Natural Justice As The Basis To Set Aside An Adjudication Decision - Section 15 (b) Construction Industry Payment & Adjudication Act 2012 of Malaysia

When can an adjudication decision be set aside? 

Section 15 Construction Industry Payment & Adjudication Act 2012 of Malaysia("CIPAA 2012") provides that:-
"An aggrieved party may apply to the High Court to set aside an adjudication decision on one or more of the following grounds:

(a) The adjudication decision was improperly procured through fraud or bribery;

(b) there has been a denial of natural justice;

(c) the adjudicator has not acted independently or impartially; or

(d) the adjudicator has acted in excess of his jurisdiction."

This post seeks to explore the concept of natural justice.

What Is Natural Justice?

It is a term that denotes specific procedural rights in the English legal system. There are two rules that natural justice is concerned with - the rule against bias and the right to a fair hearing.

1. Rule Against Bias

This basic concept of impartiality where a person is barred from deciding any case in which he may be, or suspected to be biased, applies to courts of law, tribunals, arbitrators and all those having the duty to act judicially, including adjudicators.

Bias may be actual, imputed or apparent. Actual bias is established where it is actually established that a decision-maker was prejudiced in favour of or against a party, which is in practice, very hard to prove.

One form of imputed bias is biased on the decision-maker being a party to a suit, or having a pecuniary or proprietary interest in the outcome of the decision. Once this fact has been established, the bias is irrebuttable and disqualification is automatic - the decision-maker will be barred from adjudicating the matter without the need for any investigation into the likelihood or suspicion of bias.

In certain limited situations, bias can also be imputed when the decision-maker's interest in the decision is not pecuniary but personal.

Apparent bias is present where a judge or other decision-maker is not  party to a matter and does not have an interest in its outcome, but through his conduct or behaviour gives rise to a suspicion that he is not impartial.

Exceptions to the rule against bias includes Necessity and Waiver.

Necessity is where a disqualified adjudicator cannot be replaced. as no one else is authorized to act. Waiver of the right to object, and proceedings are allowed to continue if no objection is raised as soon as the prejudiced party has knowledge of the bias.

The effect of a finding of bias - judgment not void but voidable. This advice is not wrong in the context of a judicial act under review, where the judgment will be held valid unless reversed on appeal.

2. Right To A Fair Hearing (Audi Alteram Partem)

The aspects of a fair hearing includes:

i. Prior notice of hearing - the right to adequate notification of the date, time, place of the hearing as well as detailed notification of the case to be met.

ii. Opportunity to be heard - the right to have a hearing and be allowed to present his own case. However, this requirement does not necessarily mean the decision-maker has to meet the complainant face to face.

iii. Conduct of the hearing - the adjudicator has to ask whether the person charged has a proper opportunity to consider, challenge or contradict any evidence, and whether the person is also fullly aware of the nature of the allegations against him.

iv. Right to legal representation

Summary of Cases

1. Costain Ltd v. Strathclyde Builders Ltd [2003]

The adjudicator issued a decision that the defender should repay the full amount withheld as liquidated and ascertained damages. The pursuer now raised proceedings to recover the sums found due by the adjudicator by means of court proceedings via a motion for summary decree. The only defence advanced was that the adjudicator's decision is vitiated by a breach of the principles of natural justice,  due to the fact that the adjudicator had requested for to grant an extension of four days as he wished to "discuss one point in particular with [his] appointed legal adviser". The result of the discussions with the legal adviser was not made known to the parties, nor was either party told of the terms of the discussions that had taken place, or to see their result. Neither party was invited by the adjudicator to comment or make submissions upon the advice tendered, and neither party requested any opportunity to do so.

Held : 

1. It is important that confidence in the adjudication process should be maintained. For such confidence to be maintained, it is important that adjudicators should be clearly seen to give parties a fair opportunity to present their arguments by fulfilling the principle of audi alteram partem.

2. The mere possibility of injustice is sufficient for a challenge to an adjudicator's decision for the reasons set out in para 1. above. The parties do not know the content of the legal advice obtained by the adjudicator. It could have been crucial. Indeed, because the adjudicator asked for advice on a particular matter, it is reasonable inference that he thought that it was important. I do not think that the possibility of injustice can be excluded.

3. I conclude that the defender has stated a relevant defence to the pursuer's claim to enforce the adjudicator's decision. It follows that the pursuer has not satisfied the test for summary decree, namely that the question of law that arises as to the relevancy of the defender's averments admits of a clear and obvious answer in the pursuer's favour. Pursuer's motion for summary decree is refused.

2. Discain Project Services Ltd v Opecprime Development Ltd [2001]

If an adjudicator's decision was to be challenged on account of a breach of the principles of natural justice, the breach must be substantial and relevant.

3. Inland Revenue v Barrs [1961]

Lord Reid  - this is at least clear : no tribunal, however informal, can be entitled to reach a decision against any person without giving to him some proper opportunity to put forward his case.

4. Barrs v British Wool Marketing Board [1957]

This is a case involving a statutory tribunal that determined the valuation of wool.

Lord President Clyde - "Although quasi-judicial bodies such as this tribunal are not Courts of law in the full sense, it has been the law of Scotland that they must conform to certain standards of fair play, and their failure to do so entitles a Court of law to reduce their decisions. Were it not so, such tribunals would soon fall into public disrepute, and confidence in them would evaporate. Fair and equal opportunity afforded to all interests before the tribunal is the fundamental basis upon which the tribunal must operate, and, in the absence of such fair play to all, it is right and proper that a Court of law should reduce the tribunal's decision...

The test is not 'Has an unjust result been reached?' But 'Was there an opportunity afforded for injustice to be done?' If there was such an opportunity, the decision cannot stand".

5. Balfour Beatty Construction Ltd v London Borough of Lambeth [2002]

It was accepted that the principles of natural justice were applicable to adjudication proceedings. It was further accepted that if an adjudicator obtains material from sources other than the parties, including his own knowledge and experience, he must give the parties a reasonable opportunity to comment on that material.

6. RSL (South West) Ltd v Stansell Ltd [2003]

In this case, the adjudicator had indicated to the parties' representatives that he wanted to obtain assistance on programming issues from a specialist in that area. The plaintiff's representative agreed without qualification, but the defendant;s representative agreed subject to a request that he be allowed to see any report prepared by the specialist and that he be given reasonable time to comment upon any such report.

It was held that it is elementary that the rules of natural justice require that a party to a dispute resolution procedure should know what is the case against him and should have an opportunity to meet it... It is essential, in my judgment, for an adjudicator, if he is to observe the rules of natural justice, to give the parties to the adjudication the chance to comment upon any material, from whatever source, including the knowledge or experience of the adjudicator is minded to attribute significance in reaching his decision."

Unilateral Contract - Carlill v Carbolic Smoke Ball Co [1892]

What is a unilateral contract? It is an enforceable contract created by an offer that can only be accepted by performance. In unilateral contracts, communication of acceptance is not expected or necessary. Therefore, if  there is an offer to the world at large, and that offer does not expressly or impliedly require notification of performance, then performance of the specified condition in the offer will constitute acceptance of the offer and consideration for the promise.

In Carlill v Carbolic Smoke Ball Co, statements that were made in an advertisement may be a mere “puff” and not intended to be legally binding but if the advertisement shows a clear promissory intention to be legally bound, it may constitute a unilateral offer.

Facts

• Carbolic Smoke Ball Co (Defendant) promises in the advertisement to pay 100 pounds to any person who contracts flu after using their smoke ball.
• Mrs Carlill (plaintiff) used the ball but contracts flu and claims to have relied on the said advertisement.

The issue at hand was whether there was a legally binding contract between the parties?
A valid and enforceable contract requires notification of acceptance. Did Mrs Carlill notify Carbolic of the acceptance of the offer? And thereon, did Mrs Carlill provide any consideration in exchange for the 100 pounds reward?

The Defendant argued that there was no binding contract as the words of the advertisement did not amount to a promise as the advertisement was too vague to constitute a valid and binding contract. Further, there  was  no  limit  as to the length of time and also no way of checking the actual use of the smoke ball by consumers. The Defendant further argued that the terms were too vague to make a valid contract as there was no limit as to time was clearly stated. This would mean that a person might claim they had contracted  flu 10 years after using the remedy.

The Defendant also claimed that there was no contract concluded as a contract requires communication of intention to accept the offer or performance of some overt act.

The Plaintiff’s argument is that the said advertisement was an offer that they were under an obligation to fulfill because it was published so it would be read and acted upon and it was not an empty boast. As such, the promise was not vague and that there was consideration.

Held

There was a binding contract. The advertisement was an express promise – to pay 100 pounds to anyone who contracts flu after using the ball three times daily x 2 weeks. The advertisement was not a mere puff, because of the statement “1000 pounds is deposited with the Alliance Bank, shewing our sincerity in the matter” – as proof of the defendant's sincerity to pay.

• A promise is binding even though not made to anyone in particular  – a unilateral offer  – ie. “offers to anybody who performs the conditions named in the advertisement, and anybody who does perform the condition accepts the offer”.

• The advertisement is not so vague that it cannot be construed  as  a  promise – the words can be reasonably construed.  For example, that if you use the remedy for two weeks, you will not contract the flu within a reasonable time after that.

• Notification of acceptance – notification of the acceptance need not precede the performance – “this offer is a continuing offer”.

o “If notice of acceptance is required, the person who makes the offer gets the notice of acceptance
contemporaneously with the notice of the performance of the condition”.

o Ie. when there is an offer to the world at large, acceptance is legally valid when the offeree communicates
to the offeror notice of performance of the specified conditions.  This means acceptance is not legally valid
when notification of the performance of the specified conditions does not occur.

Consideration

There was consideration in this case for two reasons:

1. Carbolic received a benefit ie. in the sales directly beneficial to them by advertising the Carbolic Smoke Ball.

2. The  direct  inconvenience  (and  detriment) to the person who uses the smoke ball 3 times a day x 2  weeks according to the directions at the request of Carbolic. In other words - performance of the specified conditions constitutes consideration for the promise.

Source : Claire Macken - Sample Case Summary

Who Decides Whether An Agreement Has Been Reached?

In a contract dispute, can a party claim that the contract did not reflect his actual intention? 

Two useful tests, the subjective and the objective tests to determine whether or not an enforceable contract has been concluded and whether the contract reflects the parties' intention.

1. The Subjective Test

To determine the existence and scope of an agreement, the subjective test attempts to ascertain the actual intention of the contracting parties, whereas an objective test also known as the "Reasonable Man's" test, examines what an objective bystander would have interpreted the intentions of the parties.

'If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms.'.. Blackburn J in Smith v. Hughes (1871) LR 6 QB 597.

Although this judgment seem to establish the objective test as the preferred method to determine the existence of a contract, it should not be assumed that the subjective intentions of the parties are irrelevant.

In many cases the subjective intentions of the parties will coincide with the interpretation of the "Reasonable Man" test. There are two situations in which the objective test is either displaced or modified by the subjective intentions of the parties.

Mistake Was Known By A Party

The first arises where the offeror knows that the offeree is suffering from a mistake as to the terms of the offer. A case in point is Hartog v. Colin and Shields [1939] 3 All ER 566, the defendants entered into a contract to sell 3,000 Argentinian hare skins to the claimants. However by mistake they offered them for sale at 10c per pound instead of 10c per piece. When they discovered their mistake, the defendants refused to deliver the skins. The claimants brought an action in respect of the defendant's non-delivery of the skins. It was held they were not entitled to succeed because the negotiations had proceeded upon the basis that the skins were to be sold at a price per piece and that, as there were three pieces to the pound, the claimants could not reasonably have thought that the defendant's offer matched their true intention. The claimants were thereby prevented from snatching a bargain which they knew was not intended by the defendants.

However, the objective test could also explain the outcome of the case on the basis that the reasonable person in the position of the claimants would have known that the offer made by the defendants did not reflect their true intention.

Party Is At Fault

The second situation in which the subjective intentions of the parties are relevant is where the offeree is at fault in failing to note that the offeror has made a mistake. In the case of Scriven Bros v. Hindley [1913] 3 KB 564, an auctioneer acting for the claimants put up for sales lots of hemp and tow. The auction catalogue implied that the lots were the same when, in fact, the second lot only contained tow, which was considerably cheaper than hemp. The defendants bid for the lot, thinking it was hemp when in fact it was tow. The auctioneer did not realize that the defendants had misunderstood what was being auctioned and thought they had overvalued the tow. When the defendants discovered their mistake, they refused to pay the price and so the claimants sued them for the price. It was held that no contract of the tow had been concluded because the auctioneer intended to sell tow and the defendants intended to purchase hemp and the defendants' mistake had been induced by the carelessness of the the claimants in preparing the auction catalog.

Once again, the objective test can be used on the basis that the reasonable person in the position of the defendants would have been misled by the auction catalog, the claimants were not entitled to enforce their version of the contract against the defendants.

The General Rule

It is important to understand that, as a general rule, the subjective understandings of the parties will not generally prevail over their objectively ascertained intention. As Lord Normand stated in Mathieson Gee (Ayrshire) Ltd v. Quigley 1952 SC (HL) 38:

"... when the parties to a litigation put forward what they say is a concluded contract and ask the Court to construe it, it is competent for the Court to find that there was in fact no contract and nothing to be construed."

The existence or non-existence of a contract is ultimately a question for the court which will generally be decided by the application of an objective test.

2. The Objective Test

There are three different interpretations of the objective test which can be applied by the courts, ie:

a. Detached Objectivity - what interpretation would a person watching the behaviour of the contracting parties place upon their words and actions or the "fly on the wall" approach.

b.Defendant Objectivity - to interpret the words as they were reasonably understood by the defendant/ promisee. This approach finds the greatest support in case law

c. Claimant Objectivity - standard of the reasonable person in the shoes of the person making the offer. This approach finds little judicial support.

Has Agreement Been Reached?

The Battle of The Forms

A useful example of the approach which the courts adopt in deciding whether or not the parties have reached  agreement can be seen in the case of Butler v. Ex-Cell-O Corporation (England) Ltd [1979] 1 WLR 401.The sellers, Butler, offered to sell  machine tool to the buyers, the offer being made on Butler's standard terms of business, which included, inter alia, a price variation clause. The buyers sent an order for the machine tool, which, in turn, was on their own standard terms of business, which made no provision for a price variation clause and stated that the price of the machine tool was to be fixed. The buyers' order form contained a tear-off acknowledgement slip, which stated that 'we [the seller] accept your order on the terms and condition stated thereon'. The sellers signed and returned this slip to the buyers, together with a letter stating that they were carrying out the order on the terms of their original offer. After constructing the machine tool, but before delivering it, the sellers sought to invoke the price variation clause contained in their original offer and claimed the additional sum of $2,892. The buyers refused to pay this increase in price claiming they were not contractually bound to do so. The sellers accordingly sued the buyers for $2892 in damages. The Court of Appeal held that they were not entitled to recover the sum claimed because a contract had been concluded on the buyer's terms which did not include the price variation clause. Although the Court of Appeal was unanimous in holding that a contract had been concluded on the buyers' terms. the court was divided in its reasoning.

The majority, Lawton and Bridge LJ used the traditional 'mirror image' rule of contractual formation, i.e the court must be able to find in the documents which passed between the parties a clear an unequivocal offer which is matched or 'mirrored' by an equally clear and unequivocal acceptance. A purported acceptance which does not accept all the terms of the original offer is not in fact a true acceptance at all but is a counter-offer which 'kills off' the original offer and amounts to a new offer which can in turn be accepted by the other party. Thus, it was held that the buyers' order could not be construed as an acceptance of the sellers' offer and therefore amounted to a counter-offer. They held that this counter-offer was accepted by the sellers when they signed the tear-off acknowledgement on the buyers' order form. The letter accompanying the the acknowledgement slip was held to not to be an attempt to reintroduce the terms of the sellers' original offer and so was not a counter-offer, but was simply a means of identifying the order for the machine tool.

The advantages of this 'traditional' approach:
1. provides degree of certainty as to whether or not a contract has been concluded.
2.can be applied to every type of contract

Criticisms:
1. excessively rigid - all or nothing result - it is either the terms of the buyer or the terms of the seller which govern the relationship of the parties; the court cannot pick and choose between respective sets of terms and conditions or seek to find an acceptable compromise
2. encourages businesses to seek the 'last shot' and places the party in receipt of the last communication in a very difficult position. However, the onus will generally be on the buyer, as Leggatt LJ observed in Hitchins (Hatfield) Ltd v. H Butterworth Ltd 1998, "if express terms are to govern a contract of sale, a buyer would expect to buy goods upon the seller's terms, unless supplanted by the buyers' own'.

The minority, Lord Denning, rejected the traditional mirror image approach, holding it to be 'out of date' and said 'better way is to look at all the documents passing between the parties and glean from them, or from the conduct of the parties, whether they have reached agreement on all material points, even thought there may be differences between the forms and conditions printed on the back of them.'

He also held that even where the terms used by the parties were mutually contradictory, it was possible for a court to 'scrap' the terms and replace them by a 'reasonable implication'. The signing of the tear-off acknowledgement by the sellers was the 'decisive document', which made it clear that the contract was concluded on the buyers' terms.

This suggests a 2 stage approach :-
1. decide whether a contract has been concluded
2. decide what are the terms of the contract.

However, English law remains wedded to the traditional approach as confirmed by Lord Diplock in Gibson v. Manchester City Council [1979] 1 WLR 294, where he said that although there may be certain 'exceptional' cases which do not 'fit easily into the normal analysis of a contract as being constituted by offer and acceptance', these cases were very much the exception and they have not displaced the traditional rule.