Ruling shows courts' reluctance to stop adjudications

Out-Law News | 23 Aug 2019 | 2:20 pm | 4 min. read

A recent ruling provides further evidence that courts in the UK will rarely intervene in order to stop a dispute from being resolved by adjudication, a specialist in construction and engineering disputes has said.

Alastair Walls of Pinsent Masons, the law firm behind Out-Law, was commenting after the Outer House of the Court of Session in Edinburgh rejected a hotelier's bid to prevent a construction company from seeking to resolve a dispute between them through adjudication.

Adjudication is a speedy and relatively informal means of dispute resolution for use in construction contracts.  Since the Housing Grants Act of 1996, a party to a construction contract has had a right to refer a dispute to adjudication "at any time". Adjudication decisions are only binding on parties until there is "final determination" of the dispute in court or arbitration.

Hotel developers Mars Black Sheep Hotels (MBSH) appointed construction company Douglas & Stewart UK (DSUK) as contractor for the refurbishment of three hotels in the Scottish Highlands. A dispute arose between MBSH and DSUK regarding payment, and this led DSUK to give notice of its intention to suspend performance of the contract. In response, MBSH terminated the contract.

DSUK referred the case to adjudication on 10 July this year. On 18 July, for the first time, MBSH claimed that DSUK had induced it to enter into the contract by misrepresentation, alleging that the construction company had misrepresented its experience and financial position.

MBSH brought proceedings before the Court of Session in which it sought an order declaring the contract void and the repayment of money it claimed it had overpaid, or alternatively damages for misrepresentation. MBSH also asked the court to issue an interdict – a legal injunction – to prohibit DSUK continuing with the adjudication, and a suspension of the adjudication process.

At an initial hearing at which DSUK was not represented, MBSH was successful in persuading a judge that it was entitled to an interim interdict, meaning that the adjudication would be halted until the litigation before the court was resolved. However, DSUK moved to get that decision recalled, and so the issue as to whether MBSH could stop the adjudication was heard in more detail by another judge, Lord Doherty.

Lord Doherty considered that although MBSH had shown on the face of it that it has a case, the balance of convenience favoured allowing the adjudication to proceed. The judge factored in that MBSH had not raised its claims of misrepresentation until after the adjudication had been commenced and the legislation which introduced adjudication for construction contracts gives parties the right to refer disputes to adjudication at any time. He said the court "should be very wary indeed of preventing a party from pursuing a right to adjudication".

Walls said that courts in England and Scotland have been grappling with legal issues thrown up by adjudication for more than 20 years.

"The general thrust of the various decisions is clear – in all but the most exceptional cases, courts will enforce adjudication decisions," Walls said. "Typically, courts will get involved after an adjudication decision has been issued, where a party seeks to avoid enforcement of the decision by challenging the jurisdiction of the adjudicator or the fairness of the process. The courts are reluctant to get involved before or during the process and prefer to let the adjudication run its course and deal with challenges afterwards. However, the door is not totally closed to a court becoming involved earlier, although the circumstances would need to be exceptional." 

"In this case Lord Doherty accepted that MBSH had a prima facie case of misrepresentation, but not a strong case as the company had claimed. He re-iterated that it would only be in the most exceptional of circumstances that a court would prevent a party from pursuing its statutory right to pursue an adjudication at any time. Given that the prima facie case was not strong, that the hotelier had only raised the misrepresentation issue for the first time after the adjudication had been raised and that interim interdict would deprive DSUK of its statutory right to seek to have a provisional decision made by an adjudicator in its favour, he concluded that the interim orders should be recalled."

Lord Doherty's decision has been appealed, meaning the adjudication process remains frozen. Walls said that he would be surprised if the Inner House of the Court of Session, Scotland's equivalent of the Court of Appeal in England and Wales, departed from the established position taken by the courts of not interfering with an ongoing adjudication in all but the most exceptional circumstances. However, he said more guidance on what an 'exceptional circumstance' looks like would be helpful.

Walls said that there was one issue in the case that Lord Doherty had not expressly addressed which could be relevant to the appeal.

"Scots law generally treats a contract which has been formed as a result of misrepresentation as voidable rather than void i.e. the contract will continue to exist unless and until the innocent party persuades a court to set it aside," Walls said. "In Scotland, only the courts have the power to set aside contracts and so if the adjudication was to go ahead, an adjudicator would probably need to proceed on the basis that the contract governed the relationship between parties."

"In this event, any defence based on arguments regarding the setting aside of the contract could not be deployed in the adjudication. Similarly, depending on how broadly the adjudication provision in the contract was worded, a claim for damages arising from a misrepresentation which induced formation of the contract could also fall outside an adjudicator's jurisdiction. English courts have reached a similar view in relation to claims under the Misrepresentation Act 1967. The Act does not apply to Scotland," he said.