Simon Tolson, in an extract from a paper given in April 2008 at the LexisNexis Construction Law Conference 2008, looks at one of the fundamental points of law and practice which has arisen time and again, since statutory adjudication came into being. Whilst the courts at first instance have not always given consistent answers, Simon’s analysis shows that you can get close to an answer, albeit one that is short of the highest appellate courts.
Over the last decade there have been scores of attempts to resist an adjudicator’s decision on interim payments by citing later valuations where the key question was whether a final valuation can be used to defeat an adjudicator’s decision on an interim valuation. The conflict was most recently taken in hand by Mr Justice Ramsey in William Verry Ltd v The Mayor and Burgesses of The London Borough of Camden1. The main issue was the status of an adjudicator’s decision as a result of the operation of the final certificate provisions in the contract and a claim for defects that had not been considered by the adjudicator. In essence, could Camden defeat the adjudicator’s decision because of a subsequent valuation and a claim for defects? It was held:
“…Where there are potentially competing disputed rights and obligations those disputes must give way to the enforcement of the decision of the adjudicator...”
The circumstances surrounding this case are fairly common. The contract was the JCT Intermediate Form 1998 and valuations were carried out by an independent firm of quantity surveyors. There had been three adjudications concerning valuations with the third being decided in January 2006, two years after practical completion. Another was to follow. The third adjudicator decided that the interim valuation at practical completion was £6,487,648.37. After taking into account the amounts paid, retention and liquidated damages he ordered Camden to pay Verry £532,351.61 plus VAT and interest.
However, just prior to the third adjudication commencing the PQS issued a draft final account. Indeed a week or so before the third adjudicator gave his decision. The contract administrator issued a final certificate based on the draft final account showing a gross valuation of £5,755,655.51 and an amount due to Verry of only £46,020.11. So at this point, the differences were over £486k between final certificate and the third adjudication. It was about to get worse.
Shortly after the third adjudicator’s decision, Camden gave notice that it would deduct liquidated damages awarded by the third adjudicator from the amount in the final certificate. According to Camden, this meant that Verry owed Camden £35,275.61. The outcome of these corresponding procedures was that Verry had an adjudicator’s decision ordering Camden to pay over half a million pounds but also had a final certificate and a notice from Camden that showed Verry was in debt to Camden for over £30,000. Camden refused to pay on the adjudicator’s decision and Verry applied for summary judgment.
Mr Justice Ramsey considered a number of authorities but firmly rejected any arguments that the third adjudicator’s decision should not be enforced. He held that Verry was entitled to the full amount awarded . The Judge made clear that an adjudicator’s decision to which the HGCRA applied was not simply a contractual obligation that could be impugned by other contractual obligations, thereby clearing a major legal fog. If what Camden argued was the case then each successive certificate would defeat the adjudicator’s decision on a previous certificate and the fundamental purpose of providing cash flow in the construction industry would be undermined. Potentially conflicting rights had to give way to enforcement of an adjudicator’s decision. This decision finally established at HCJ level that generally there is no right of set-off from such an adjudicator’s decision.
Camden also tried to reduce the amount awarded by an amount for alleged defects, even though it had not sought to have them dealt with in the third adjudicator’s valuation or in the final certificate. Again, the judge rejected this approach for the same reasons. Camden had not sought to withhold an amount for defects against the certificate for interim payment on practical completion. It could not do so now.
Camden had started a fourth adjudication on the matter of defects and if the adjudicator awarded a sum thereon then Camden would be entitled to payment on that decision. It appears from the judgment that the valuation of the final certificate was based on various contentions that differed from the third adjudicator’s decision.
But it was an important point in the recent Scottish decision in Castle Inns (Sterling) v Clark Contracts2 where the final certificate was issued after the adjudicator’s decision. In Castle Inns, Lord Young stated that the architect had no power to undo the decisions of an adjudicator and accordingly had to comply with those decisions so far as they were relevant to any of his tasks, including making his valuation in the final certificate. There was one important qualification: Lord Young held that if new material had emerged since the date of the adjudicator’s decision, the architect was entitled to take that into account in preparing the final certificate, or indeed any interim certificate, and to make any appropriate modification to the adjudicator’s decision. What he could not do was challenge an issue of principle in the adjudicator’s decision.
It is clear from the judgments that the court will seek to resist any attempts to prevent cash flow based on an adjudicator’s decision to which the HGCRA applies. Any issues that will affect valuation need to be raised with an adjudicator during the adjudication proceedings; it will be most difficult to resist enforcement later for matters that could have been raised earlier. It is now very tricky to get round an adjudicator’s decision using inconsistent certificates.
- Subject to higher judicial authority, an adjudicator’s decision is not simply a contractual obligation that can be reduced by other contractual obligations:
- There is no general right of set-off from such an adjudicator’s decision.
- If new material emerges after the date of an adjudicator’s decision, it may be taken into account in preparing the final certificate.
- Any issues that will affect valuation need to be raised with an adjudicator during the adjudication proceedings.
Withholding liquidated damages from an adjudicator’s decision
The basic starting point question is, if a defendant is entitled to be paid liquidated and ascertained damages is he entitled to set off that claim against the sum which the adjudicator has decided must be paid to the claimant? There have been a number of court cases on this issue and on the entitlement of the paying party to resist paying an adjudicator’s decision due to set-off. However, as far back as 2000 this robust submission was rejected by Dyson J, as he then was, in Edmund Nuttall Ltd v Sevenoaks DC.3 Dyson J held that the contract worked perfectly satisfactorily without such a term. He was very wary about implying a term as to the circumstances in which LADs may be deducted from a sum due to the contractor, when the contract contained detailed express provisions which dealt precisely with the issue.
Two years later in The Construction Centre Group Ltd v The Highland Council4 the paying party only gave notice of withholding monies pursuant to Section 111 of the Act after the adjudicator’s decision, arguing that it was impossible to give notice before the decision as there was otherwise “no sum due under the contract” and the adjudication notice had not referred to the paying party’s claim for recovery of LADs, and which the paying party had not therefore pursued in the adjudication itself. The Court found that an employer who disputes sums claimed by a contractor due to an alleged entitlement to recover LADs is entitled to rely on that LADs claim as a set-off in adjudication. The fact that it had not been referred to in the notice of adjudication was irrelevant to the issue of whether or not the adjudicator could consider the claim, assuming the claim had been made prior to the notice of adjudication being issued. However, and crucially, as the paying party had chosen not to raise the LAD claim during the course of the adjudication, the Court decided that they were not entitled to raise that claim as a set-off against the adjudicator’s decision and that it was not possible to issue a section 111 notice after the adjudicator’s decision
In 2004 Jackson J gave guidance (reviewing VHE, Bovis Lend Lease, Parsons Plastics and Levolux) on this point in his judgment in Balfour Beatty Construction Ltd v Serco Ltd:5
“(a) Where it follows logically from an adjudicator’s decision that the employer is entitled to recover a specific sum by way of liquidated and ascertained damages, then the employer may set off that sum against monies payable to the contractor pursuant to the adjudicator’s decision…
(b) Where the entitlement to liquidated and ascertained damages has not been determined either expressly or impliedly by the adjudicator’s decision, then the question whether the employer is entitled to set off liquidated and ascertained damages against sums awarded by the adjudicator will depend upon the terms of the contract and the circumstances of the case.”
Two years later came R J Knapman Ltd v Richards and others6, a case which restricts the scope of the Balfour Beatty decision. Knapman was the contractor. Richards was the employer. It decided that if it does not strictly “follow logically” from the adjudicator’s decision that a sum is due by way of liquidated damages, then no set-off can be made by the employer. In the Knapman case, the adjudicator had decided that Knapman was entitled to an extension of time of 13 weeks and that liquidated damages and interest were therefore repayable in part. Richards therefore took the line that they were entitled to set off liquidated damages for the balance of the delay period up to practical completion. However, the court decided that there were three grounds for saying that the right to deduct liquidated damages did not follow logically:
- The adjudicator had not carried out an exhaustive review of delay within the adjudication;
- Knapman had put its claim on the basis that practical completion arose at the end of April 2006. It did not claim, in the alternative, that if there was a later practical completion date, it was entitled to an extension of time to that date. The court concluded that “the adjudicator was not dealing with any full extension claim”; and
- Richards’ entitlement to levy liquidated damages depended on there being a noncompletion certificate. The contract administrator had not issued a non-completion certificate. Hence there was no entitlement to take liquidated damages.
The Knapman case demonstrates that, even though the adjudicator has only awarded a partial extension of time, the employer cannot set-off liquidated damages unless the adjudicator’s review of delay is comprehensive and all relevant notices and procedures under the contract have been complied with.
In Avoncroft Construction v Sharba Homes7 HHJ Kirkham also rejected a cross-claim for liquidated damages made against an adjudicator’s decision. The contract under which a dispute arose was JCT 98 Without Quantities . The judge reviewed the two principles of law identified by Jackson J and concluded in relation to (a) that the adjudicator did not decide the question of entitlement to liquidated damages, but he had decided whether the claimant was entitled to an extension of time for completion. No claim was made within the adjudication for payment of liquidated damages. As regards (b), she concluded that Clause 41A.7.2 is clear; the parties are obliged to comply with the decision of an adjudicator, and there is no reference to any right of set- off against such decision.