Adjudicator’s awards and JCT termination provisions

Where:  

  • an employer terminates a contract (for contractor's default);
  • the contractor has obtained an adjudication award in its favour; and
  • the construction contract provides, in effect, that the employer is not required to make any further payments to the contractor following termination (for contractor's default) until the works have been completed, is the employer entitled not to pay the contractor the amount directed by the adjudicator?  

Westwood Structural Services Limited v Blyth Wood Park Management Limited [2008] EWHC 3138 (TCC)

Disputes arose between the parties as to whether or not practical completion had been achieved (and therefore an amount had become payable to the contractor). The contractor commenced adjudication proceedings. It subsequently left the site. The employer determined the contractor’s employment under the contract.  

During the adjudication, the employer argued that it was not liable to pay any amount which would otherwise be due to the contractor on the basis that it was not obliged to make any further payment to the contractor under clause 7.2.3 of the JCT Minor Works Form.  

The JCT termination provision

Clause 7.2.3 provides:  

“Upon termination of the employment of the Contractor ... [Editors’ note: for default] … the Employer shall not be bound to make any further payment to the Contractor that may be due under this Agreement until after completion of the Works and the making good of any defects therein.”

The adjudicator’s first decision

The adjudicator decided that he had no jurisdiction to deal with this termination issue because the employer had determined the contractor’s employment under the contract after the adjudication had commenced.  

The adjudicator determined that practical completion had occurred, and he awarded an amount to the contractor.  

The adjudicator’s second decision

The employer then commenced a second adjudication (in front of the same adjudicator) to deal with its termination claim.  

The employer argued (amongst other things) that, in the light of clause 7.2.3, it was under no obligation to make payment to the contractor - including payment of any sum found due in the first adjudication - unless and until completion of the Works by another contractor.  

Was clause 7.2.3 a valid ground for not paying an adjudicator’s award? The adjudicator’s view

The adjudicator found (amongst other things) that clause 7.2.3 did not bite when the payment in question arose out of an adjudicator’s decision. The employer was therefore unsuccessful. T

he employer refused to pay the amount awarded by the adjudicator under the first adjudication. The contractor brought enforcement proceedings.  

Was clause 7.2.3 a valid ground for not paying an adjudicator’s award? The court’s view

On the basis of established principles (that the courts generally will enforce adjudicators’ decisions except in clear cases of lack of jurisdiction or breach of natural justice), the court determined that it would enforce the adjudicator’s decision (that the employer could not use clause 7.2.3 to avoid or deduct any amount from a payment directed to be paid by an adjudicator's decision). It was immaterial whether the adjudicator’s decision was right or wrong.  

The court then observed (amongst other things):  

  • The Court of Appeal in Ferson Contractors Ltd v Levolux AT [2003] BLR 118 did not accept the proposition that contractual terms - which provide for an entitlement to avoid or make a deduction from a payment directed to be made by an adjudicator - will prevail over the requirement of the Construction Act that adjudication awards are to be complied with.
  • In the later case of Verry v London Borough of Camden[2006] EWHC 761, the court followed Levolux.
  • The circumstances in both Melville Dundas Ltd v George Wimpey UK Ltd [2007] UKHL 18 and Pierce Design International v Mark Johnston [2007]EWHC 1691 (TCC) were very different from the circumstances of this case and were of no assistance to the court in deciding the issue under clause 7.2.3. [Editors’ comments: these decisions seemingly allowed contractual termination provisions to take precedence over the statutory requirement to serve withholding notices under section 111 of the Construction Act).  

Editors’ comments: the fundamental question

The fundamental question is: are there any circumstances in which parties can validly contract either (i) to avoid payment of an adjudicator’s award; or (ii) to make deductions from the amount directed to be paid by an adjudicator?  

The authorities - and in particular the Court of Appeal in Levolux - support the view that there is no right of set-off from an adjudicator's decision.  

However, the position in relation to set-off in relation to adjudicator’s awards is not entirely clear cut. There is authority - such as Balfour Beatty v Serco [2004] EWHC 3336 - which suggests that liquidated damages can (at least in some contexts), be set-off against an adjudicator’s award. (We briefly discussed this issue in our editors’ comments under our report on Avoncroft Construction Limited v Sharba Homes (CN) Limited [2008] EWHC 933 (TCC) in the May 2008 issue of our Updater.  

Clarity would be welcome on the issue as to the precise circumstances in which parties can (if ever) validly contract to avoid/reduce amounts determined by an adjudicator.  

View: Westwood Structural Services Limited v Blyth Wood Park Management Limited [2008] EWHC 3138 (TCC)