When an adjudicator decides that one party must pay money to another, can the paying party successfully resist enforcement proceedings by exercising a right of set-off? The answer is no - except in certain circumstances. In December 2008 Shepherd Construction Limited v University College London confirmed just how difficult it is to make use of the limited exception and successfully set off against an adjudicator's decision.

The contract in question incorporated the 1998 edition of the standard form JCT, Private with Quantities incorporating amendments 1 to 5. University College London (UCL) deducted £550,000 of liquidated and ascertained damages (LADs) from payments due to Shepherd Construction Limited (Shepherd) based on five withholding notices. Shepherd commenced an adjudication challenging the validity of the withholding notices and seeking repayment of the LADs. The adjudicator decided that four of the five withholding notices were invalid and, as a result, decided UCL had to pay Shepherd £477,000.

UCL refused to hand over the money, so Shepherd issued enforcement proceedings. In its defence, UCL asserted that it could set off sums due from Shepherd, being LADs and a debt allegedly due following a negative payment certificate that UCL issued just days before the adjudicator made his decision. UCL lost – it had no right of set-off and was not entitled to a stay of execution. The reasons for, and implications of, His Honour Judge (HHJ) Grant's decision are explored below.

Set-off: LADs

Parliament intended adjudication to be binding on an interim basis pending the final determination of a dispute and the courts are ready, willing and able to enforce adjudicator's decisions summarily. So it is not surprising that, generally speaking, it is not permissible to set off against an adjudicator's decision. The exceptions to the general rule, where a right of set-off may arise, are explained by the following two authorities.

In Balfour Beatty v Serco Mr Justice Jackson (as he then was) said that a set-off was possible where it follows logically from the adjudicator's decision that the employer can recover LADs of a specific sum, provided that he has given the required notices. Alternatively, if the adjudicator has not determined the entitlement to LADs either impliedly or expressly, then any right to set off will depend on the terms of the contract and circumstances of the case.

Mr Justice Ramsey elaborated on this in Ledwood Mechanical Engineering v Whessoe Oil & Gas. He said that a set-off would be possible if it followed "logically from the decision of the adjudicator" or was a "natural corollary of the adjudicator's position"; for example a calculation of LADs by multiplying the number of weeks decided by the adjudicator with the agreed rate. However, he also said that this "does not, in my judgment, give a wider power to set off sums generally against an adjudicator's decision."

In the Shepherd case HHJ Grant considered whether UCL's entitlement to recover LADs followed logically from the adjudicator's decision and whether UCL's claim for LADs was undisputed or indisputable. To answer these questions the Judge had to analyse what the parties asked the adjudicator to decide and what he did decide. On the facts, he found that the adjudicator was not asked to decide if UCL was entitled to LADs and, as that question simply did not form part of the adjudication, it could not follow from the decision that UCL was entitled to LADs.

UCL's claim for LADs was neither undisputed nor indisputable. While UCL could show that certificates of non-completion had been issued, i.e. that the works were not completed by the extended date for completion and that the contract provided for LADs at £50,000 per week, this just showed that there was a claim for LADs, not that the claim was undisputed or indisputable. On the contrary, Shepherd's evidence was that it disputed UCL's claim and that it intended to challenge the certificates of non-completion and to claim an extension of time.

Set off: Negative Payment Certificate

Shortly before the adjudicator reached his decision, UCL purported to issue a payment certificate in the negative sum of £830,203.73 and demanded that Shepherd refund that sum. UCL argued that this debt could found a set-off, but the Judge disagreed. Previous authorities make it clear that parties must comply with an adjudicator's decision without recourse to defences or cross-claims not raised in the adjudication. Neither party had referred to the payment certificate in their pleadings, and the adjudicator was not asked to decide anything about it and so did not refer to it in his decision. Consequently, the subject matter of the payment certificate did not follow logically from the adjudicator's decision.

HHJ Grant went on to say that the negative payment certificate was flawed because the contract did not provide for such a thing. If UCL considered that Shepherd had been overpaid it should have issued a payment certificate of £nil until the value became positive or the final payment was assessed. It could not issue a negative interim certificate.

The result: UCL had no right of set-off. (Note: UCL has sought leave to appeal, but it is anticipated that the Court of Appeal will be reluctant to extend the circumstances in which a set-off can succeed, even if leave to appeal is granted).

Stay of Execution

As a last shot, UCL applied for a stay pending the outcome of a second adjudication. No stay was granted. HHJ Grant confirmed that, in the absence of contractual provisions to the contrary or evidence of the receiving party's financial difficulties, the courts will be unlikely to stay the execution of enforcement proceedings even if the decision in a subsequent adjudication between the parties is imminent.

Comment

Yet again, the courts have confirmed the general rule that enforcement cannot be resisted on the basis of set-off, except in very limited circumstances.

A set-off might be possible if it follows logically from the adjudicator's decision, but to establish that it does so follow, the parties will need to identify exactly what the adjudicator was asked to decide and precisely what he did decide.

Any party that thinks it may need to rely on a set-off defence at the enforcement stage should ensure that any potential set-off arguments are brought into the adjudication before the adjudicator makes his decision. There is a risk that the adjudicator might dismiss the arguments and leave you stuck with a decision you do not like, but if those arguments are not included early on then you will not be able to rely on them at the enforcement stage anyway.