A recent post of mine considered two separate Coulson J judgments where the paying party attempted to set-off claims after the adjudicator’s decision had been issued. But what happens if the responding party raises a set-off (or counterclaim) during the adjudication process?
Counterclaims in adjudication
It is well established that a responding party can raise any issue as a defence to the claim set out in the referral, irrespective of whether that issue (or defence) has been raised previously. It is worth noting that there are some obvious limitations to this, such as when a withholding notice is required before payment can be withheld. A counterclaim pleaded in an adjudication cannot overcome a lack of a withholding notice, no matter how the counterclaim is phrased.
Equally well established is the principle that the adjudicator must take the responding party’s defence into account when making his decision. We have seen countless examples in the law reports of situations where this didn’t happen, especially when defences or counterclaims were alleged to be new or to fall outside the scope of the dispute referred to the adjudicator. If the adjudicator gets it wrong, and is held to be in breach of the rules of natural justice because he wrongly excluded the defence/counterclaim, the consequences are costly for the parties as there is an unenforceable decision.
Tactical use of counterclaim in adjudication
So far, I’ve not told you anything new, but I recently came across a situation that demonstrated the tactical use of counterclaims in adjudication and how parties sometimes seek to work around some of the rules on set-off in adjudication.
The situation I came across involved a sub-contractor’s claim against a contractor for, among other things, prolongation costs and repayment of liquidated damages. By way of defence, the contractor sought to extinguish any payment to the sub-contractor by way of a counterclaim for the payment of further liquidated damages and contra charges.
As the question of entitlement to liquidated damages and contra charges went directly to the question of whether the sub-contractor was entitled to payment, they were clearly relevant defences that, potentially, needed to be addressed. I say potentially because, as long as the contractor’s entitlement exceeded any sum the sub-contractor was entitled to, there would be no need to consider the extent of the contractor’s entitlement beyond the level of the sub-contractor’s entitlement.
However, in an attempt to obtain a monetary award in its favour, shortly after the first adjudication started, the contractor started a second adjudication seeking payment of further liquidated damages and contra charges.
The net result was an accounting exercise between the respective parties’ entitlement and, in my view, represented a practical way of dealing with a party ensuring its counterclaim was considered and given effect to.