Adjudication
KNS Industrial Services (Birmingham) Limited v Sindall Limited (July 2000) TCC

© Daniel Atkinson 2000   15 September 2000

The decision in KNS Industrial Services (Birmingham) Limited v Sindall Limited (July 2000) TCC gives useful guidance on the jurisdiction of the Adjudicator when the issue referred to him is the valuation of works in an interim application for payment. The case also establishes the contractual standing of the Adjudicator’s decision in relation to other terms of the contract.

The dispute arose from a project in which Sindall was carrying out works for Sir David Alliance at Mermaid House in London. Sindall subcontracted to KNS mechanical and electrical works under the standard JCT conditions DOM/1 and the terms of Sindall’s order forms.

KNS submitted a monthly application in December 1999. The dispute which arose was referred to adjudication. Sindall had properly notified KNS of its intention to withhold £44,158.52. The Adjudicator decided the amount due by deducting from the KNS December valuation the amount of £44,158.52, but also deducted an additional sum for "non-compliant work" which had not been part of Sindall’s notice of withholding. He ordered Sindall to pay KNS the resultant sum which Sindall duly did. It appeared then that there was little for KNS to dispute in the decision. KNS’s case however was that the Adjudicator had no jurisdiction to reduce the valuation in its December application by amounts which had not been the subject of an effective notice under Section 111 of the Act. This therefore was a challenge to the jurisdiction of the Adjudicator to decide as he did, by reducing the valuation for "non-compliant work".

His Honour Judge Humphrey Lloyd emphasised that when the jurisdiction of a person appointed to make a decision under a contract (such as an adjudicator) is called into question, it is always necessary to ascertain with precision what the decision-maker was authorized to do. It was held that the events leading up to the notice of adjudication have to be examined to understand what dispute the adjudicator was appointed to resolve. Reference was made to the decision in Fastrack Contractors Ltd v Morrison Construction Ltd and the well known description of the nature of the enquiry. In this case it was clear that the proper measurement and/or valuation of additional or varied works was referred to the Adjudicator.

Judge Lloyd then examined the operation of the payment provisions of JCT DOM/1 and Section 111 of the Housing Grants Construction and Regeneration Act 1996, which provides for notice of withholding of payment. The DOM/1 provisions are similar to other JCT standard forms, so his findings are of general application to such forms.

He held that DOM/1 Clause 21.3 read with Clause 21.4 requires the contractor to notify the subcontractor on valuation dates of the amount of interim payment due to the subcontractor as the value of the work properly executed, how it is calculated and the amount of any deduction for any payment due. He held that the amount notified as due will be the Contractor’s view of the true value of the work, taking into account any factors that affect the true value of the work. Such factors were matters which might qualify in law as entitling a contractor to the defences of abatement or set-off such as the state of completion and proper execution of the work, including whether it was properly carried out or has proved to be defective. Any amount that is due by the subcontractor (e.g. contra-charges for labour, plant or materials supplied at the subcontractor’s request) will also be notified as a deduction so as to arrive at the net amount due under clause 21.3.2.

Judge Humphrey Lloyd held that the term "withhold" is used in Section 111 of the Act to cover two situations. The first is where the contractor had not taken account of a countervailing factor in arriving at his declared valuation. The second situation is where there is to be reduction in or deduction from an amount that had been declared or thought to be due. Judge Lloyd considered that in the former case the word "withholding" may not always be correct for as he put it, one cannot withhold what is not due.

This part of the judgment is difficult to understand fully. It appears to suggest that the contractor may value of the works by making adjustments for items of work which have not been carried out at all, or for works which have not been carried out properly. If he does not do so when declaring his valuation, the contractor may subsequently give notice of withholding for such matters under Section 111. In other words the contractor can carry out a gross valuation and then give notice of withholding for incomplete or improper work, or he may carry out a valuation net of such work. The question which then arises is what happens if the contractor does not make a valuation or give a notice at all? Can the adjudicator include such matters in his decision on the true value of the valuation?

KNS submitted that the Adjudicator did not have jurisdiction to reduce the gross valuation for "non-compliant work" and relied upon Judge Bowsher’s decision in Northern Developments (Cumbria) Ltd v J & J Nichol that "there is to be no dispute about any matter not raised in an intention to withhold payment. ... the adjudicator had no jurisdiction to consider any matter not raised in the notice of intention to withhold payment...".

Judge Lloyd held that this was a misreading of the extract. It was correct that an adjudicator cannot dispense with a pre-condition to withholding or deducting an amount. In this case the Adjudicator had decided that Sindall had given effective notice for deduction of only £44,158, but he had allowed for a further deduction for "non-compliant work". It was clear therefore that the Adjudicator had not decided that there was an effective notice for the additional deduction. If the additional deduction did require an effective notice then the adjudicator would have made an error. In this case Judge Humphrey decided that he could not safely conclude that the Adjudicator had accepted KNS gross valuation as the true value of the works and then made deductions from it. It was possible for instance that the deduction for "non-compliant work" might mask matters which would affect the valuation.

It appears therefore from this part of the decision that where the issue of the valuation of the works has been referred to the Adjudicator, that he can decide the value of the work properly carried out and reduce the gross valuation for non-compliant work even in the absence of an effective notice. Such a deduction is an integral part of valuation and does not require an effective notice under Section 111. This simply follows common sense.

This therefore dealt with the matter, but Sindall raised a further defence to payment.

Sindall had properly terminated the employment of KNS and relied upon Clause 29.6.3 of DOM/1 to discharge it from any obligation to make further payment. Clause 29.6.3 provides that upon determination of the subcontractor’s employment, the Contractor is not required to make any further payments until completion of the Sub-Contract Works and the making good of defects. This is a common provision in JCT standard forms. KNS on the other hand submitted that an order by an adjudicator for a sum to be paid, has to be paid notwithstanding any provision in the subcontract.

Judge Lloyd held that unless the parties agree otherwise an adjudicator is not appointed to adapt the terms of the contract or vary, add to or take away from the terms of the contract. An Adjudicator’s role is to apply the terms of the contract and decide whether in the circumstances of the dispute a particular right exists and should be enforced. There was nothing in the Act to suggest that a decision that a payment should be made overrides the parties’ other contractual rights. Judge Lloyd referred to Clause 38A.7.2 which provides that the parties shall comply with the decisions of the Adjudicator, but expressly states that this is without prejudice to their other rights under the Contract. Other rights under the contract which were not the subject of the decision remain available to the relevant party.

It was held that if the contract has been lawfully terminated by the time an adjudicator makes a decision, or some other event has occurred which under the contract entitles a party not to pay, then the amount required to be paid by the decision does not have to be paid.

This is an important decision, since it makes clear that the adjudicator’s decision is simply part of the contractual machinery and subject to the other terms of the contract.