Scope on a Rope: The slippery issue of set-off in the context of adjudicators' jurisdiction

CC Construction Limited v Raffaele Mincione [2021] EWHC 2502 (TTC)

The following is a quote from an Adjudicator's decision in a recent dispute between an Employer and Contractor:

"It is established law that an Adjudicator cannot open up a certificate considered to be conclusive, as such, once the due date has been determined, the Adjudicator will have no further power to open up the Final Statement. In respect of liquidated damages, I conclude that it is not a part of the dispute I have been asked to decide and therefore cannot be raised in set off in these circumstances."

And this is what HH Judge Eyre QC had to say when the Employer resisted enforcement of the adjudication on the grounds that the Adjudicator had breached natural justice by failing to take account of the Employer's asserted set-off in respect of liquidated damages:

"…the adjudicator deliberately declined to consider the defence that the liquidated damages claim operated as a set off and did so because of the view he took of the scope of the dispute before him. That view was incorrect and meant that the adjudicator failed to address a defence which was before him."

What can be learned from Judge Eyre's judgment?

The dispute

The Employer had engaged the Contractor under a JCT Design and Build Contract (2011 Edition) with a small number of variations. The design and build related to a new house in London.

The dispute concerned the sum due to the Contractor following an Adjudication and several issues emerged for review including the conclusivity Final Statement, the relevant due date for payment and Employer defences and set-offs. The Employer's quarrel (one of several) was that account had not been taken within the decision of their claim for set-off in respect of liquidated damages. While this adjudication covered several issues (as above) that is the issue on which this blog focusses.

The decision

In his decision, the Adjudicator declined to consider the Employer's defence of legal set off on the grounds that he did not consider that he had jurisdiction to consider the issue. The Technology and Construction Court, however, would go on to find that the Adjudicator had materially breached the rules of natural justice in deciding not to consider a set off defence on the ground that it did not form part of the dispute referred. In effect, that he lacked jurisdiction.

Judge Eyre considered Coulson J and O'Farrell J's judgements (Pilon Ltd v Breyer Group Plc [2010] EWHC 837 (TCC) and Global Switch Estates Ltd v Sudlows Ltd [2020] EWHC 3314 (TCC) respectively) in reaching his conclusion.

The Adjudicator fell into error on the question of set-off. It seems tolerably clear that the Adjudicator regarded the set-off in respect of liquidated damages as falling outside of the scope of the dispute. O'Farrell J, in Global observed that while the responding party is not entitled to widen the scope of the adjudication by adding further disputes arising out of the underlying contract, they areentitled to raise any defences it considered properly arguable to rebut the claim made by the referring party. By doing so, the responding party is not widening the scope of the adjudication; it is engaging with and responding to the issues within the scope of the adjudication.

So, in raising the issue of liquidated damages as a set-off, the responding party was addressing the issue at hand: the sum due to the Contractor. Importantly, the referring party was seeking payment rather than declaratory relief or findings.

In this regard, 10 principles earlier proffered by O'Farrell J in Global, and lifted directly into Judge Eyre's decision, can be summarised as follows:

1. The referring party is entitled to define the dispute referred to adjudication by its notice.
2. The responding party is not entitled to widen the scope of the adjudication by adding further disputes.
3. The responding party is entitled to raise defences to the claim made by the referring party.
4. Where the referring party seeks declaration as to valuation, the responding party is not entitled to seek a competing declaration.
5. Where the referring party seeks payment, the responding party is entitled to rely on all available defences, including valuation of other element of the works.
6. It is for the adjudicator to decide whether defences put forward are valid.
7. Where the adjudicator has asked the relevant question, whether the answer is right or wrong is immaterial and the decision will be enforced.
8. If the adjudicator fails to consider whether the matters put forward by the responding party are a valid refence to the claim in law and on the facts, that may be a breach of the rules of natural justice.
9. To be a breach of the rules of natural justice, the breach must be material and the case must be plain and obvious.
10. Where there is a material breach of the rules of natural justice, the decision will not be enforced.

Judge Eyre's decision is worthy of note for its reiteration that claims for declaratory findings and payment may well produce differing results in terms of the determination of the true scope of the dispute. That, together with the fact that the Court had to address questions of set-off – an issue which often bedevils adjudicators and parties alike – makes the Court's decision an interesting read. Parties would be well-advised to acquaint themselves with the principles on which the scope of their dispute and the adjudicator's associated jurisdiction will be determined.