The Human Rights Act and statutory adjudication: a conflict?

In the summer edition of our environment law bulletin the leading article provided an overview of the Human Rights Act 1998 (the Act) which came into force on 2 October 2000. In this article we look in more detail at how the Act will affect the construction industry and in particular whether the Act has any relevance to statutory adjudication.

The effect of the Act is to incorporate the most important parts of the European Convention on Human Rights (ECHR) into the law in England and Wales. From now on, all legislation, whether primary or secondary, whenever enacted, is to be construed consistently with ECHR so far as it is possible to do so. Moreover, section 6 of the Act makes it unlawful for a public authority to act in a way that is incompatible with a convention right, and if they do, a "victim" of such an act can bring proceedings against the public authority for compensation or other remedies as appropriate.

Thus, the obligations under the Act apply to public authorities rather than private individuals. However, "public authority" is defined as:

• A court or tribunal, and
• Any person certain of whose functions are functions of a public nature.

Because courts (and tribunals) are included in this definition, they are likely to adapt and develop existing causes of action to provide effective protection of ECHR rights against private individuals.

Adjudication

The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) provides parties to a construction contract with a statutory right to adjudication at any time. A decision of an adjudicator is binding until the dispute is finally determined by a court or arbitrator or by agreement between the parties. An adjudicator appointed pursuant to the HGCRA is likely to fall within the definition of a "tribunal" under the Act and thus will be obliged to act in a way that is compatible with convention rights.

The convention right that will be relevant to adjudication will be Article 6, the right to a fair trial. Article 6(1) states:

"In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. Judgment shall be pronounced publicly but the press and public may be excluded from all or part of the trial in the interest of morals, public order or national security in a democratic society, where the interests of juveniles or the protection of the private life of the parties so require, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice."

The main procedural rights expressly conferred by Article 6(1) are:

• the right to a fair hearing
• the right to a public hearing (but note qualifications)
• the right to a hearing within a reasonable time, and
• the right to an independent and impartial tribunal established by law.

Immediately one can see the potential for conflict between statutory adjudication and Article 6(1). Yet so far, statutory adjudication has been rigorously enforced by the Courts despite claims that to enforce the decision would in some way be unfair. For example,

• In Macob, Judge Dyson held that as a matter of law, it was not open to him to investigate the validity of the objection which had been taken on the grounds of natural justice against the decision of the adjudicator;
• In How Engineering v Lindner, Judge Dyson held that a decision supported by no evidence at all amounted only to a mistake of fact rather than law; and
• In Bouygues v Dahl Jensen, Judge Dyson held that although an error was manifest within an adjudicator's decision it would nonetheless not be corrected as mistakes will inevitably occur in relation to a speedy dispute resolution process such as adjudication (and this decision was upheld by the Court of Appeal).

In recent weeks there have been a number of commentaries from Judges of the Technology and Construction Court, and now a decision, on the operation of the Act as regards adjudication.

Before the Act came into force, but no doubt influenced by it, Judge Bowsher gave his decision in Discain Project Services v Opecprime Development. In that case he declined to enforce an adjudicator's decision because he found that there was serious risk of bias on the part of the adjudicator because he failed to consult with one party on important submissions that were made by the other party. Although the Judge said that he did not wish to detract in any way from the Macob decision, it was a question of fact and degree in each case, and in this case there was a triable issue over whether the adjudicator had overstretched the rules.

Natural justice

In the addendum to his Judgment, Judge Bowsher makes further comments about the application of the rules of natural justice to adjudication. He says that he believes that the system created by the HGCRA (i.e. a speedy decision which is to be enforced speedily, right or wrong, subject to being put right, if necessary, in subsequent legal proceedings or arbitration) can only be made to work in practice if some breaches of the rules of natural justice which have no demonstrable consequence are disregarded. However, in this case, since compliance with the rules of natural justice might have produced a different decision on the adjudicator's part, he would not enforce the decision.

Significantly, the Judge commented that he had been talking about the rules of natural justice but that the same principles would apply when the Human Rights Act came into force. Clearly the Judge thought that the Human Rights Act would have some application to adjudication.

This view was reinforced by Judge Thornton in an article written for Building magazine (22 September edition). In that article he says in terms that adjudication parties are entitled to the rights provided by Article 6. He also says that a nominating body must also comply with Article 6 and ensure that only independent adjudicators are nominated. Finally, he says, a court may only enforce an adjudicator's decision if it was made following a procedure complying with Article 6.

Judge Thornton goes on to examine how adjudication procedures will have to change once the Act comes on stream. The changes he describes would fundamentally alter adjudication procedures that have hitherto applied. As regards the statutory time limits, he says that if they unfairly disadvantage one side, then the adjudicator may have to decline to make a decision. His words strike a death knell for adjudication as we know it.

These prophetic words from Judge Thornton were probably written without consideration of Judge Havery's view on the subject, given in his decision in Elanay Contracts Ltd v The Vestry on 30 August. He said "in my judgment, Article 6 of the ECHR does not apply to an adjudicator's award or to proceedings before an adjudicator". In this case, the defendant to the enforcement proceedings had argued that there had not been equality of arms for the purpose of a fair hearing in the adjudication because much of the time of the principal person involved with the defendant was spent in hospital, visiting his dying mother, and also because documents were produced late by the other side in the adjudication.

The Judge's reason for saying that Article 6 did not apply was that, although an adjudicator's decision was the decision or the determination of a question of civil rights, it was not in any sense a final determination. The matter can be re-opened. He also commented that if Article 6 did apply to proceedings before an adjudicator, it is manifest that a coach and horses would be driven through the whole of the HGCRA.

This decision, although not binding upon the other judges in the Technology and Construction Court, will be influential in determining how the other judges respond to challenges to enforcement proceedings based upon breach of Article 6. However, it is understood that the case will be going to the Court of Appeal.

In reality, of course, the real concern about the binding nature of unsatisfactory adjudicator's decisions is the risk of insolvency, both of the payer (due to the requirement to pay monies in accordance with the decision) and the payee (thereby making later recovery of the monies paid difficult or impossible). For this reason it has been argued that although adjudicators' decisions are in theory not a final determination of a dispute, in practice this is what they can lead to.

The Court of Appeal (in Bouygues UK Ltd v Dahl-Jensen UK Ltd) has already indicated that in the situation where the payee is insolvent at the time of the application for summary judgment, rule 4.90 of the Insolvency Rules 1986 has effect. The relevant part of the rule is as follows:

• This rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation.
• An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other.
• Only the balance (if any) of the account is provable in the liquidation. Alternatively (as the case may be) the amount shall be paid to the liquidator as part of the assets.

Thus insolvency set off is distinguished from legal set off outside insolvency (which is not permitted as a defence to the enforcement of an adjudicator's award). The insolvent party's creditor may set off pound for pound what he owes the insolvent party and pay only the balance in satisfaction of the adjudicator's award.

The Court of Appeal in Bouygues elaborates that in circumstances where there are latent claims and cross claims between parties, one of which is in liquidation, there is a compelling reason for a judge to refuse summary judgment on a claim arising out of an adjudication which is, necessarily, provisional. In that case, the claims and cross claims should be resolved in the liquidation where a full investigation will be made and a balance between competing claims struck.

The Insolvency Rules thus provide a remedy for a party making a payment pursuant to an adjudicator's decision in the situation where the recipient is in liquidation. However, it does not remove the risk of losing the money should the recipient fall into liquidation after payment of the adjudicator's award or where the recipient is merely in administration at the time of enforcement proceedings. In addition it will not provide comfort to that party who is obliged to make payment knowing that the payment is unjustified and that it will propel him towards insolvency before the dispute can be finally determined (in his favour) by litigation or arbitration.

For this reason, the basis of Judge Havery's decision in the Elanay case does not feel satisfactory. It is also uncomfortable bearing in mind the different views expressed by Judges Thornton and Bowsher.

On the other hand, if one accepts that statutory adjudication for all its faults is "a good thing" for the construction industry (and recent surveys indicate that the general view is that this is so), the pragmatic approach adopted by Judge Havery may be what is required to keep adjudication in its present form, albeit somewhat constrained by those tentative lines in the sand drawn by Judge Bowsher in the Discain case.

It is likely that the story will not end here.

For further information, please contact Caroline Cummins on [email protected] or on +44 (0)20 7367 2914.