HGCR Act 1996 - Second Adjudication on Set-Off

© Daniel Atkinson 2001 30 September 2001 Revised 12/01/02

SUMMARY

An attempt to start a second adjudication is simply an attempt, by a side door, to get round the fact that there was a contractual bar to set-off.

There is no residual right to set-off in adjudication in the absence of Section 111 Notice.  A valid counterclaim under the contract such as the payment of liquidated damages may be taken into account in enforcement proceedings.

In A Straume (UK) Ltd v Bradlor Developments Ltd (1999) the contract was under JCT 80 with Amendment 18 incorporating adjudication provisions. An administrative order was made against Bradlor. The Administrator of Bradlor commenced adjudication for payment of various interim certificates. Straume raised defences of set-off in the adjudication, but in addition applied to the Court for leave pursuant to s11(3) of the Insolvency act 1996 to commence adjudication proceedings in respect of its own claims.

The Court first assumed that there was a valid set-off. If so it could be used as a valid defence against the claim for payment and therefore could be determined in the adjudication commenced by the Administrator. It was held that it was unnecessary for there to be two adjudications raising the same point.

The Court then assumed that the contract prevented set-off in some way. If that was the case the Court suggested there may be counterclaims for damages for breach of contract but these could not be defences to the claims for payment. In that case it was clear that the attempt to start the second adjudication was simply an attempt, by a side door, to get round the fact that there was a contractual bar to set-off.

On the basis of this analysis the Court refused leave to start the second adjudication. Any valid set-off should be dealt with in the Adjudication. If the contract prevented this, then the Court will not allow the contractual provisions to be side stepped by starting a separate adjudication.

In VHE Construction plc v RBSTB Trust Company (2000) it was held that there is no residual right of set-off in adjudications. Adjudicator’s decisions are required contractually to be complied with and it would be nonesense if the decisions were more vunerable to attack by deduction for claims of set-off than payments falling due under the Contract when there was no Section 111 Notice.

It is suggested that in the absence of a Section 110 Notice it is however possible to raise in an adjudication issues of reduction in price for patent defects when the issue is one of valuation of the work.

In David McLean Housing Contractors Limited v Swansea Housing Association Limited (2001) the main issue was whether a party required to pay on an Adjudicator’s decision could raise a counterclaim for payment of liquidated damages and have this taken into account in any enforcement proceedings.  

It was argued that Judge Hicks in VHE had held that the adjudicator's decision itself created a debt, and that was the cause of action upon which a claimant can claim.

His Honour Judge Lloyd does not appear to have accepted that argument but instead referred to his decision in Glencot Development and Design Co Ltd v Ben Barrett & Son (Contractors) Ltd [2000] BLR 207 where he held (without having been referred to VHE) that the cause of action was the right or obligation in dispute. In this case it was held to be the unmet claim for payment on application 19 and the right to a further certificate. That was the right under the contract which has or had not been honoured by Swansea, thereby giving rise to the dispute about a cause of action for a sum due under the contract.

The decision establishes what is due under the contract. The parties have agreed to accept the decision as binding (section 108(3)of HGCRA and paragraph 23(2) of the Scheme) so, unless otherwise agreed by them or determined by a court or arbitral tribunal, each agrees that the amount to be paid is and was due, and each must act accordingly and accept any assumptions upon which the decision must have been based. 

This analysis of the legal status of the Adjudicator’s decision led to the main point in issue – whether McLean was entitled to the full sum stated in the adjudicator's decision, or whether Swansea was entitled to the amount for liquidated damages.

Swansea had realistic prospects of success in maintaining that it had complied with the provisions of the contract for the deduction or payment of liquidated damages,  particularly having regard to the fact that all along it had made it very clear that it wanted to recover liquidated damages. It was held that it would be manifestly unjust to deprive Swansea of an opportunity of maintaining that it was not obliged to pay the full amount of the adjudicator's decision.

Swansea was entitled to summary judgment dismissing the claim so that it could safely keep the liquidated damages. Even if McLean was entitled to judgment, Swansea would be entitled to a stay of execution or it would be entitled to set off the amount due on the counterclaim against the debt due on the claim so that, in practical terms, McLean would not get the money that it is seeking.