To pay or not to pay?

Adjudicator's decisions are binding on the parties until subsequent arbitration, litigation or by agreement. But can parties set off against adjudicator's decisions, monies that are alleged to be due under the contract? Can a set off be raised against monies ordered by an adjudicator to be paid? If so, is it dependent upon a valid Section 111 Notice having first been served?

The approach initially adopted by the courts was that there is no right to set off unless previously raised in a valid notice issued pursuant to Section 111 of the Housing Grants, Construction and Regeneration Act 1996. This states: "A party to a construction contract may not withhold payment after the final date of payment of a sum due under a contract unless it has given an effective Notice of Intention to Withhold Payment."

In the case VHE Construction -v- RBSTB Trust, the court said that monies due pursuant to an adjudicator's decision were exactly that, and not due under the contract. Accordingly, any defence or set off not raised in the adjudication could not subsequently be relied upon.

Different views have been expressed by the courts, most noticeably in Maclean Housing Contractors -v- Swansea Housing Association (2002). The judge found that the paying party was entitled not to pay as it had given an effective Section 111 Notice immediately after receipt of the adjudicator's decision. "It would be manifestly unjust also to deprive the [paying party] of an opportunity of maintaining that it was not advised to pay the full amount of the adjudicator's decision… Even if the [non paying party] were entitled to judgment [on an application to enforce the adjudicator's decision], the [paying party] would undoubtedly be entitled to a stay of execution or to set off the amount due on the counterclaim against the debt due on the claim so that, in practical terms, the claimant will not get the money that it is seeking," the judge stated.

This approach was adopted by the Court of Appeal in the subsequent case of Parsons Plastics (Research & Developments) -v- Purac (2002). The subcontract expressly preserved the paying party's common law rights of set off and made the payment and Withholding Notice provisions subject to those rights. The court decided that, based on this specific wording, the adjudicator's decision could be made the subject of set off and counterclaim.

In The Construction Centre Group -v- The Highland Council (2002), the paying party, as in the Maclean case, only gave a Section 111 withholding notice after the adjudicator's decision. It argued that it was impossible to give notice before the decision as there was otherwise "no sum due under the contract". It also stated that the Adjudication Notice had not referred to the paying party's claim for recovery of liquidated and ascertained damages (LADs), which the paying party had not therefore pursued in the adjudication.

A party may not withold payment after the final date due unless it has given an effective Notice of Intention to Withhold

The court found that an employer who disputes sums claimed by a contractor due to an alleged entitlement to recover LADs is entitled to set off the LADs in adjudication. A lack of referral to the set off in the Notice of Adjudication was irrelevant to the adjudicator considering the claim. However, as the paying party had not pursued the LAD claim at adjudication, the court decided that it was not entitled to issue a Section 111 Notice afterwards and set off against the adjudicator's decision. Contrast with the Maclean case, where the court allowed the employer to set off the LAD claim against the adjudicator's decision as the adjudicator had considered the extension of time claim.

These decisions were analysed in the late 2002 case of Bovis Lend Lease -v- Triangle Development and the court highlighted the following key principles:

• to be effective, a Section 111 Notice against an adjudicator's decision must be given before the Adjudication Notice;
  
• where other contractual terms supersede or provide for an entitlement to avoid or deduct from an adjudicator's decision, those contractual terms will prevail and take precedence;
  
• where a paying party is contractually entitled to deduct by cross claim against monies due under an adjudicator's decision, it can rely on those contractual terms to avoid having to make further payment pursuant to the decision.

However, the Court of Appeal did not accept these principles in the 2003 case of Levolux AT -v- Ferson Contractors. Levolux, the subcontractor, was not paid an interim payment due and suspended work. Ferson, the main contractor, argued that this was an invalid suspension of works and determined the contract. The adjudicator decided that Ferson's Section 111 Notice was invalid and ordered payment to be made to Levolux. Ferson refused, relying on a contract term stating that on determination all sums due under the contract ceased to be owed.

The Court of Appeal disagreed and enforced the decision, saying the purpose of the Act is to provide an enforceable award. The Court held that the contract clause, providing that on determination all sums due under the contract ceased to be due, did not apply to monies due pursuant to an adjudicator's decision. Any contractual clause that has the effect of preventing this conclusion being reached will not be enforced.