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Contract Adjudications – Breaches of Natural Justice Are Hard to Prove

hotel roomViolations of natural justice are often cited by those who are unhappy with contract adjudicators’ decisions. However, as one High Court case concerning a hotel development showed, such breaches are far from easy to prove.

The owner of an office block wished to convert it into an 87-bedroom hotel and had engaged a contractor to carry out the work. The contract price was £6.67 million, but costs ballooned due to delays in the project, primarily caused by the late installation of an electrical sub-station. That, in turn, meant that commissioning of the hotel’s electrical and mechanical services had to be put back.

The contractor was estimating its final account at £9.8 million, and had already been paid almost £8.2 million, when it signed a memorandum of understanding (MOU) with the owner in an attempt to reach an amicable settlement. The MOU made provision for three equal stage payments, totalling £600,000, to be made to the contractor on achievement of various milestones.

Two of those payments were made but, following installation of the sub-station, the contractor sought to operate the payment mechanism under the contract and put in a bill for over £680,000. When the owner refused to pay that sum, the contractor launched adjudication proceedings.

In ruling in the contractor’s favour, the adjudicator rejected the owner’s plea that the terms of the MOU had superseded the contract and effectively governed payments to the contractor up to the date of practical completion. The owner had put in no valid pay less notice and the whole sum was therefore payable.

In dismissing the owner’s challenge to that decision, the Court rejected claims that the adjudicator had breached natural justice by basing his decision on arguments that neither party had relied upon. Both sides were aware from the outset that the proper interpretation of the MOU was central to the dispute and it could not be said that the adjudicator had gone off on a frolic of his own.

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