If a party loses an adjudication and is ordered to pay up, can it set this sum off against anything it thinks it is owed from a subsequent adjudication award?

My goodness, this turndown is having its effect on disputes. Adjudications are up, so too the number of folk going to court to resist obeying adjudicators’ awards. The Technology and Construction Court is deciding enforcements a dozen a week. It used to be about two. Let me tell you about an enforcement case: Hart vs Smith.

Hart was the contractor. The job, worth £600k, was to convert three barns in Somerset owned by Mr and Mrs Smith into four houses for sale. It was a JCT 2005 contract with quantities. The architect regularly certified Hart’s interim certificates. Certificate no. 21 was underpaid by the Smiths, but only by £10k. They sent a withholding notice. It was too late but hey-ho it’s “only” £10k. Certificate no. 24 saw the stakes rise. The Smiths withheld not only the £10k, but another £70k as well. The builder took advice and was informed that the withholding notices for both certificates were out of shape and time.

The right approach would be to politely inform the payer where he had gone wrong and if he said push off, to politely call for an adjudicator. The builder did. David Simper is a very experienced adjudicator who soon decided that the withholding notices were out of time. He ordered the two withheld sums to be paid. So the Smiths had to pay up.

They must have been impressed by the efficient way of sorting differences of opinion: so much so that they decided to begin an adjudication themselves. Mr Simper was called upon by the Smiths, who said their barn conversions were now late. They asked for a declaration by the adjudicator that (1) the architect ought to have issued “a certificate of non-completion”, and (2) “they were entitled to deduct or be paid liquidated and ascertained damages (LADs) at the rate stated in the contract”. Let’s call this adjudication no. 2.

The Smiths wanted to be paid £145k plus the declarations. The adjudicator decided that the Smiths’ position was only made out for a defect to the tune of £12k. He also declared that the Smiths were entitled to a “certificate of non-completion”, and declared that until the architect issued the certificate, the Smiths could not require the builder to pay LADs. That is a rule in the JCT standard form contract, but lots of times it is overlooked.

Credit: Simone Lia

Anyway, the architect promptly popped the certificate into the arena – and now the Smiths wanted their LADs, if you please, Mr Builder. The Smiths’ letter of demand for their LADs was quickly followed by a trip to that well-known builders merchants just off the Strand called the High Court.

The Smiths’ lawyers explained that while adjudication no. 1 ordered them to pay £80k to the builder, they could set off or deduct from that award the LAD they were owed because of the adjudication no. 2 award. The judge was shown adjudication no. 2. You will remember that it said the architect was obliged to first issue a certificate of non-completion so as to allow the employer to deduct or claim payment for the LAD. And since the architect had now done so, it could set off the second award against money due from the Smiths under the first award. True, true, award no. 2 did not actually order a sum of LADs to be paid; it only said the certificate was required first. But the Smiths said the LAD cash was a natural consequence of award no. 2. So let’s have the money.

The barrister for the builder took a simple approach. The adjudicator had not ordered any sum in LADs to be paid and that’s that. The judge took the Smiths through this Construction Act. Nothing in the act allows a set-off from an adjudicator’s decision. Nobody is allowed to withhold payment against an award on the grounds of an anticipated recovery in a future adjudication based on different issues. It’s true that if in the Hart and Smiths case a specific sum logically follows from an adjudicator’s decision, that sum can be recovered. But here the adjudicator did not find a specific entitlement to LADs. Smith couldn’t set off.

Mind you, if adjudication no. 1 had ordered a specific sum from employer to builder and if adjudication no. 2 had ordered a specific sum or logically obvious sum from builder to employer, the court would give effect to both decisions in a fair manner.