which has not been revised by an arbitrator or the courts
The project manager did not assess the compensation event following the adjudicator’s decision, even after receiving a notification requesting assessment from Framatome. This meant that fallback provisions in the contract applied, with the effect that Framatome’s quotation was deemed accepted by the project manager.
Framatome then notified the project manager and Eskom of a dispute regarding the project manager’s assessment. This dispute was again referred to adjudication (‘adjudication 11’), with Framatome requesting the adjudicator to determine whether the project manager had made a full assessment of the compensation event in due time, as directed by adjudication 7; whether the project manager had properly assessed the impact of the change to key dates; and whether Framatome’s quotation was deemed accepted by Eskom. The adjudicator found that Eskom had failed, under the project manager’s assessment, to make a full assessment of the compensation event in due time as required by adjudication 7 and the contract. He also found that Framatome’s quotation was deemed to have been accepted by Eskom. This meant that the adjusted key dates, sectional completion dates, completion dates, activity schedule and payment schedule in Framatome’s quotation become contractually binding.
Eskom notified the adjudicator of its dissatisfaction, and Framatome began enforcement proceedings in the High Court in Johannesburg.
The High Court found in favour of Framatome in respect of adjudication 7, on the basis that the dispute fell within the jurisdiction of the adjudicator and that Eskom neither objected to that decision nor gave notice of its intention to refer the decision to arbitration. However, it also upheld Eskom’s argument that the adjudicator in adjudication 11 did not decide the dispute that was referred to him under the contract by the parties. In essence, the High Court found that the adjudicator had answered the wrong question, and there was no mention at all in the referral about whether the project manager timeously issued the assessment.
Before the SCA, Framatome argued that the courts have repeatedly confirmed that an adjudicator’s decision is final and binding until set aside by the tribunal. It also argued that the High Court’s decision incorrectly introduced a subjective judicial discretion into the enforcement of adjudicator’s awards by concluding that “a very good prospect of successfully establishing that an adjudicator acted outside his jurisdiction in respect of [adjudication 11] and that the decision is not binding upon the parties and is unenforceable”.
Eskom put forward three grounds in its defence to the appeal: adjudication 11 was not in respect of the dispute notified; adjudication 7 in respect of the project manager’s notification of the event could only have been notified and referred to the adjudicator under the terms of the contract; and that by deeming Framatome’s quotation to be acceptable, the adjudicator purported to vary the terms of the contract, which he did not have the power to do. Eskom further argued that the quotation was not one which fell within the fallback provisions as it was a calculation of the relief which Framatome sought in adjudication 7 rather than an assessment in connection with a compensation event.
Referring to an earlier case, the SCA considered whether the High Court correctly declined the order of enforcement sought by Framatome. Eskom argued that because adjudication 11 was based on adjudication 7, which it argued was invalid, the award was unenforceable and not binding. However, the SCA disagreed. It found that Eskom had had the opportunity to challenge adjudication 7 and had opted not to do so. Further, the High Court had rightly rejected Eskom’s argument in respect of adjudication 7, and it was not open to Eskom to reopen this argument in the appeal.
The SCA held that the purpose of adjudication 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”. Eskom’s interpretation therefore undermined the scheme of adjudication. The SCA found that Eskom’s arguments that the adjudicator exceeded his jurisdiction and that the proper procedure was not followed did not entitle Eskom not to comply with the adjudicator’s award, but that Eskom had not at any stage preceding the litigation claimed that the dispute referred to the adjudicator was outside of his jurisdiction. Lastly, the SCA found that Eskom was being disingenuous in refusing to comply with the payment of the adjudicator’s award, as it had accepted that the dispute fell within the arbitrator’s remit.
On the argument relating to Framatome’s quotation, the SCA referred directly to the fallback provisions in the contract and held that Eskom’s argument had no merit. Eskom did not object to Framatome’s quotation as submitted to the adjudicator in the referral notice. Whether the quotation itself or the process for the deemed acceptance of that quotation was valid was an issue for the arbitrator to deal with. The SCA held that the basis on which Eskom resisted the payment to the Framatome had no merit. Under arbitration 11, the amounts claimed were due and payable as Framatome’s quotation had been deemed acceptable by the project manager. The SCA also found that what Framatome claimed was consistent with the contractual provisions.
Lastly, the SCA considered whether the award in adjudication 11 was binding on the parties. It found that the adjudicator had formulated the dispute as it was referred to him, and that at no stage did he depart from the real dispute between the parties. The High Court had wrongly focused its attention on the words “timeously or in due course” in the adjudicator’s award and concluded that the adjudicator had exceeded his jurisdiction. Instead, it should have looked at the dispute holistically, taking into account how the parties had conducted themselves.
Adjudication is intended as a temporary solution allowing for interim payments, subject to revision by a court or arbitral tribunal, in the event of a dispute between the parties, with provisions requiring that payment be made even before arbitration a “strong indication” of the ousting of a court’s jurisdiction to review the award. The SCA found that the High Court erred in its finding that the adjudicator had answered the wrong question.
Co-written by Kirsten Gilbert-Dempsey of Pinsent Masons
07 Jul 2021