Set-off in adjudication

In September 2002, I reported the case of The Construction Centre Group -v- The Highland Council. That case dealt with, among other matters, whether an employer was able to raise a withholding notice after the publication of an adjudicator's decision, to resist enforcement of that decision.
In April of this year, that decision was the subject of an appeal to the Inner House of the Court of Session in Scotland where further detailed discussion on the rights of the parties took place.
The Construction Centre Group had been engaged by the Highland Council to undertake the design, construction and maintenance of works involved in the Small Isles and Inverie Ferry Scheme on the west coast of Scotland.
Disputes arose and these were referred to adjudication under the HGCRA 1996. The adjudicator ordered the council to pay the Construction Centre the sum of about £250,000.
The money was not paid and the parties ended up in the Court of Session in Edinburgh. The Construction Centre sought enforcement of the adjudicator's decision.
The council raised arguments to resist that enforcement. In particular, the council complained it was entitled to apply a deduction or set off for liquidated damages for delay, which it had quantified in the amount of £420,000.
Within seven days of the adjudicator's decision, the council had issued a Section 111 withholding notice in respect of those liquidated damages.
The council argued that a withholding notice could not have been issued prior to the adjudication because the engineer had issued a 'nil' valuation. Accordingly, there was no sum due under the contract against which a withholding could be made. The council maintained that now a sum had been awarded by the adjudicator, it should not be deprived of its right to make such a deduction.
On hearing these matters at first instance in the Outer House of the Court of Session, Lord Macfadyen made some surprising comments.
First, he said the council had not needed a withholding notice to argue in the adjudication that it had a right to apply liquidated damages for delay against any sums which the adjudicator might subsequently award.
Some would argue against that, on the basis that liquidated damages do not concern the valuation of the work carried out, but instead concern the separate grounds that an employer may have to apply a cross claim or set off, flowing from the contractor's breach.
Setting those arguments aside, it was nevertheless the case that the council had not raised by way of defence or cross claim its entitlement to liquidated damages before the adjudicator. The consequence, according to Lord Macfadyen, was that the council could not later resist enforcement of the adjudicator's decision by raising a Section 111 withholding notice after receipt of the decision. Section 111 of the Act did not permit the giving of a withholding notice in respect of an adjudicator's award.
That finding was examined by Lord Hamilton on appeal to the Inner House. A further complication was that a receiver had been appointed to the Construction Centre.
By clause 63(4) of the ICE conditions of contract, the council argued that it would not be liable to pay the contractor any further money until the end of the period of maintenance when the costs of completion had been ascertained and certified by the engineer.
The council elaborated that an order by the adjudicator for the employer to make a money payment was no more than money "on account of the contract" and where clause 63(4) applied, the obligation to pay was suspended.
The Construction Centre disagreed. The case of Levolux
-v- Ferson Contractors in January this year was raised. There, the Court of Appeal in England had held that where a conflict arose between the obligation to pay an amount stated in an adjudicator's decision and the prevailing contract terms between the parties, the adjudicator's decision should take precedence. The Construction Centre contended that, as a dispute resolution procedure, adjudication was not simply a process of ascertainment of sums due under the contract, such as certification by the engineer, but involved a judgement, albeit provisional, on the parties' disputed contentions.
If the adjudicator had been presented with a claim for liquidated damages, he would have been entitled and bound to consider that claim. The council had chosen not to put before the adjudicator its claim for payment of any liquidated damages for delay and completion. The Construction Centre said it would defeat the purpose of the adjudication if the court were to entertain that claim in enforcement proceedings.
In considering these arguments, Lord Hamilton was clear that the process of interim certification was quite different from the adjudication process. The issue of payment certificates did not constitute the resolution of any pre-existing dispute and was therefore quite distinct from adjudication. It made no difference whether the claims now raised by the council were retention or compensation (broadly equivalent to abatement and set-off in English law).
It was sufficient to hold that, not having relied upon its claim for liquidated damages as it might have done before the adjudicator, the council could not now raise that claim in this action for enforcement. That would not be consistent with its contractual obligations to give effect to the adjudicator's decision.
The appeal was dismissed and the Construction Centre was entitled to enforcement of the adjudicator's decision for the payment of £250,000.