When are losing parties in adjudication entitled to a set-off or to withhold money from sums awarded by an adjudicator? A recent case offers some advice for parties.
The Technology Construction Court has considered the circumstances in which the losing party to adjudication is entitled to set-off against the sum awarded to the winner. Historically, this much-debated point has evaded judicial clarification.
A recent judgement, Thameside Construction Company Ltd v Stevens & Anor  EWHC 2071, gives parties some points to consider before setting off against or withholding money from sums awarded by an adjudicator.
Typically, in construction litigation, a contractor’s claim for payment will be met by a counterclaim for damages in relation to delay or defects (or vice versa). A set-off is counterclaim that operates as a defence.
“As a general rule, set-offs and counterclaims cannot be raised to defeat an application for summary judgment enforcing an adjudicator’s decision”
To work as a defence, the circumstances giving rise to the counterclaim must be closely related to those giving rise to the claim, or there must be a contractual right of set-off.
As a general rule, set-offs and counterclaims cannot be raised to defeat an application for summary judgment enforcing an adjudicator’s decision.
The courts have said that to allow a set-off or counterclaim against an adjudicator’s decision would frustrate the purpose of the Construction Act, which is to ensure that adjudicators’ decisions are obeyed and that cashflow is maintained within the construction industry.
Dispute arose over delays and variations
In this recent case, Mr and Mrs Stevens had appointed Thameside on JCT terms to extensively extend and convert their home.
There were significant variations and delays. Disputes arose in relation to both the date of practical completion and the value of the final account.
Thameside referred a claim to adjudication. There was a comment in the adjudicator’s reasoning that said he was treating the dispute like an interim valuation but, ultimately, the adjudicator directed Mr and Mrs Stevens to pay around £88,000 to Thameside.
“The reality is that, in most cases, the losing party will need to pay first and argue any claim not included in the first adjudication later”
Rather than pay the sum awarded, Mr and Mrs Stevens had a payment certificate issued in respect of the sum awarded, issued a withholding notice in respect of £40,000 of liquidated damages they considered deductible, and paid the balance.
Thameside issued proceedings to enforce the adjudicator’s award in respect of the £40,000 balance. The judge ordered Mr and Mrs Stevens to pay the £40,000 withheld plus £11,000 in respect of Thameside’s legal costs.
In reaching his decision, the judge summarised the factors you must consider before setting-off against or withholding money from sums awarded by an adjudicator.
Before setting-off against an adjudicator’s award, a paying party must consider two key points.
Firstly, what has the adjudicator decided that the payer must do? The general position is that a decision which directs one party to pay money to the other must be honoured without set-off, failing which the court may well order the non-payer to reimburse the other party’s costs of enforcing the award.
Secondly, do any of the very limited exceptions to the general position apply? These are:
- Does the adjudicator’s decision permit further set-off? For example, has the adjudicator simply decided how the terms of a contract operate or the value of a sum which should still be subject to the contract machinery? If so, is it fair to say the adjudicator has not actually directed that the sum/value decided/value a payment should be paid? If so, then it may still be possible to serve an effective withholding or pay less notice.
- Contractual set-offf – is this a very rare case where the underlying contract contains a set-off provision capable of ‘trumping’ part or all of the adjudicator’s decision?
The reality is that, in most cases, the losing party will need to pay first and argue any claim not included in the first adjudication later. ‘Arguing later’ can be done via court proceedings, arbitration or counter-adjudication.
To do other than to pay exposes the non-payer to the cost of defending enforcement proceedings, bad publicity but also liability to reimburse the legal costs of their opponent.
Laura Phoenix is an associate in the construction team at Thomas Eggar