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Set off in adjudication enforcement after Thameside Construction

The adjudication enforcement in Thameside Construction Company Ltd v Stevens raised, as Akenhead J noted:

“…the sometimes vexed question of whether and when a party against whom an adjudicator has decided may seek to set off against the sum said by the adjudicator to be due and avoid or defer payment.”

Thameside Construction Company Ltd v Stevens

In Thameside v Stevens, Mr and Mrs Stevens had engaged Thameside to carry out construction works at their home. The contract included extension of time provisions and a liquidated damages clause for late completion. Time was extended, but the work was not finished by the extended completion date and there was an issue as to when practical completion actually took place.

Thameside submitted an interim application for payment, which both parties treated as a final account. Mr and Mrs Stevens paid the bulk of the sum claimed and Thameside referred the matter to adjudication, seeking payment of the remainder. Mr and Mrs Stevens counterclaimed, seeking damages for defective work together with liquidated damages for Thameside’s failure to complete on time.

In his decision, the adjudicator noted that he had not been asked to determine whether or when practical completion had taken place. He said:

“…the only practical way to deal with this is to approach it on the basis that this is an application for a further interim certificate, leaving over any issues as to precisely when practical completion occurred, as to extension of time and therefore liquidated damages, to another day.”

In a footnote to his decision, he said “I would… be doubtful of any, or any substantial, entitlement to liquidated damages”. After deducting sums in respect of defective work, the adjudicator found the balance due to Thameside to be £88,000 “on the grounds this decision is the equivalent of an interim certificate” and he ordered that Mr and Mrs Stevens should pay that sum within 14 days.

Mr and Mrs Stevens paid part of the £88,000, withholding £40,000 to set off their liquidated damages claim against the decision. Mr and Mrs Stevens’ argument was that the adjudicator was, in effect, treating his decision as if it were an interim certificate or valuation such that they were contractually entitled to withhold liquidated damages by way of set-off against the decision.

The relevant legal principles

Akenhead J reviewed the authorities and set out the following relevant legal principles:

  • The first exercise is to interpret or construe what the adjudicator decided. This involves looking at the dispute as it was referred to him, including the notice of adjudication, the referral notice, the response, other “pleading” type documents and the underlying construction contract. Primarily, one needs to look at the decision itself.
  • In looking at what the adjudicator decided, one can distinguish between the decisive and directive parts of the decision and the reasoning, although the decisive and directive parts need to be construed to include other findings that form an essential component of or basis for the decision (see Hyder Consulting v Carillion Construction).
  • Adjudicators’ decisions which direct that one party is to pay money should be honoured and a party should not be permitted to set-off or withhold against payment of that amount.
  • There are limited exceptions:
    •  if there is a specified contractual right to set-off that does not offend against the statutory requirement for immediate enforcement of an adjudicator’s decision (albeit this will be relatively rare); and
    • where an adjudicator declares that an amount is due or is due for certification, rather than directing that a balance should be paid, a legitimate set-off or withholding may be justified when that amount falls due for payment or certification in the future (see Squibb Group v Vertase).
  • Where it can be determined from the adjudicator’s decision that the adjudicator is permitting a further set-off to be made against the sum otherwise decided as payable, that may well be sufficient to allow the set-off to be made (see Balfour Beatty Construction v Serco Ltd).

The court’s decision

The court found in favour of Thameside. Applying the relevant principles, Akenhead J was:

“…wholly satisfied that it would be absolutely wrong to construe or interpret this decision as meaning that the adjudicator was saying that he was expecting, anticipating or permitting the loser in the adjudication to be able to set-off the clearly and obviously disputed claim for liquidated damages. The final words of the decision direct Mr and Mrs Stevens to pay Thameside the specified amount.”

When the adjudicator said that his decision was “the equivalent of an interim certificate”, he was actually explaining the reasons why he was ordering an immediate payment. Those reasons did not form an essential part of his decision. He did not limit himself simply to declaring what the net sum outstanding was. To the contrary, he actually directed that payment of the sum was to be made.

Accordingly, this was not a case that fell into either of the main exceptions namely, an allowable contractual set off which does not offend against the statutory requirements or a declaratory type of decision. There was no good reason to assume that the adjudicator meant anything other than that the specified sum would be paid within 14 days.

Significance of the decision

The decision in Thameside provides a useful summary of the principles concerning set off against an adjudication decision, which is likely to be frequently cited in later cases.  The decision also reinforces the general rule that a defect in the adjudicator’s reasoning will very rarely give rise to good grounds to resisting enforcement.

An issue of particular interest, which is likely to provide fertile ground for argument in future cases, is the extent to which an adjudicator’s reasons are binding on the parties.  In Thameside, Akenhead J applied the earlier case of Hyder Consulting v Carillion Construction and found that, when looking at what the adjudicator decided, it is necessary to distinguish between the decisive and directive parts of the decision and the reasoning.

But what if the adjudicator did not give reasons for his decision? After all, an adjudicator acting under the Scheme for Construction Contracts 1998 is not obliged to give reasons unless asked to do so (paragraph 22, Part I of the Scheme).  The answer, it is suggested, is that it is likely to be a matter of fact and degree as to what forms the basis of the reasoning of an adjudicator looking at all the documentation.

Charles was counsel for Thameside.

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