Author: Digby Hebbard
Digby Hebbard, Partner, Fladgate LLP (firstname.lastname@example.org)
A key consideration for a party before commencing an adjudication is what the defending party might say or claim in reply, because the courts adopt a generous approach to whether a defence or counterclaim is within the scope of the dispute.
Broadly, no matter how narrowly defined a dispute referred to adjudication might be, at law the dispute is deemed to include all defences available to the responding party (Cantillon Ltd v Urvasco Ltd  EWHC 282 (TCC)). It follows that an adjudicator’s duties of natural justice include duly considering and determining the merits of any legitimate set-off and/or counterclaim.
We have noticed a trend in adjudications that claiming parties and/or the adjudicators appear to misunderstand that an adjudicator’s jurisdiction necessarily extends to such set-offs and counterclaims. More particularly, (i) claiming parties contend that defences and counterclaims are outside the scope of the dispute and therefore the adjudicator has no jurisdiction and/or (ii) adjudicators have accepted this jurisdictional argument or failed to deal with the defences and counterclaims in their decision.
The danger of such misunderstanding is obvious. To illustrate, a contractor might consider it has a discrete claim for unpaid sums of, say, £100,000; however, this could be met by an employer’s counterclaim for delay damages of, say, £300,000. A perceived “slam dunk” could end up creating a substantial liability.
In summary, the relevant authorities provide:
We were recently involved in an adjudication and subsequent enforcement proceedings involving these principles.
A contractor referred a claim against an employer to adjudication asserting it was owed approximately £150,000 in unpaid VAT. The employer advanced various defences, set-offs and counterclaims, including that it was due around £300,000 for delay damages and the contractor was not entitled to payment under the contract because the contract had been terminated. The contractor contended that such matters were outside the scope of the adjudicator’s jurisdiction.
The adjudicator found for the contractor. The written decision recorded that the adjudicator considered the employer’s defences on delay damages and termination were outside his jurisdiction.
The employer for whom we acted did not comply with the adjudicator’s decision and the contractor sought to have the decision enforced. Mr Justice Stuart Smith in the Technology and Construction Court refused to enforce the decision. He accepted that the employer’s set-off for liquidated damages was part of the dispute and therefore in line with Pilon v Breyer and that the adjudicator was in breach of natural justice for failing to consider and determine these material issues.
In particular, Mr Justice Stuart-Smith decided:
Referring parties need to be alive to the risk of counterclaims and set-offs and frame their adjudication in the best way possible. In this case, had the adjudication been framed as seeking a declaration on the applicable rate of VAT, rather than seeking payment, no counterclaims and set-offs would have been allowed.
Adjudicators should not ignore the defences put before them or they risk their decision being subject to challenge on the grounds of an error of jurisdiction and/or breach of natural justice.