[2017] CSOH 143

DC entered into a contract with Renfrew for the construction of a new special needs school at Linwood. The contract incorporated the 2005 NEC3 Form, Option C. A dispute arose as to the sum Renfrew was liable to pay the pursuer in respect of payment certificate number 33. The amount due was £287k, no pay less notice was served and Renfrew paid the sum notified.

On 6 June 2017, DC served a notice of adjudication in respect of three aspects of its dispute with payment certificate number 33. There were three limbs to the dispute, relating to separate subcontract packages. The project manager had assessed one item at £254k and the other two at nil. DC said the three items had been under-assessed in the amount of £821k. The adjudicator agreed.

Renfrew defended enforcement proceedings saying that the adjudicator had failed to address a material defence, also known as failing to exhaust his jurisdiction. During the adjudication, Renfrew had submitted that DC were in delay and that they were accordingly entitled to deduct delay damages (of £469k) from Renfrew. Had the project manager’s assessment included the claims being made in the adjudication, Renfrew would have issued a pay less notice to limit the payment. Renfrew further said that if the adjudicator opened up the assessment and decided that further sums were due, they would rely on their right of set-off. The delay damages were £468,666 (from 18 November 2016 to the due date amounting to 162 days x £2,893) and should be offset against any sums which might become payable to the Referring Party.

The adjudicator in his Decision listed the submissions he had received and confirmed that:

“I have considered all the submissions and their accompanying documents, but have not found it necessary to refer to all of the material provided to me in explaining the reasons for my decision.”

The adjudicator did not make any reference to Renfrew’s claim for delay damages to be offset, even though he decided he could open up the assessment.

DC said that the adjudicator had not failed to consider the set-off submission. A court should not be overly critical of the adjudicator’s reasons. Where, as here, the defence had been raised at a very late stage, it was legitimate to bear that in mind. A court should only interfere in the plainest of cases. Further, if the adjudicator had failed to deal with the delay damages defence, the court should conclude that it had not been a material line of defence, and it should enforce the adjudicator’s decision. Renfrew could not make the defence because it had not issued a pay less notice.

Renfrew said that the defence of set-off of delay damages fell within the scope of the adjudication and that the adjudicator failed to address it. This omission was a failure to exhaust his jurisdiction. There was no discussion of set-off in the decision. One could not place reliance upon the adjudicator’s general statement that he had considered all of the submissions or that the relief sought was declined. It was held that:

“The adjudicator was under an obligation to provide adequate, intelligible reasons dealing with all material matters. If he [the adjudicator] had rejected the set off defence, he had not explained the basis upon which he had done so.”

Further, Lord Doherty noted that

“The scope of an adjudication is defined by the notice of adjudication together with any ground founded upon by the responding party to justify its position in defence of the claim made…”

Although DC had had the opportunity to respond, it did not. The Judge was not persuaded that the adjudicator had addressed the set-off defence. He made no explicit reference to it in the decision, and the general comments such as “The Council’s relief sought is declined” fell far short of being sufficient to show that the defence was considered but was rejected for stated reasons, especially as the adjudicator was obliged to give written reasons for his decision. Lord Doherty said that:

“the adjudicator required to give at least some brief, intelligible explanation of why the defence of set off was being rejected…”

This was not a case where the rejection of the defence was implicit in the reasons given. The failure to address the set-off defence was material. The claim had a substantial potential value equivalent to more than half of the principal additional sum which the adjudicator decided was due.

Further, Lord Doherty said that it was not a prerequisite of the set-off defence that a pay less notice should have been given. Where a compliant payment notice has been given, the notified sum is the amount specified in the notice. A pay less notice only needs to be given if the payer intends to pay less than the notified sum. If, on the other hand, the payer is content to pay the notified sum, there is no basis for a notice that the payer intends to pay less. By advancing the set-off defence in the adjudication, Renfrew did not alter its position in relation to the notified sum. Rather, it sought to set off delay damages against any additional sums that the adjudicator might decide were payable. Renfrew was entitled to deploy that defence to the claim for additional sums. The decision was not enforced.