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Contractor unable to recover losses arising from an overturned adjudicator's decision

  • United Kingdom
  • Financial services disputes and investigations

20-04-2022

The case of John Graham Construction v Tecnicas Reunidas[1] illustrates the interplay between the temporarily binding nature of adjudication and the finality of arbitration or court proceedings.  It highlights the problem that a performance obligation carried out in compliance with an adjudicator’s decision cannot be overturned retrospectively if an arbitration award later decides differently.

The case involved a dispute between John Graham Construction (the ‘Subcontractor’) and Tecnicas Reunidas (the ‘Contractor’). The court had to consider to what extent the Subcontractor was required to comply with an adjudicator’s decision regarding its scope of work when that decision was ultimately overturned in a subsequent arbitration, and what effect this had on the valuation of such work in a later adjudication.

Adjudication 1

The dispute between the parties began in respect of works carried out at the Tees Renewable Energy Plant Biomass Power Station, which was referred to adjudication by the Subcontractor to determine the scope of the contract works (Adjudication 1). The adjudicator decided, in favour of the Subcontractor, that the scope of the work was limited to the achievement of milestones described in the contract.  The Subcontractor continued to carry out its work based on the adjudicator’s decision and the Contractor instructed others to undertake what was then considered to be ‘out of scope works’.

The Arbitration

The decision in Adjudication 1 was, however, later overturned by arbitration.  The tribunal decided that the scope of work was not limited to achieving the milestones, as contended for by the Subcontractor, but rather it included the previously determined ‘out of scope works’.

Following the arbitration award, the Subcontractor submitted an interim application for the value of work done to that date. However, the Contractor challenged the application and deducted a contra charge of £356,000 on the basis that:(i) the Subcontractor had failed to carry out the full scope of the works in line with the arbitrator’s award; and (ii) the Contractor had incurred the cost of instructing others.

Adjudication 4

The Subcontractor commenced a further adjudication (Adjudication 4) in relation to its interim application, challenging the deduction of the Contractor’s contra charge on grounds that the limited scope of work was carried out in compliance with the decision in Adjudication 1.

The adjudicator in Adjudication 4 decided in favour of the Subcontractor and rejected the contra charge on grounds that the Contractor’s loss was not caused by the Subcontractor’s breach.  Instead the loss was caused by the Subcontractor’s compliance with the (temporarily) binding decision in Adjudication 1.  Contrary to the adjudicator’s decision in Adjudication 4, the Contractor continued to withhold payment from the Subcontractor to the value of the contra charge.

Enforcement Proceedings (the decision in Adjudication 4)

The Subcontractor brought enforcement proceedings in relation to Adjudication 4, requiring payment in full by the Contractor.  The Contractor challenged the claim on grounds that the adjudicator in Adjudication 4 lacked jurisdiction by:

  1. undermining and overriding the arbitration award;
  2. failing to act in accordance with the powers granted in the adjudication and subcontract; and
  3. answering the wrong question. 

The Subcontractor argued in response that the jurisdictional challenges were wrong and in any event the Contractor had waived its right to raise such challenges by not raising them sooner in the process and until after the decision. The Contractor counterargued that the adjudicator’s decision was so fundamentally flawed that waiver did not apply and, in any event, the challenge could not have been brought any sooner than after issue of the decision in Adjudication 4.

The Court’s decision

In relation to the three jurisdictional challenges in Adjudication 4 the Court decided that the Adjudicator:

  1. had not undermined or overridden the Arbitration Award; whereas the arbitration considered the construction and interpretation of contractual terms, Adjudication 4 decided the financial consequences of those contractual terms. 
  2. had acted in accordance with the subcontract and the adjudication reference in determining a financial matter rather than a contractual one; and
  3. had answered and decided the correct question referred i.e. was the defendant entitled to levy the contra charge? The adjudicator’s decision had acknowledged the authority of the arbitration award and developed it by considering its financial consequences. 

The court clarified that there is a difference between: (i) an adjudicator’s decision; and (ii) the reasons for their decision.  Even if the reasons for an adjudicator’s decision had strayed into matters that did not concern them (such as the contractual terms) this will not affect their jurisdiction, if they answered the correct question referred.

On the matter of whether the Contractor had waived its right to bring a challenge in the first place (which became a moot point), the court concluded that it had not. The court agreed that the Contractor could not have reasonably raised the various challenges any sooner than after receipt of the decision in Adjudication 4. Incidentally, the court was not persuaded by the Contractor’s suggestion that a fundamentally wrong decision could in some way preclude a party’s waiver of a jurisdictional challenge.

Practical effect of the Court’s decision

Having upheld enforcement of Adjudication 4 in favour of the Subcontractor and deciding that the contra charge should not have been levied against the interim application, the Contractor was ultimately without a remedy.  They were unable to recover the cost of employing another contractor to complete the full scope of works, even though the arbitration award had determined that the Subcontractor had been responsible for this work.  The court decided that the arbitration award could not reverse the parties’ previous compliance with the adjudicator’s decision in Adjudication 1. The Honourable Mr Justice Morris said:

The First Partial Award [i.e. the arbitration award], although reversing the Decision in Adjudication No 1, cannot, as a matter of fact, have a retrospective effect on the lawfulness of the subsequent actions of the Parties, because the Parties were obliged to give effect- albeit temporarily – to that Decision.  Neither party should be penalised for doing so.”[2]

Commentary

This case raises the important point that even though an adjudicator’s decision can later be reversed by subsequent proceedings, the parties are required to comply with the adjudicator’s decision in the interim. When an adjudicator’s decision concerns a performance obligation, any later judgement or award overturning that decision will not have retrospective effect. As such, if a party does comply neither party can later be penalised by such compliance if subsequent proceedings reach a different conclusion. 

If, an Adjudicator’s decision involves a decision concerning performance of an obligation, the effect of this case is that one party may not have a remedy or redress for its counterparty’s performance during the interim period up to final determination. A party wishing to challenge an adjudicator’s decision concerning performance on a live contract, should look to bring proceedings as soon as possible to reduce their exposure within the intervening period and (if at all practicable) take as few steps as possible in the interim. However, this creates obvious practical difficulties, given the timeframes associated with proceedings, and brings into sharp focus the cost/benefit analysis of raising any challenge at all.



[1]    [2022] EWHC 155 (TCC)

[2]    Paragraph 6.3.3 of the Judgment.