Adjudication
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KEYWORDS: |
Non-Statutory Adjudication, set-off, existing rights, stay to arbitration, interim award, Court of Appeal. |
The decision in Parsons Plastics (Research and Development) Ltd -v- Purac Ltd clearly establishes the difference between statutory and non-statutory adjudications. There have been a number of decisions on statutory adjudications which have consistently held that the failure to give notice of withholding in accordance with the 1996 Act is fatal to a right of set-off against a payment due. The Court of Appeal decided that in non-statutory adjudications, it is possible to make the right of set-off independent of procedural requirements by appropriate terms.
The facts of the case are as follows. In a first instance judgment of the Technology and Construction Court, Parsons Plastics were refused summary judgment of £222,765 against Purac and a stay to arbitration of Purac’s money claim. The judge granted Purac summary judgment on the money claim and ordered an interim payment of £12,000. Parson appealed that decision. The main issue in the Court of Appeal in Parsons Plastics (Research and Development) Ltd -v- Purac Ltd was whether Purac could set-off its claims against an adjudicators decision, which was not a statutory adjudication decision.
Purac was engaged by Anglian Water as main contractors for the design and construction of a sewage treatment works at Lowestoft. Parsons were engaged as sub-contractors for the supply of an odour control package at the works. On 20th December 2000 Parsons made Application for Payment 3 for milestone payments. Purac declined to pay. On 12th January 2001 Parsons were ejected from the site. On 4th April 2001 the issue of payment under Application 3 was referred to adjudication.
It was common ground that the Housing Grants Construction and Regeneration Act 1996 did not apply to the adjudication. The Adjudicator gave his decision on 17th May 2001 ordering Purac to make payment to Parsons.
On 23rd May 2001, Purac served notice of intention to withhold payment of the sum awarded. Purac had paid more to have the work completed than the sum awarded by the Adjudicator and claimed that Parsons was not entitled to payment. Parsons commenced proceedings to enforce the adjudicator’s decision on 24th May 2001.
The Sub-Contract specified procedures for the adjudication at Clause 27 and stated that the adjudicator’s decision was “final and binding”. Clause 17(f) provided that the right of Purac to withhold payment was subject to Clause 31 and “without prejudice to any rights which exist”. Clause 17(g) of the Sub-Contract provided that notice of intention to withhold payment had to be given no later than one day before the Final Date for Payment of a sum. Clause 31 provided that nothing in the Sub-Contract restricted Purac’s equitable or common law rights of set-off.
Parsons submitted that the referral to adjudication was on the basis that the decision of the adjudicator should be “final and binding” under Clause 27h(i) and that the decision “shall be complied with forthwith upon receipt” under Clause 27g. Parsons submitted that while the adjudication was not under the Act it should be treated as if given under the Act to the extent that the terms of the sub-contract should be construed on the basis that the parties intended a swift resolution of disputes. Purac had not complied with the contractual procedure which would have enabled it to set-off (Clause 17g).
The Adjudicator found that no Clause 17g notice was served by 16 February, the date by which, on the adjudicator’s finding, the sum he found due was payable. It was common ground that the Adjudicator’s finding was not susceptible to challenge.
Purac submitted that it had followed the procedure under Clause 17g by its notice of 23 May 2001 which was given before it was obliged to give effect to the adjudicator’s final decision of 17 May. Purac also submitted that the procedure specified in Clauses 17f and 17g was expressly made subject to Clause 31 which preserved Purac’s equitable and common law rights of set-off. Purac relied on the statement Lord Diplock in Modern Engineering -v- Gilbert-Ash (1974) that clear unequivocal words were necessary to prevent the remedy of setting up a breach of warranty in diminution or extinction of the price of material supplied or work executed under the contract.
Lord Justice Pill gave the leading judgment in the Court of Appeal and Lord Justice Mummery and Lotham agreed.
Lord Justice Pill held that when parties provided a specific procedure by which a claim to withhold payment it to be notified and detailed, it cannot readily be concluded that the effect of a general clause such as Clause 31 was to make the procedure unnecessary. He held that in this case failure to give a notice under Clause 17g was not fatal to Purac’s right to set-off. Clauses 17f and 17g had to be read together. Clause 17g provided a mechanism whereby Purac could exercise the right conferred in Clause 17f. The expression “subject to Clause 31" governed both paragraphs and maintained the express preservation of rights of set-off in Clause 31.The expression “nothing contained in this deed shall in any way restrict” in Clause 31 was consistent with the procedure in Clause 17g being subject to it. Lord Justice Pill held that the first instance judge reached the correct conclusion. Purac could set-off against the adjudicator’s decision any other claim they had against Parsons which had not been determined by the adjudicator. The adjudicator’s decision could not be re-litigated in the other proceedings but, on the wording of the sub-contract, could be made subject to set-off and counterclaim. This decided the issue, and therefore it was not necessary to decide whether the notice of set-off complied with Clause 17g.
Lord Justice Pill made interesting observations on another issue, which was not necessary to decide the case. The judge at first instance had decided that the sum claimed by Parsons was a sum determined by the adjudicator and was not therefore a sum due under the sub-contract. He observed, without deciding, that the fact that it is an adjudicator who decides that the payment should be made does not on the face of it make it any less due under the sub-contract which has provided for his appointment. It may also have become due under the sub-contract on a particular date even if that date is only determined by the adjudicator at a later date.
Lord Justice Pill then dealt with the application to stay Purac’s claim to arbitration. Clause 27 set out the procedure for adjudication. Clause 27h(i) provided that the Adjudicator’s decision was final and binding. Clause 27h(ii) made the Adjudicator’s decision binding to be finally decided by legal proceedings or arbitration. Clause 27(iii) stated that if neither clauses 27h(i) or 27h(ii) had been deleted then Clause 27h(i) applied. Neither clause had been deleted. Clause 28a provided for arbitration but only if Clause 27h(i) did not apply.
The Adjudicator had decided that the work was not a “construction operation” within the meaning of the Act. Parsons argued that Clause 27 could have no application because the work was not a “construction operation” within the meaning of Clause 1g and Clause 27. Clause 28 should be read as if Clause 27 was not present in the contract and provided a binding arbitration clause. Clause 1(g) provided a definition of “Sub-Contract Dispute” in terms limited to any matter in connection with a “construction operation” under the Act.
Lord Justice Pill did not accept this argument. He held that the fact that it was later decided by an adjudicator that the sub-contract work was not a construction operation did not permit a party to treat the sub-contract as if Clause 27 was absent so that the reference to it in Clause 28a could be ignored. The opening words of Clause 28a referred to Clause 27 and required arbitration only “where Clause 27h(i) does not apply”. When the parties entered into the contract they did not delete Clause 27h(i) with the result that by virtue of Clause 27h(iii) that paragraph “shall apply”. Clause 28a could by the terms, operate only where Clause 27h(i) did not apply.
The final issue was whether the judge at first instance had applied the wrong test for an application for summary judgment. Lord Justice Pill held that the judge was correct to decide that the issue was whether the breaches entitled Purac to take over the work pursuant to Clause 20 and questions as to whether Parson’s delays were causative of other delays were not relevant. The judge was entitled to conclude that Parson had “no real prospect of successfully defending [Purac’s] claim” for the cost of completing the work. There was no error of law by the judge who was entitled, on the evidence, to reach the conclusion that Purac was entitled, to the extent of the two claims, to summary judgment. The judge acknowledged that credit should be given to Parsons for the amount awarded to them by the adjudicator. The figures were such that a modest interim award could properly be made.
Accordingly the appeal was dismissed.