Global Switch Estates 1 Limited v Sudlows Limited

In Global Switch Estates 1 Limited (‘GSEL’) v Sudlows Limited (‘Sudlows’), the TCC held that an adjudicator wrongly confined the scope of a dispute and thus erroneously restricted his jurisdiction. This resulted in a breach of natural justice.

Facts

GSEL appointed Sudlows to carry out works to fit out and upgrade GSEL’s specialist data centre in London. The Employer’s Agent under the Contract was Mace Limited (‘Mace’). The contract was an amended JCT Design and Build 2011 with amendments, dated December 2017 (‘the Contract”). The value of the Contract was approximately £15,000,000.

The works were divided into two sections. Section 1 achieved practical completion on 3 July 2019. Practical completion of section 2 has not yet been certified. The Contract entitled Sudlows to a fair and reasonable extension of time if relevant events caused delay to completion. The Contract also allowed for interim payments to be made to Sudlows.

In 2019, disputes arose and four adjudications followed. Events took place as follows:

• On 3 June 2019, the first adjudication commenced regarding whether Mace had failed to serve a timely payment notice in respect of an interim application for payment. The adjudicator found that GSEL had failed to issue effective notices within the required time and awarded Sudlows a sum of approximately £4,500,000, which was paid by GSEL.
• On 29 July 2019, the second adjudication was held, which was in respect of Sudlows’ application for an extension of time in relation to section 2 of the works. It was found that Sudlows was entitled to the extension until 14 August 2019, but that GSEL was entitled to withhold or deduct liquidated damages for any period after the new extended completion date until the date of Practical Completion.
• On 23 October 2019, Mace issued non-completion notices to Sudlows due to failure to complete section 1 and section 2 by the relevant revised completion dates.
• On 24 October 2019, GSEL notified Sudlows that it was entitled to payment of, or to withhold, liquidated damages in respect of the alleged failures.
• On 25 October 2019, GSEL made a demand under a bank guarantee procured by Sudlows in the sum of approximately £1,000,000.
• On 29 October, the third adjudication took place, in which the adjudicator held that GSEL had failed to issue a valid payment notice.  Sudlows was awarded approximately £7,000,000, which GSEL paid.
• On 30 October 2019, Sudlows disputed GSEL’s entitlement to call on the guarantee.
• On 31 March 2020, Sudlows submitted an interim application for payment totalling approximately £8,750,000. No payment was made by GSEL in respect of this interim application.

The fourth adjudication took place on 15 May 2020 to decide the true value of the interim application of 31 March 2020.

GSEL’s notice stated “[GSEL] is asking the Adjudicator to open up, review and revise – and determine the true value of – certain parts of [the interim application]. [i]n order to reach a Decision, this will also technically require the Adjudicator to open up, review and revise – and determine the true value of – the equivalent parts of the Payment Notices served by Mace in response.”  Importantly, the notice by GSEL sought to exclude certain matters, including Sudlows’ entitlement or otherwise to further extensions of time and the question of liability for defective works.

Sudlows responded on 8 June 2020 by disputing GSEL’s confinement of the scope of the adjudication. Sudlows claimed that “it is open to Sudlows to raise any defence open to it to defend its assessment of the value of the works.” Sudlows asked the adjudicator to determine its entitlement to additional extensions of time, adjusted contractual completion dates, and the true value of the works carried out.

When issuing his decision, the adjudicator chose to limit the scope of his jurisdiction in the manner proposed by GSEL and stated that he did not have jurisdiction to consider any of the defences raised by Sudlows. The adjudicator awarded GSEL a sum of approximately £5,000,000. Sudlows failed to pay the sums due and on 31 July 2020, GSEL issued proceedings in the TCC.

Judgment:

O’Farrell J concluded:

1. A referring party is entitled to define the dispute referred to adjudication, for example by confining the dispute referred to specific parts of a wider dispute.
2. A responding party may not widen the scope of an adjudication by adding further disputes.
3. However, a responding party is entitled to raise any defences that it considers properly arguable to defend the claim by the referring party. By doing so, the responding party is not widening the scope of the adjudication but is engaging with and responding to issues within the scope.
4. Where a 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.
5. It is then a matter for the adjudicator to decide whether the defences put forward are valid in law and on the facts.
6.  Importantly, “if there is a breach of the rules of natural justice and such breach is material, the decision will not be enforced.”

O’Farrell J held that Sudlows’ defences disputing the claim for payment were relevant to the adjudication. The adjudicator should have considered the claims made by Sudlows for additional payment in respect of the rectification costs and consequential loss and expense. He did not do so,  incorrectly assuming that his jurisdiction was limited. This was thus a breach of the rules of natural justice and the decision was unenforceable.

The adjudicator was misled by GSEL and the error was pivotal in determining the outcome of the dispute. As such, the TCC dismissed GSEL’s summary judgment application and refused to enforce the adjudicator’s decision.

Comment:

The case provides interesting confirmation that a responding party in an adjudication can rely on valuation of works that form part of the overall context of the financial position under a contract in order to establish that the referring party is not entitled to payments claimed.

If an adjudicator fails to take into account such a defence his decision will be in breach of the rules of natural justice and thus unenforceable.

It will require a forensic review by the adjudicator to be satisfied that what is being raised as a defence is engaging with and responding to issues within the scope.

Further, such defences will have to be dealt with by the referring party in the adjudication, with potentially limited time to prepare, rather than rely on the argument that the adjudicator does not have jurisdiction to deal with it.