Can defendants make counterclaims in an adjucation without a withholding notice, as part of their defence?
Urang sought to enforce two adjudication decisions arising from separate adjudications against Century and Eclipse (collectively referred to as “the defendants”) in relation to building conversion works to hotels that Urang had performed under the JCT Standard Form of Building Contract 2005 Edition and the JCT Design and Build Form of Building Contract 2005 Edition respectively.
Urang had made several claims in the adjudication against Century including a claim for payment of a sum that had been certified under an interim valuation but not paid, and claims for an extension of time and prolongation costs, retention and interest.
Century had in its response claimed that it was entitled to payment in respect of remedial work to soil drainage, loss of revenue during repairs and liquidated and ascertained damages. Century also referred to other defects in the works without quantifying them. Eclipse had made similar claims in response to Urang’s claims in adjudication.
The adjudicator decided that these claims were presented as a counterclaim and should properly have been the subject of a withholding notice; absent such a notice he was unable to assess the value of these claims in each adjudication.
The defence raised by the defendants in the enforcement proceedings was that the adjudicator had failed to make a ruling on their counterclaims in breach of natural justice and failed to take into account, also in breach of natural justice, the fact that they had each served a withholding notice.
Urang submitted that in each case the adjudicator did not fail to address the counterclaim but simply regarded it as a defence that was bound to fail in the absence of a withholding notice. If this was an error, then it was an error made by the adjudicator when addressing the right question, namely whether or not the counterclaim could be deployed as a defence to Urang’s claims in the adjudication.
The defendants also submitted that in each case Urang had failed to show that any sum was due under the contract and that this was a pre-requisite to any recovery, i.e. the counterclaim showed that the sum claimed was not, or at least arguably was not, a sum due under the contract. Urang countered by submitting that where a contract provided for interim valuations in which the sums certified as due had been assessed by a third party, the balance shown in the valuation was a “sum due” within the meaning of the contract.
Was the adjudicator wrong in deciding that in the absence of a withholding notice each defendant could not deploy its counterclaim as a defence to Urang’s claims in adjudication?
In deciding that he could not address the merits of the counterclaims in the absence of a withholding notice, did the adjudicator fail to address an issue put before him such that this was a breach of natural justice which meant that the defendants could resist enforcement of the adjudicator’s decisions?
The JCT contracts include provisions relating to certification and payment and the requirement for a withholding notice to be served not later than five days before the final date for payment. Mr Justice Edwards-Stuart held that the effect of those provisions is that the amount stated in the certificate as due is a “sum due” under the contract, and the employer must pay that sum on the date specified unless he has issued an appropriate withholding notice in time.
In these circumstances, the contractor does not need to do any more than prove the existence of a properly issued certificate and does not have to prove that the valuation in the certificate is correct or that there are no other potential cross claims by the employer, such as, for example, a claim for defects.
The judge concluded that the amount stated in the interim valuation was a “sum due” under the contract and that, since the defendants did not issue a valid withholding notice in time, there could be no defence to a claim for that sum (or any unpaid balance of it).
The judge noted that the terms of the contract only required a withholding notice to be issued in relation to sums stated as due in the interim valuations. There was no requirement to serve a withholding notice in relation to other claims made by a contractor, whether under a different provision in the contract or for damages. The requirement for a withholding notice was confined to the procedure in relation to interim valuations as required by Sections 110 and 111 of the HGRCA. The judge therefore held that the adjudicator was wrong to decide that the defendants could not deploy their counterclaims as a defence to Urang’s claims in the adjudications (apart from the claims under the certificates) in the absence of withholding notices.
To recap, the adjudicator had decided that in the absence of a withholding notice he was “unable to assess the value” of the defendants’ counterclaims. The defendants argued that in adopting this approach the adjudicator wrongly failed to deal with an issue that was before him, namely to consider the counterclaims. The judge did not accept this submission and found that the question for the adjudicator was whether, and if so to what extent, the defendants’ counterclaims could be deployed as a defence to Urang’s claims in the adjudications. If the adjudicator concluded, as he did, that the counterclaims could not be deployed as a defence to the claims in the absence of valid withholding notices, then he had answered the question. It is well established that an error of law or fact made by an adjudicator when deciding an issue referred to him is no defence to an application to enforce the award. The fact that the adjudicator answered the question wrongly afforded the defendants no defence to Urang’s application for an enforcement of the adjudicator’s decisions.
This judgment mentions S L Timber Systems Ltd vs Carillion Construction Ltd, which is often cited by parties submitting in defence to a claim for payment that the claimant has failed to show that there is a sum due under the contract because there is no contractual entitlement to payment. The judge helpfully refers to Coulson on Construction Adjudication, 2nd Edition, paragraphs 9.06 - 9.12 and the case of Rupert Morgan Building Services (LLC) Ltd v Jarvis, where the Court of Appeal drew a clear distinction between interim payments that had been certified and were therefore due under the contract, and sums that had not been the subject of any third party scrutiny but were simply claimed as due by the contractor or sub-contractor in question. This should assist those considering running this argument in assessing whether or not they have valid grounds for doing so.
This judgment also confirms once again that even if an adjudicator makes a wrong decision, that in itself is not a breach of the duty of natural justice if the adjudicator has answered the question put to him. The fact that he answered it wrongly is no defence to enforcement proceedings.
This may appear to be a harsh result in certain circumstances, but it is commensurate with the principle of upholding the sanctity of adjudicator’s decisions as being binding on parties until the dispute is finally determined by agreement or in other proceedings. This is different to the situation where an adjudicator completely fails to acknowledge or address the fact that a counterclaim has been raised as a defence, or part thereof. In that instance, the adjudicator would have failed to even answer the question of whether the counterclaim could be deployed as a defence to the claim, which is likely to be a breach of the duty of natural justice. The difference may in some instances appear to be slight and lead to the same erroneous result, but each case must be decided on its own facts.
Urang Commercial Limited vs (1) Century Investments Limited (2) Eclipse Hotels (Luton) Limited  EWHC 1561 (TCC)
Andrew Hales, Fenwick Elliott
020 7421 1986