The issue before the court in the following case was whether an entitlement to a sum of money under an adjudication award could be used to set-off the payment of a sum of money arising out of an arbitrator’s award?
Workspace Management Limited v YJL London Limited  EWHC 2017 (TCC)
There were a total of three adjudications between the parties in this case, each in relation to the same building contract and the same underlying dispute. It is not necessary to set out the facts of each of these adjudications. However, the main features of the adjudication decisions 2 and 3 were:
- Adjudication Decision 2 - the contractor was liable to pay liquidated damages in the sum of £285,000 and repay the employer loss and expense previously paid to the contractor in the sum of £126,192.
- Adjudication Decision 3 - the adjudicator found that on a proper analysis of payment certificate number 27 the true negative balance of the certificate was less than the amount which the contractor had repaid to the employer following Adjudication Decision 2. This meant that the contractor had overpaid the employer a total of £56,000.
Arbitration proceedings were commenced by the contractor mainly in response to Adjudication Decision 2. Award No 1 was concerned with an estoppel issue and is not relevant to this case.
Award No 2 required the contractor to make an interim payment on account of costs of Award No 1. Award No 2 was provisional as a detailed cost assessment was to take place at a later date. The contractor paid an amount towards payment of Award No. 2 but left a balance outstanding of £56,000.
Was the contractor entitled to set-off the outstanding balance due under Award No 2 against what it was owed by the employer under Adjudication Decision 3?
Set-off: the court’s approach
The authorities were clear that generally a defendant could not raise a counterclaim as a means of defeating a claim to enforce an adverse arbitral award. In Margulies Bros Ltd v Dafnis Thomaides & Co (UK) Ltd  1 Lloyds Rep 250 Diplock J said:
“No authority has been cited to me in which the existence of a counterclaim has been held to be a good reason for refusing to allow an award to be enforced as a judgement. I do not think that the existence of a counterclaim is a good reason.”
This was approved by Lord Denning MR in Middlemiss & Gould (A Firm) v Hartlepool Corporation (1973) 1 AER 172.
The situation in this case was different:
- The contractor was not asserting the existence of a counterclaim.
The contractor was contending that there was a binding decision by an adjudicator the effect of which was that the employer should pay the contractor the sum in question.
- On analysis, this was a simple mutual set-off of debts.
The employer owed £56,000 by reason of Adjudication Decision 3 and the contractor owed the same sum by reason of Award No 2. Each decision required the permission of the Court to be enforced. They therefore cancelled each other out (provided that they could be regarded as giving rise to an equitable set-off).
Did Award No 2 trump Adjudication Decision 3?
The employer argued that because Award No 2 was final and binding and Adjudication Decision 3 was, at most, only temporarily binding, Award No 2 trumped that decision, and should be enforced regardless of the position in Adjudication Decision 3.
The Court held that:
- Both decisions were binding on the other side. One did not have greater status than the other. They were both capable of being the subject of the judgment of the court.
- Award No 2 was described on its face as being “provisional” because the Arbitrator was still tasked with the exercise of assessing the detailed costs. There was no reason to elevate its status above Adjudication Decision 3.
- The mutual debts arose out of the same transaction and gave rise to an equitable estoppel.
Lord Denning in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (1978) 1 QB 927, said:
“It is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the [claimant’s] demands, that are so closely connected with his demands that it would be materially unjust to allow him to enforce payment without taking into account the cross-claim”.
The court concluded that it would be manifestly unjust to allow the employer to enforce payment under Award No 2 without taking into account the cross-claim based on Adjudication Decision 3. The principles of an equitable set-off were triggered in this case.
This case makes it clear that adjudicators’ decisions and arbitrators’ awards have equal status - both are binding (albeit temporarily in the case of an adjudication decision) and are to be treated equally.
However, it should be noted that in this case the arbitration award was described on its face as “provisional” and “interim” because the arbitrator still had to complete the detailed assessment of costs. It would be interesting to know whether the court’s view would have been any different had the arbitrator’s award been a final award. A different decision may be unlikely given Lord Denning’s comments that it would be “materially unjust to enforce payment without taking into account the cross-claim”.