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Set-off in adjudication
11:02 05 Dec 2002
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Ordinarily, the decision of an adjudicator will give rise to a
contractual entitlement to immediate payment without deduction,
set-off, withholding, reliance on a cross claim, abatement or stay
of execution. The courts have repeatedly held that no deduction or
withholding will be allowed from an adjudicator's decision.
The courts have, however, developed exceptions to this general rule. These exceptions include situations where it can be shown that the adjudicator had no jurisdiction to make the decision in question, or where the adjudicator had failed to act fairly or in conformity with applicable procedural rules.
Examples of such cases have been well canvassed in the law reports and construction press, such that adjudicators, and those who might use adjudication regularly, will be familiar with the points. Less clearly understood however, is the idea that an adjudicator's decision may not be enforceable where there are other terms of the contract between the parties which override the obligation of a party to comply with an adjudicator's payment decision. Clear words will be needed in the contract if this is to apply.
At the heart of this question lies a debate as to whether the requirement to comply with an adjudicator's decision is based upon some separate statutory force, or whether it is no more than a contractual obligation between the parties, albeit backed by statute. It is the latter of those two views (that compliance with an adjudicator's decision is simply a matter of contractual obligation) that appears to have won the day.
Judge Humphrey Lloyd has been in the vanguard of this view. In three of his judgments, Judge Lloyd held that an adjudicator's decision does not create an obligation to pay which is separate from the underlying contractual obligation. Thus, other rights under the contract which are not the subject of the adjudicator's decision remain available to the relevant parties.
In April of this year, the Court of Appeal confirmed in principle this line of authority in the case of Parsons Plastics -v- Purac Limited. In this case, the Court of Appeal agreed that Purac was entitled to resist payment of a sum ordered to be paid by an adjudicator on the basis of a notice of intention to withhold payment raised after the date of the adjudicator's decision.
The reasoning behind the Court of Appeal's decision lay in the non-standard form of subcontract between the parties which contained a clause which expressly preserved Purac's common law rights of set-off and made the payment and withholding notice requirements subordinate to those rights. Whether such a clause fell foul of the Construction Act appeared not to have been argued, but nevertheless a principle was established.
Parties to a construction contract may agree a clause concerning payment, which may trump the contractual obligation to comply with an adjudicator's decision.
A very good example of such a clause, which would not fall foul of the Construction Act, is one which states that following the determination of the employment of the contractor, no further payment shall be made to the contractor until an account of all claims and cross claims is established. Such a clause is commonplace in standard form agreements.
Whether the clause would bite to prevent enforcement of an adjudicator's decision was the subject of the recent case of Bovis Lend Lease -v- Triangle Developments heard in the Technology and Construction Court.
Management contract
Bovis had entered into a management contract with Triangle to refurbish and fit-out three existing Victorian school houses into 43 luxury residential apartments in south-west London.
The contract incorporated the JCT standard form of management contract. Acting on the advice of a quantity surveyor, the architect decided that Bovis, as management contractor, had been in default in the manner in which it had checked payment applications for three work package contractors and in consequence disallowed the entire sum being claimed for each. This removed substantial sums from those previously certified and led to the issue of two negative valuations to Bovis.
Shortly after issuing his negative payment certificates, the architect served on Bovis a notice to the effect that Bovis was failing to proceed regularly and diligently with the works. Some days later, Triangle issued a notice informing Bovis of its intention to withhold liquidated damages.
Bovis responded to these actions by serving a notice to the effect that Triangle had repudiated the contract, and there followed the usual dance culminating in Triangle following up its earlier default notice by determining Bovis' employment under the contract.
Meanwhile, in parallel to all this aggravation, three adjudications were being progressed. The first of these concerned whether the negative valuations were correct. The adjudicator concluded they were not and ordered that Triangle should pay Bovis £158,000. Triangle refused to pay. The matter moved to enforcement proceedings in front of His Honour Judge Thornton QC.
Triangle's primary contention was that it had successfully determined Bovis' employment, or that Bovis had irrevocably repudiated its contract. Relying on Clause 7.6.4.1 of the JCT form, Triangle contended that the provisions of the contract requiring further payments to be made to Bovis no longer applied. To give crucial weight to its position, a third adjudicator's decision concerning the matter of repudiation had been decided in favour of Triangle.
In a careful judgment, Judge Thornton reviewed the previous decisions of the courts, including the Court of Appeal's decision in Parsons Plastics. He concluded that appropriate terms of a contract can defeat the requirement that immediate effect should be given to an adjudicator's payment decision. Such an effect was obtained by Clause 7.6.4.1. The adjudicator's third decision made it clear that Bovis could not, for present purposes, argue that Triangle had repudiated its contract.
In consequence, Triangle was entitled to rely on Clause 7.6.4.1 to withhold payment of the sum directed to be paid under the adjudicator's first decision.
The courts have, however, developed exceptions to this general rule. These exceptions include situations where it can be shown that the adjudicator had no jurisdiction to make the decision in question, or where the adjudicator had failed to act fairly or in conformity with applicable procedural rules.
Examples of such cases have been well canvassed in the law reports and construction press, such that adjudicators, and those who might use adjudication regularly, will be familiar with the points. Less clearly understood however, is the idea that an adjudicator's decision may not be enforceable where there are other terms of the contract between the parties which override the obligation of a party to comply with an adjudicator's payment decision. Clear words will be needed in the contract if this is to apply.
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At the heart of this question lies a debate as to whether the requirement to comply with an adjudicator's decision is based upon some separate statutory force, or whether it is no more than a contractual obligation between the parties, albeit backed by statute. It is the latter of those two views (that compliance with an adjudicator's decision is simply a matter of contractual obligation) that appears to have won the day.
Judge Humphrey Lloyd has been in the vanguard of this view. In three of his judgments, Judge Lloyd held that an adjudicator's decision does not create an obligation to pay which is separate from the underlying contractual obligation. Thus, other rights under the contract which are not the subject of the adjudicator's decision remain available to the relevant parties.
In April of this year, the Court of Appeal confirmed in principle this line of authority in the case of Parsons Plastics -v- Purac Limited. In this case, the Court of Appeal agreed that Purac was entitled to resist payment of a sum ordered to be paid by an adjudicator on the basis of a notice of intention to withhold payment raised after the date of the adjudicator's decision.
The reasoning behind the Court of Appeal's decision lay in the non-standard form of subcontract between the parties which contained a clause which expressly preserved Purac's common law rights of set-off and made the payment and withholding notice requirements subordinate to those rights. Whether such a clause fell foul of the Construction Act appeared not to have been argued, but nevertheless a principle was established.
Parties to a construction contract may agree a clause concerning payment, which may trump the contractual obligation to comply with an adjudicator's decision.
A very good example of such a clause, which would not fall foul of the Construction Act, is one which states that following the determination of the employment of the contractor, no further payment shall be made to the contractor until an account of all claims and cross claims is established. Such a clause is commonplace in standard form agreements.
Whether the clause would bite to prevent enforcement of an adjudicator's decision was the subject of the recent case of Bovis Lend Lease -v- Triangle Developments heard in the Technology and Construction Court.
Management contract
Bovis had entered into a management contract with Triangle to refurbish and fit-out three existing Victorian school houses into 43 luxury residential apartments in south-west London.
The contract incorporated the JCT standard form of management contract. Acting on the advice of a quantity surveyor, the architect decided that Bovis, as management contractor, had been in default in the manner in which it had checked payment applications for three work package contractors and in consequence disallowed the entire sum being claimed for each. This removed substantial sums from those previously certified and led to the issue of two negative valuations to Bovis.
Shortly after issuing his negative payment certificates, the architect served on Bovis a notice to the effect that Bovis was failing to proceed regularly and diligently with the works. Some days later, Triangle issued a notice informing Bovis of its intention to withhold liquidated damages.
Bovis responded to these actions by serving a notice to the effect that Triangle had repudiated the contract, and there followed the usual dance culminating in Triangle following up its earlier default notice by determining Bovis' employment under the contract.
Meanwhile, in parallel to all this aggravation, three adjudications were being progressed. The first of these concerned whether the negative valuations were correct. The adjudicator concluded they were not and ordered that Triangle should pay Bovis £158,000. Triangle refused to pay. The matter moved to enforcement proceedings in front of His Honour Judge Thornton QC.
Triangle's primary contention was that it had successfully determined Bovis' employment, or that Bovis had irrevocably repudiated its contract. Relying on Clause 7.6.4.1 of the JCT form, Triangle contended that the provisions of the contract requiring further payments to be made to Bovis no longer applied. To give crucial weight to its position, a third adjudicator's decision concerning the matter of repudiation had been decided in favour of Triangle.
In a careful judgment, Judge Thornton reviewed the previous decisions of the courts, including the Court of Appeal's decision in Parsons Plastics. He concluded that appropriate terms of a contract can defeat the requirement that immediate effect should be given to an adjudicator's payment decision. Such an effect was obtained by Clause 7.6.4.1. The adjudicator's third decision made it clear that Bovis could not, for present purposes, argue that Triangle had repudiated its contract.
In consequence, Triangle was entitled to rely on Clause 7.6.4.1 to withhold payment of the sum directed to be paid under the adjudicator's first decision.
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