A binding decision

Reference

Mr Justice Ramsey considered that the intention of Parliament was that adjudicator’s decisions should be enforced, pending final determination, because of the use of the word “binding” in Section 108(3) of the Act. He held that the word “binding” was intended to provide “a similar degree of compliance” to that of an arbitrator’s award, while recognising that adjudication is not arbitration as a decision is not “final” but is “interim”. He referred to and relied upon Macob Civil Engineering Ltd vs Morrison Construction Ltd and Ferson Contractors Ltd vs Levolux AG Ltd. He went onto say at paragraph 24:

“The intention of Parliament must be that the decision is binding and enforced at an interim stage. If the decision were no more than another contractual obligation, which could be breached or could be reduced or diminished by other contractual obligations, then the fundamental purpose of providing cash-flow in the construction industry will be undermined.”

He was, therefore, following the approach of Lord Justice Mantell (at paragraph 31 of Ferson vs Levolux) rather than the approach of judge Thornton in Bovis Lend Lease vs Triangle Developments Ltd.

The question of whether the employer could deduct liquidated damages from an adjudicator’s decision, had been considered by judge LLoyd in David MacLean Housing Ltd vs Swansea Housing Association Ltd and Mr Justice Jackson’s subsequent decision in Balfour Beatty Construction vs Serco Ltd. Two principles were derived by Mr Justice Jackson:

1 If it follows logically from an adjudicator’s decision that an employer is clearly entitled to recover a specific amount by way of liquidated damages, then the employer may set that sum off against any money payable to the contractor pursuant to the adjudicator’s decision. This will be subject to the employer giving the proper notices if and as so far as they might be required; and

2 If the amount of liquidated damages has not been determined (expressly or impliedly) by the adjudicator’s decision, then the entitlement of the employer to set-off liquidated damages against the adjudicator’s decision would depend upon the terms of the contract and circumstances of the case.

These principles were determined against the circumstances of Parsons Plastic vs Purac. In that case, an overriding contractual provision provided that Purac retained its equitable and common law rights of set-off. More importantly, the contract fell outside of the definition of a construction contract under the Construction Act, and therefore was not caught by the provisions of Section 108. Parsons Plastics, therefore, turned upon the wording of the contract, Section 108 having no impact upon the contract at all.

Mr Justice Ramsey referred to an adopted approach of judge Gilliland in David MacLean Contractors Ltd vs The Albany Building Ltd where he said “that there was a danger that an adjudicator’s decision could be effectively rendered nugatory by simply raising a cross-claim which might or might not succeed at the end of the day.” He went onto to make a distinction between a cross-claim that of course would be genuine but was not established and was therefore not a legal set-off, but a defence in equity and so an equitable set-off according to the principles of Hanack vs Green.

In respect of the final certificate, Mr Justice Ramsey considered that the subsequent issuing of the final certificate should not prevent the contractor from being paid properly at practical completion. The contract envisaged that an interim payment would take place at practical completion and that the contractor would be paid the amount properly due. The mechanics of the final certificate and final payment operated after the payment of the amount properly due at practical completion. He held that an adjudicator’s decision should not give way to a disputed final certificate valuation. There were a number of reasons for this conclusion:

1 An adjudicator’s decision should, prima facie, be enforced;

2 If an adjudicator’s decision were subject to the view of a contract administrator or quantity surveyor at a subsequent decision, then the intention of Parliament would be defeated;

3 Clause 9A.7.2 requires the parties by agreement to comply with the decision. The preserved rights were not prejudiced by compliance as compliance was on an “interim provisional basis”;

4 Sums due under Clause 4.3 at practical completion could not be prevented from payment on the basis of subsequent operation of the final certificate; and

5 Adjudication No. 4 was commenced within 28 days of the final certificate. As a result, the final certificate could not be said to be conclusive.

In respect of defects, Mr Ramsey noted that Camden did not raise the issue of defects in adjudication number three. As they had not been raised, Camden could not be in a better position by attempting to set-off a “disputed, unliquidated counter-claim against the adjudicator’s decision”. Camden therefore could not resist payment of adjudication number three on the basis of the unliquidated disputed counter-claim for defects, nor on the basis of a final certificate which did not have a conclusive effect.

Finally, Verry demonstrated that it was a company of substance and so a stay was inappropriate.

*Full case details: William Verry Limited vs The Mayor and Burgesses of the London Borough of Camden [2006] EWHC 761 (TCC), Mr Justice Ramsey

Contact Fenwick Elliott on 020 7421 1986 or NGould@fenwickelliott.co.uk

Postscript

This is a useful decision for Mr Justice Ramsey in respect of the status of an adjudicator’s decision. An adjudicator’s decision is almost elevated to that of an arbitrator’s award on the basis that the decision is “binding” under Section 108(3) of the Act and so the intention of Parliament must have been that an adjudicator’s decision was provided with a similar degree of compliance by the parties. The distinction between an adjudicator’s decision and an arbitrator’s award was that an adjudicator’s decision while binding, was “interim” not “final”.

The more interesting aspect is that the decision should be enforced regardless of the subsequent final account valuation procedures. The quantity surveyor did not agree with the adjudicator’s approach and so in the subsequent valuation, adopted different values to many of the items. Verry argued that the quantity surveyor was now bound by the detail of the adjudicator’s interim valuation and had to adopt the values given to each specific item. This is an interesting question which frequently arises where there has been an interim account adjudication and the employer is attempting to claw-back those items where there is a perceived over-valuation.

Mr Ramsey’s approach was that a subsequent interim certificate did not prevent the contractor from being paid properly at practical completion. It is a small step of logic therefore to suggest that a subsequent interim certificate does not stop a contractor being properly paid for a previous valuation. The amount being paid is the sum properly due at the date of the valuation. An adjudicator’s decision in respect of the next valuation would be required in order to defeat the first adjudicator’s decision, bearing in mind that subsequent adjudicator’s decisions are bound by previous adjudicator’s decisions.

While this case touches on the issue of an adjustment to the value in a subsequent valuation, it does not deal with how a quantity surveyor is to approach that subsequent valuation. The most sensible approach is that the quantity surveyor should really adopt the approach of the adjudicator, as a subsequent adjudicator will be bound by the decision of the first.