A decision of the High Court of South Africa in Durban last year in a dispute concerning NEC adjudications exposed a lack of knowledge among NEC users and their advisers and, more importantly, the judiciary in countries where adjudication does not generally exist.
South African state-owned freight and logistics company Transnet – a major NEC user – had entered into an NEC3 Engineering and Construction Contract (ECC) with Group Five and others for the design, supply, erection and testing of product pipeline accumulators. A dispute subsequently arose as to whether the appointment of an adjudicator appointed for a previous dispute remained the adjudicator for all disputes.
The High Court judge held that Transnet was not permitted to approach the court on this matter, saying, ‘courts are generally not entitled to determine issues that fall within the province of an arbitrator’. In South African law there is no statutory definition of the term ‘adjudication’ so he equated this dispute to an issue involving arbitration.
Adjudication not arbitration
However, the reality is that adjudication in NEC is determined by the terms of the contract and has nothing to do with arbitration. ECC option W1 sets out the adjudication process and the powers of the adjudicator agreed to by the parties. Option W1.3(10) states, ‘the Adjudicator’s decision is binding on the parties unless and until revised by the tribunal, and is enforceable as a matter of contractual obligation between the parties and not as an arbitral award’. This clause emphasises the distinction between an arbitration and an adjudication.
Adjudication is a creature of contract agreed to by the parties. The courts are excluded from making an agreement for the parties, they are only bound to give effect to the terms of the agreement entered into between the parties. It is for this reason that Transnet’s application for judicial interference should have failed – not because of a legal principle applied to arbitration agreements.
The judge then proceeded to hold that NEC provisions contemplate that several adjudicators may be appointed, but he failed to consider an ambiguity in the parties’ agreement. ECC clause W1.2(1) of option W1 provides, ‘The Parties appoint the Adjudicator under the NEC Adjudicator’s Contract current at the starting date.’ However, this conflicted with the contract data which stated, ‘The adjudicator is – to be appointed under the NEC3 Adjudicator’s Contract (June 2005) if and when a dispute arises.’ Instead of naming the adjudicator in the contract data, as the first three words required, the parties had inserted details of when the adjudicator was to be appointed.
NEC clauses ignored
In accordance with ECC core clause 17.1, the resulting ambiguity should have been resolved by the NEC project manager, but this fact was ignored by the High Court judge. He stated, ‘The words “If and when a dispute arises” may be ambiguous. The words could mean that an adjudicator is appointed initially “if and when a dispute arises” and then retains such appointment, as the applicant contends, throughout the period of the project. They could equally mean that an ad hoc adjudicator is appointed “if and when a dispute arises” for that dispute only and another ad hoc adjudicator may be appointed “if and when” each subsequent dispute arises.’
The judge relied on the principle of interpretation contained in ECC core clause 12.1 that, ‘words in the singular also mean in the plural’ and concluded that NEC provides for the appointment of multiple adjudicators. He ignored the fact that the parties had agreed in core clause 17.1 that the project manager was obliged to give an instruction resolving any ambiguity or inconsistency.
Further, the judge gave no cognisance to ECC option W1.2(3), which deals with the very situation which confronted him in the application. It provides, ‘If the Adjudicator is not identified in the Contract Data…the Parties choose a new adjudicator jointly. If the Parties have not chosen an adjudicator, either Party may ask the Adjudicator nominating body to choose one.’
No adjudicator was identified in the contract data, so option W1.2(3) applied, but the parties did not make the requisite application to the adjudicator nominating body. Had they done so the adjudication nominating body would have appointed one adjudicator, thus eliminating the dispute between the parties.
The case is a demonstration of what can happen when neither parties nor the courts appear to understand the workings of NEC contracts. ECC permits the parties to agree expressly on the appointment of multiple adjudicators, but this cannot be implied from the standard wording.