Adjudication Matters – July 2018

13th July 2018

Set-Off Sent Off

Summary

The Courts have re-affirmed that, despite a contract containing an express right of set-off, it is only in exceptional circumstances that a party will be entitled to set-off another claim against an Adjudicator’s award.

This case serves as a helpful reminder that a right to set-off is unlikely to apply to an Adjudicator’s decision.

The courts have confirmed that unless set-off follows logically from the Adjudicator’s award, or is the natural corollary of the decision, then it would not be compliant with the Construction Act to allow set-off.

Background

Elements (Europe) Limited (Elements) was a contractor who entered into a sub-contract with M I Electrical Solutions Limited (MIES) as its mechanical and electrical sub-contractor.

During the course of the works, MIES submitted an interim payment application valued at circa £179,000. Elements subsequently issued a Pay Less Notice showing an overpayment of £38,000. A large amount of this deduction arose from “Delay Overhead” and “Delay Labour” and which amounted to £184,000. In light of the Pay Less Notice, Elements did not make any payment to MIES.

MIES brought an adjudication for interim payment. The dispute was identified as whether Element’s Pay Less Notice was effective. The Adjudicator found that the Pay Less Notice was compliant procedurally, however he also had the jurisdiction to assess whether it was correct in substance. Here the Adjudicator found that Elements had failed to substantiate the claim that MIES had caused the delays. As such, the grounds for non-payment could not be accepted and so the Pay Less Notice was not effective.

During the Adjudication, Elements raised the issue that there were significant and extensive faults with the works performed by MIES. The contract contained an express right of set-off and Elements claimed that repair works would likely exceed any sum the Adjudicator may award.

This was not raised in the Pay Less Notice as the defects only came to light subsequent to this. The Adjudicator found that as Elements had not raised this issue in the Pay Less Notice, it could not now be included, and therefore did not form part of the dispute to which he was to make an award.

The Adjudicator therefore awarded in favour of MIES and for Elements to pay the sum of circa £179,000 plus interest.

Elements paid some, but not all, of this award, leaving £168,452.33 outstanding – this being the sum Elements believed it was entitled to set-off as a result of the defects.

MIES therefore brought summary judgment for the outstanding amount.

The Decision

The Judge held that it was not open for Elements to defend the claim on the basis that defects existed.

The Adjudicator had jurisdiction to assess the substance of the Pay Less Notice and had found that the existence of defects had not been included within the Pay Less Notice. Elements did not dispute the Adjudicator’s jurisdiction and therefore the Judge held that the Adjudicator’s Decision should be enforced in full. .

Elements sought to rely upon two separate set-off provisions claiming that each of these allowed Elements to set-off against an Adjudicator’s decision the liability of MIES accruing as a result of the defects. The Judge confirmed the general principle that set-off against an Adjudicator’s decision is not permitted. Only in exceptional circumstances will a defendant be entitled to set-off; such as where it follows logically from the Adjudicator’s decision, or where it is the natural corollary of the decision that set-off is to apply. Neither of these exceptions applied here.

Practical Implications of the Case

It is important to ensure that each pay less notice includes all reasons, properly substantiated, as to why deductions are to be made. The Adjudicator is not entitled to insert further deductions into a pay less notice and must assess only those that are included at the time of the notice and cannot retrospectively consider more reasons.

Careful consideration must be given as to the extent of the Adjudicator’s jurisdiction. In this case, the Adjudicator had been asked by the parties to assess not only whether the procedural requirements of the Pay Less Notice had been met, but also the substantive merits of the reasons contained within it. As a result, the Adjudicator was deemed to have considered and dealt with the issue of the defects and whether the defects claim had been set out in the Pay Less Notice. The defects claim was not an argument that Elements could therefore later rely on in the enforcement proceedings.

It should also be remembered that a set-off clause, no matter how widely worded, will not allow a party to set-off against an award of an Adjudicator except in exceptional circumstances.