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Setting off to defend – can the adjudicator hear you?

Set-off is a common defence in adjudication. When money is sought it is likely that any available deductions or cross-claims will be used to prevent payment. But does an adjudicator have jurisdiction to consider them?

This point was recently re-examined in Global Switch Estates 1 Limited v Sudlows Limited [2020] EWHC 3314 (TCC).

Global Switch

Global Switch employed Sudlows to fit out and upgrade its data centre in London under a contract based on the JCT Design and Build 2011. The works were running very late and the enforcement proceedings before the court related to the fourth adjudication between the parties.

Global Switch commenced the adjudication seeking valuation of an interim certificate. The claim as referred related to part of the certificate only. In its Response, Sudlows argued that it could set-off its own claims for increased sums dealt with elsewhere in the certificate. In particular, it sought to set-off a loss and expense claim which was in its application, but not part of the referred claim.

In his decision, the adjudicator determined that he could not consider the additional loss and expense claim and awarded Global Switch around £5 million. Sudlows did not pay and Global Switch issued enforcement proceedings.

Enforcement

Sudlows resisted enforcement, arguing that the adjudicator should have considered the additional loss and expense claim. The Court agreed and held that the adjudicator had wrongly decided that he did not have jurisdiction to consider the set-off. As O’Farrell J confirmed:

“The adjudicator's jurisdictional error precluded any consideration of a very substantial part of the defence. In those circumstances, that amounted to a material breach of the rules of natural justice and renders the decision unenforceable.”

Commentary

The Global Switch case follows a long line of authorities stretching back around ten years to the case of Pilon v Breyer Group [2010] EWHC 837. This case confirmed the principle that while the notice of adjudication sets the bounds of the adjudicator’s jurisdiction, it cannot restrict the responding party’s defences. This is a matter of common sense. If this position were otherwise a cleverly worded notice of adjudication could exclude legitimate defences to a claim.

This position was confirmed in a number of subsequent cases, before finally receiving the approval of the Supreme Court in Bresco Electrical Services Limited (in liquidation) v Michael J Lonsdale (Electrical) Limited [2020] UKSC 25, with Lord Briggs’ statement that:

"However narrowly the referring party chooses to confine the reference, a claim submitted to adjudication will nonetheless confer jurisdiction to determine everything which may be advanced against it by way of defence, and this will necessarily include every cross-claim which amounts to (or is pleaded as) a set-off."

There can, therefore, be no doubt that a party may use any valid defence to protect itself in an adjudication, irrespective of any attempt by the referring party to exclude it. There are, however, ways to limit the available defences in certain cases.

One key example is that, where a referring party seeks a declaration as to the correct value of specific elements of a certificate (without seeking payment) it is not open to a responding party to cross-claim for declarations on other sections of the certificate. This is explicitly confirmed in the Global Switch case, where O’Farrell J drew the following distinction (paragraph 50):

“iv) Where the referring party seeks a declaration as to the valuation of specific elements of the works, it is not open to the responding party to seek a declaration as to the valuation of other elements of the works.

v) However, where the referring party seeks payment in respect of specific elements of the works, the responding party is entitled to rely on all available defences, including the valuation of other elements of the works, to establish that the referring party is not entitled to the payment claimed.” (emphasis added)

Therefore, by framing a claim in terms of a declaration (and not seeking payment), it is possible to avoid cross-claims for set-off of unrelated parts of contractor’s account. For example, if an employer seeks a declaration that the contractor is not entitled to any further extension of time, the contractor could not ask the adjudicator to value its variation account.

There can be significant advantages to adopting a declaration only approach to adjudication. Taking the example in the preceding paragraph - if the employer was successful in its claim, it could eliminate any claims for time-based preliminaries from the contractor (which are reliant on extensions of time) and confirm its own entitlement to liquidated damages. The contractor could not, however, bring in other elements of its account (where it may be stronger) as a defence.

The use of declaration only adjudications can also be a powerful tool in settling final accounts. They can be used to keep the emphasis on the strongest parts of a party’s claim, or to confirm one’s own entitlements, while avoiding areas of weakness and potential set-offs arguments. This in turn can lead to a quicker and more favourable settlement, particularly against an unprepared opponent.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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