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Fri August 12 2022

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Pay now argue later

4 Nov 13 Laura Phoenix, associate at Thomas Eggar LLP, explains the implications of a recent judgment on adjudication payments.

Laura Phoenix
Laura Phoenix

The Technology & Construction Court (TCC) has considered the circumstances in which the losing party to adjudication is entitled to set-off against the sum awarded to the winner. This article explains what the judgment – Thameside Construction Company Ltd v Stevens & Anor [2013] EWHC 2071) – means for those embroiled in adjudication or enforcement of an adjudicator's award.

Typically, in construction litigation, a contractor’s claim for payment will be met by a counterclaim for damages in relation to delay or defects (or vice versa). For a set-off to work as a defence, the circumstances giving rise to the counterclaim must be closely related to those giving rise to the claim, or there must be a contractual right of set-off.

As a general rule, set-offs and counterclaims cannot be raised to defeat enforcement of an adjudicator’s decision. The courts have said that this would frustrate the purpose of the Construction Act, which is to ensure that adjudicators’ decisions are obeyed and that cash flow is maintained.

Here, Mr and Mrs Stevens had appointed Thameside on JCT terms to extensively extend and convert their home.

There were significant variations and delays. Disputes arose in relation to the date of practical completion and the value of the final account. Thameside referred a claim to adjudication. There was a comment in the adjudicator’s reasoning that said he was treating the dispute like an interim valuation but, ultimately, the adjudicator directed Mr and Mrs Stevens to pay around £88,000 to Thameside.

Mr and Mrs Stevens had a payment certificate issued in respect of the sum awarded, issued a withholding notice in respect of £40,000 of liquidated damages that they considered deductible, and paid the balance.

Thameside issued proceedings to enforce the adjudicator’s award in respect of £40,000. The judge ordered Mr and Mrs Stevens to pay the £40,000 withheld plus £11,000 in respect of Thameside’s legal costs. In reaching his decision, the judge summarised the factors you must consider before setting-off against or withholding money from sums awarded by an adjudicator and these are:

  1. What has adjudicator decided that the payer must do?

The general position is that a decision that directs one party to pay money to the other must be honoured without set-off, otherwise the court may order the non-payer to reimburse the other party’s costs of enforcing the award.

  1. Do any of the exceptions apply? These are:
  1. Does the adjudicator’s decision permit further set-off? For example, if the adjudicator simply decided how the terms of a contract operate then is it fair to say the adjudicator has not actually directed a payment and it may still be possible to serve an effective withholding or pay less notice?
  2. Contractual set-off: does the underlying contract contain a set-off provision capable of ‘trumping’ part or all of the adjudicator’s decision?

In most cases, the losing party will need to pay first and argue later. ‘Arguing later’ can be done via court proceedings, arbitration or counter adjudication.

To do anything other than pay exposes the non-payer to the cost of defending enforcement proceedings, bad publicity and also liability to reimburse the legal costs of their opponent.

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