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Set-off as a defence in construction adjudication

14 May 2021
In this article, David Humphreys discusses a recent successful defence of an adjudication brought under the TESCA Rules, key facts of the case and what we can learn for the future.

I recently concluded a successful defence of an adjudication brought under the TECSA Rules by a subcontractor against a main works contractor operating a solar energy plant in England.

The subcontractor referred the dispute to adjudication to determine the basis of its remuneration for remedial works which it effected, following an intrusion at the plant site; it further sought relief to the effect that the main works contractor failed to serve a pay less notice in respect of its invoice for the remedial works. The responding party sought to set-off the amounts claimed by reference to the subcontractor's breach of contract and negligence in relation to the performance of its sub subcontractor, which had been engaged principally for the purpose of ensuring the security of the plant.

Since an adjudicator's jurisdiction is constrained by the Notice of Adjudication, a key consideration in defending an adjudication is whether the Notice is drafted in sufficiently wide terms to allow a responding party to raise a cross-claim or set-off. The Courts have demonstrated a tendency to avoid construing Notices of Adjudication as excluding or limiting defences which can be raised by the responding party (Broadwell -v- k3D Property Partnership Ltd [2006] ADJ CS 04/21; Pilon Ltd -v- Breyer Group Plc [2010] EWHC 837 (TCC)), particularly where such matters are necessarily part and parcel of the 'dispute arising under the contract'. Since, it is not possible to set-off the Adjudicator's decision itself (William Verry -v- Camden LBC [2006] EWHC 761 (TCC), set-off requires to be specifically pleaded in the responding party's response to the Referral Notice. 

In construction adjudication, the Adjudicator is required take into account any matter raised by way of defence to the extent of determining if the defence is effective (see KNS -v- Sindall (2001) 3 RCLR 10; Wales and West Utilities Ltd -v- PPS Pipline Gmbh [2014] EWHC 54 (TCC)). Consequently, in respect of set-off, the Adjudicator is required to consider any cross-claim referred to him for decision and also whether that cross-claim amounts to a defence of the claim raised by the referring party (see Lulu Construction Ltd -v- Mulalley & Co Ltd [2016] 1852 (TCC); Allied P&L Ltd -v- Paradigm Housing Group Ltd [2009] EWHC 2980 (TCC).   

Counterclaims normally fall outside the scope of Notices of Adjudications, however under the TECSA Rules (like the Scheme for Construction Contracts) provided that the scope of the adjudication shall be 'identified in the Notice together with any further matters which the Adjudicator determines must be included in order that the Adjudication may be effective and / or meaningful'. It has been suggested by Crispin Winser BL that this may be seen as a more relaxed test for the availability of equitable set-off.

In the present adjudication the referring party sought to argue that, irrespective of the method of remuneration, the responding party had failed to deliver a pay less notice and, consequently, the sum on the referring party's invoice became the notified sum and was due and owing by the responding party. The Adjudicator decided that it was 'beyond argument' that the failures of the sub subcontractor caused all the losses claimed by the referring party by reason of its negligence and breach of contract and, accordingly, the responding party had a valid set-off.

In deciding whether the responding party's set-off was trumped by its failure to serve a valid pay-less notice the Adjudicator said that there were exceptions to the general rule that, under section 111 of the Housing Grants, Construction and Regeneration Act 1996, a pay-less notice must be issued in relation to sums falling due under a contract, failing which the sum is to be paid in full. The Adjudicator considered that the responding party's set-off fell into two of the possible exceptions: firstly, the case in which the sum claimed is not due under the contract at, and secondly where the contract provides no certification provisions relating to payment, and the payee raises a set-off against the claim, along the principles identified by Sir Peter Coulson at paras. 9.14 - 9.21 of Coulson on Construction Adjudication.

Two cases identified by Coulson are relevant to this point. In Woods Hardwick -v- Chiltern Conditioning [2001] BLR 23, the Court noted that whilst Chiltern had not served a withholding notice in respect of their alleged claims arising of the loss caused by Woods Hardwick's breaches of contract, the sums claimed by Woods Hardwick had not been subject to third party assessment or certification, so that any abatement relied on by Chiltern did not require a withholding notice to be served under s. 111. Similarly, in KNS Industrial Services (Birmingham) Ltd -v- Sindall [2001] Const. L.J. 170, the Court concluded that 'one cannot withhold what is not due'.

While in the present case the Adjudicator's decision resulted in a positive outcome for the responding party (to the extent that the referring party was order to pay 100% of the adjudicator's fees), the lessons for any party having to defend an adjudication in which a payless notice was not served are:

  1. To carefully consider whether the Notice of Adjudication is drafted in wide enough terms to include the scope of the Responding Party's cross-claim
  2. If not, whether the principles of equitable set-off may operate so as to save the cross-claim;
  3. Whether on proper construction of the contract, the sums claimed do not actually fall due in the manner in which the Referring Party so claims;
  4. The Referring Party is, by reason of other factors (such as negligence or breach of contract) is estopped from denying the existing of a genuine cross-claim; and,
  5. Whether the Referring Party is, by its construction of the Notice of Adjudication, seeking to benefit from its own breach.

If you require any advice in relation to construction related disputes, the Construction & Infrastructure Team at DWF would be able to assist or for more information on the topic discussed in the article, please contact David Humphreys.

Further Reading