The Construction Act needs to make clear that when an adjudicator tells a party to pay out, that decision should be enforced even if counterclaims are made
In all the writings and talks devoted to proposed amendments to the Construction Act, one issue has been left out. This is an issue that has become even more urgent since the statements made in the judgments by Lords Hoffman and Hope in the case of Melville Dundas vs Wimpey.
The issue relates to enforcement of adjudicators’ decisions. The act should be amended to state that adjudicators’ decisions – where they relate to paying a sum of money – should be enforced as a debt irrespective of any counterclaims. Parliament envisaged that, where the adjudicator had decided that one party should pay another, the cash would actually be handed over. As the late Lord Ackner explained in the House of Lords at the time the act was being debated, adjudication came under the rubric “pay now, argue later”.
But, there is still considerable doubt about the extent to which a party can exercise a right of set-off in discharge of the whole or part of the amount owed following an adjudicator’s decision. There is an assumption that the Court of Appeal in Ferson vs Levolux put the matter beyond doubt. The court decided that contractual set-off rights should give way to the statutory requirement that adjudicators’ decisions are binding and, therefore, must be paid in full.
However, if the majority view in the House of Lords case of Melville Dundas vs Wimpey was to prevail, the opposite would be the case – contractual provisions would supersede the express statutory provisions. I can almost hear their Lordships saying that there must be clear words in the act directed at excluding equitable set-off rights in this context.
The Melville Dundas case was concerned with section 111 of the act, which requires a withholding notice to be issued before the final date for payment if a party intends to withhold a sum due under the contract. In this case such a notice was not issued. Wimpey had already certified a sum as due. After the final date for payment Wimpey brought the contract to an end when Melville Dundas went into administrative receivership. Wimpey’s action was justified by the determination provisions in the JCT contract. In spite of the lack of any ambiguity in section 111 Lord Hoffman held that “section 111(1) must be construed in a way that is compatible with the operation of the determination provisions”.
The Levolux decision was, however, primarily concerned with a contractual provision requiring adjudicators’ decisions to be enforced summarily leaving further doubt as to whether it gave rise to a principle of general import. Since Levolux, Mr Justice Jackson in Balfour Beatty vs Serco has made clear that set-off rights as against adjudicators’ decisions are not necessarily excluded. Liquidated damages, for example, could be set-off if the contract expressly or implicitly allows for this.
It is clear that the courts would be loath to allow a party to erase an adjudicator’s decision by simply making up a figure and issuing a withholding notice
So, if there has been an architect’s certificate authorising deduction of liquidated and ascertained damages and a withholding notice has been issued, it seems that such damages can be set-off against an adjudicator’s decision. Furthermore, this would be permitted if the exercise of the right to set-off such damages is a logical consequence of the adjudicator’s decision (such as a refusal to grant part of a contractor’s claim to an extension of time).
Can a right of abatement be exercised against adjudicators’ decisions? There hasn’t been a decision directly on this point. It is clear that the courts would be loath to allow a party to erase an adjudicator’s decision by simply making up a figure and issuing a withholding notice. In most situations an abatement issue should have been raised in the course of the adjudication.
But what if the issue has arisen after the adjudicator’s decision? And what if an architect or engineer has certified that there has been an over-valuation and, therefore, too much money has already been paid, for example, if it is discovered that the work is not up to the requisite standard or certain works haven’t been carried out?
Can the employer recover the excess and, until it does so, can it argue that no further monies are contractually due even if there is an outstanding due amount created by an adjudicator’s decision? It is quite possible that the decision could be wiped out wholly or in part by the overpayment.
The uncertainty in this area has already generated substantial case law. The “contract prevails” view of the majority of their Lordships in Melville Dundas has reinforced this uncertainty. Part eight of the Local Democracy, Economic Development and Construction Bill (now in the House of Lords) should be amended to deal with this issue.
Rudi Klein is chief executive of the Specialist Engineering Contractors’ Group