NEC3 Contract adjudicator awards binding unless revised by arbitration, South African court rules

A ruling from the South African Supreme Court of Appeal (SCA) in a case between Sasol South Africa and M&R Limited (20 page / 387KB PDF) said that a party is not entitled to ignore an adjudicator's award simply because it considers it to be invalid. The award remains binding and enforceable as a contractual obligation between the parties unless it is revised in arbitration under the NEC3 Engineering Construction Contract (NEC3 Contract).

In 2015, chemicals and energy company Sasol and engineering and mining firm Murray & Roberts (M&R) concluded a construction contract for structural, electrical instrumentation and piping work for phase 1 of the volatile organic compound abatement project at Sasol’s Secunda plant.

The terms of the contract were those of the standard form NEC3 Contract which provided for the appointment of a project manager to manage and administer the NEC3 Contract for Sasol as well as a dispute resolution procedure. It said that a dispute should first be notified and then referred to an adjudicator, whose decision would be enforceable as a contractual obligation, unless and until it is revised in arbitration.

The project manager disallowed some of the payment applications made by M&R, withholding payment of ZAR42 million (US$3 million) on the basis that M&R had failed to demobilise from the site as instructed by the project manager. M&R notified a dispute, arguing that Sasol was bound to make payment, based on timesheets that Sasol had signed off. Sasol, however, said that the timesheets did not settle M&R's entitlement to payment and that the project manager was entitled to withhold payment arising from M&R's failure to demobilise. The dispute was referred to the adjudicator, who rejected M&R's claims and confirmed the project manager's assessments.

M&R then took its dispute to arbitration, and the arbitrator found in its favour, finding that the project manager was incorrect in withholding payment from M&R and ordering the project manager to adjust his assessment and for Sasol to make payment to M&R. At the same time and prior to the arbitrator's award, the project manager continued to assess M&R's payment applications and proceeded to withhold further payments from M&R. Further disputes arose and once again, the adjudicator found in Sasol’s favour.

M&R asked the project manager to apply the arbitrator's award by adjusting payments in his assessment to all 10 disputes it had raised. The project manager complied with the arbitration award in some cases, disregarding certain portions of the award which Sasol considered were invalid, reasoning that contrary to the arbitrator's findings in the award, M&R's timesheets were not contractually binding whereas the project manager's instruction to M&R to demobilise from the site was. As a result, M&R referred a further dispute, known as Dispute 16, to adjudication. In the adjudication proceedings of Dispute 16, M&R referred the adjudicator to the arbitration award issued in its favour and the adjudicator, having considered and applied the arbitration award to Dispute 16, directed Sasol to pay M&R the amounts withheld. Sasol refused to comply with the adjudicator's award on the basis that it considered it to be invalid.

M&R asked the South African High Court to enforce the adjudicator’s award as a matter of contractual obligation under the NEC3 Contract, with the High Court ruling in its favour, resulting in Sasol’s appeal to the SCA.

Sasol challenged the validity of the adjudicator's award on two main grounds of appeal: that the adjudicator lacked jurisdiction to decide Dispute 16, as it was the same or substantially the same as the disputes previously decided in separate dispute proceedings; and the adjudicator's jurisdiction to determine Dispute 16 ceased when he failed to publish the award within the prescribed four-week period as set out in the NEC3 Contract.

On the first ground of appeal, Sasol relied on clause 2.1 of the adjudicator's contract which said: "The adjudicator does not decide any dispute that is the same or substantially the same as one that he or his predecessor has previously decided.” It said the arbitrator’s award only applied to disputes referred to arbitration and not to all other payment assessment disputes or the adjudicators' previous decisions. Relying on the NEC3 Contract’s dispute resolution procedure, Sasol argued that an arbitration award cannot be used as a blanket measure to cover all previous assessments and decisions.

The SCA disagreed with Sasol and considered its interpretation of clause 2.1 to be incorrect. It said Dispute 16 related to the manner in which the project manager applied the arbitrator's award, and not whether the project manager was obliged to comply with it. The SCA ruled that according to clause 51.3 of the NEC3 Contract, the project manager was obliged to take into account contractual entitlements determined in favour of M&R in the arbitrator's award. In addition, the SCA said that an adjudicator is empowered by clause W1.3 (5) of the NEC3 Contract to "review and revise any action or inaction of the Project Manager…related to the dispute…" and that in acting under this clause, the adjudicator does not reconsider prior decisions but simply does what the project manager should have done in terms of the NEC3 Contract in accordance with the principles established in the arbitrator's award. Therefore, the SCA ruled that the adjudicator was entitled to act in circumstances where the project manager had declined to act or failed to do so.

On the second ground of appeal, Sasol said the four-week period prescribed under the NEC3 Contract for the adjudicator to publish the award had not been extended by agreement between the parties and, as such, his jurisdiction ceased. Sasol also claimed that the adjudicator's jurisdiction ceased when it issued a notice of dissatisfaction arising from the adjudicator's failure to publish his decision in time.

The extended period of the adjudication proceedings was explained with reference to the further information provided and responded to by Sasol and M&R as well as that which was requested from the parties by the adjudicator. The SCA confirmed that it could only be at the end of the period of receiving the further information that the four-week period within which the adjudicator's decision was to be published would start to run. The SCA found that the four-week period could be extended by reference to the NEC3 Contract, as well as the adjudicator’s contract, which allowed for more time if further information was requested and responded to by the parties. In addition, the parties had expressly extended the period in terms of the adjudicator’s contract, and the SCA found that the terms of the adjudicator’s contract prevailed in the event of a conflict with the terms of the NEC3 Contract. The SCA agreed with M&R's submissions that in terms of the NEC3 Contract, both parties are permitted to provide and respond to further information until the last day of the four-week period and only after that day can the adjudicator consider if, based on the information received, further information is required. Consequently, the adjudicator's award was not out of time.

The SCA dismissed Sasol's arguments that the adjudicator's jurisdiction had ceased and further found that Sasol's notice of dissatisfaction was premature as the time period within which the award ought to have been published had not expired when the notice was issued.

”Sasol's efforts to challenge the validity of the adjudicator's award and circumvent its enforceability were found to be unpersuasive and legally unsustainable on the facts and the law,” said construction disputes expert Natalie Keetsi of Pinsent Masons, the law firm behind Out-Law. “The SCA dismissed Sasol's appeal and ordered it to make payment to M&R for the amounts withheld.”