Judgment Date: 29.05.2003
Where an adjudicator's decision deals with a set off or withholding notice raised during the adjudication, that will not preclude the paying party from in the future raising a set off or withholding notice relating to matters that were not put before the adjudicator; where the parties had agreed the basis of their contractual relationship in the adjudication, the adjudicator had no jurisdiction to make his decision on a different contractual basis; the TeCSA Rules (1999 v1.3) did not prevent a party applying to the Court for a declaration that the adjudicator had acted outwith his jurisdiction in making the decision that he did.
Technology and Construction Court, Judge Frances Kirkham
The claimant (“Shimizu”) was the main contractor for works at a high-tech industrial park. Shimizu appointed the claimant (“LBJ”) to do cladding works pursuant to a Letter of Intent (“LOI”). The LOI provided that the parties would ultimately enter a sub contract in the DOM/1 form incorporating various non-standard amendments, and that if no such contract came into being the amount payable to LBJ would be subject to a specified cap. No DOM/1 contract was in fact signed. Works progressed under the LOI and Shimizu subsequently wrote to LBJ issuing a summary of alleged set-off charges. LBJ made an application for interim payment, which Shimizu refused to deal with, and LBJ referred the dispute concerning the interim payment application to adjudication. The adjudicator decided that Shimizu should pay LBJ £47k plus VAT “without set off”. He directed that payment should be made not later that 28 days after LBJ had delivered a VAT invoice. LBJ duly submitted a VAT invoice to Shimizu for the amount of the adjudicator’s award. Shimizu made no payment. Instead, Shimizu wrote to LBJ, reserving their position on the validity and enforceability of the adjudicator’s decision and serving notice of their intention to withhold payment in relation to the amount claimed by LBJ. This set off, amounting to £107k, was claimed in respect of alleged defects in LBJ’s work, consequent delay, disruption and damage to other trades. Shimizu also wrote to the adjudicator seeking clarification that the use of the words “without set off” in the decision did not preclude Shimizu’s rights to notify and make set off against the amount due. The adjudicator confirmed that his decision did not refer to any set offs that he had not seen before coming to his decision.
Shimizu sought declarations as to the proper construction of the adjudicator’s decision, the adjudicator’s jurisdiction and the rules of natural justice. The adjudication had been conducted under the TeCSA Rules 1999 v1.3. These provided (Rule 28) that every decision of the adjudicator was to be implemented without delay, that the parties would be entitled to such reliefs and remedies as were set out in the decision, and to summary enforcement thereof, regardless or whether such decision was or was to be the subject of any challenge or review, and that no party would be entitled to raise any right to set off, counterclaim or abatement in connection with any enforcement proceedings. Rule 33 stated that no party shall, save in the case of bad faith on the part of the adjudicator, make any application to the Courts whatsoever in relation to the conduct of the adjudication or the decision of the adjudicator until such time as the adjudicator had made his decision, or refused to make a decision, and until the party making the application had complied with any such decision.
The Court addressed the following issues:
- Whether the adjudicator’s decision prevented Shimizu from withholding payment of all or part of the sums he had awarded to LBJ.
- Whether the adjudicator acted in breach of the rules of natural justice and/or outwith his jurisdiction insofar as he purported to decide or determine the basis of the parties’ contractual relationship, in particular, that the parties had entered into a sub-contract and that the cap under the LOI did not therefore apply.
- Whether Shimizu were in any event prevented from arguing any of the points it raised by virtue of the TeCSA Rules.
The Court held:
- On a true construction of the adjudicator’s decision, the adjudicator did not decide that Shimizu had no further right of set off. The agreed payment provisions stated that payment became due upon receipt by Shimizu of a VAT invoice and that the final date for payment would be 28 days thereafter. The interim payment application that LBJ had referred to adjudication had not fallen due for payment, because LBJ had not, at the time of the adjudication, issued a VAT invoice in respect of it. The decision decided that Shimizu had no right to set off against the sum which would become due to LBJ the set-offs which Shimizu had identified in its summary and claimed in the adjudication but it did not have the effect of removing any of Shimizu’s rights under the sub-contract or from exercising any future rights under the subcontract.
- The adjudicator's decision gave rise to a right for LBJ to be paid within the context and in accordance with the agreed payment provisions and the Construction Act. This was not a case of set-off or withholding against a decision (Ferson Contractors Ltd v Levolux (CA)  EWCA Civ 11 distinguished). Shimizu was therefore entitled to serve a withholding notice in relation to the sum which the adjudicator decided would become due on delivery of the VAT invoice.
- The adjudicator’s decision was invalid insofar as it purported to decide the basis of the contractual relationship between parties. The parties had agreed in the adjudication that their agreement was based on the LOI. The contractual relationship was not in issue. The adjudicator did not therefore have jurisdiction to decide that the parties had contracted on some other basis.
- Given the Court’s decision as to the adjudicator’s jurisdiction, it was not necessary to decide whether or not he had failed to act in accordance with the rules of natural justice. However, the Court indicated that it would have concluded that by failing to make clear to the parties that, although they agreed that they had contracted on the basis of the LOI, he was intending to decide whether or not that was so, and to give the parties the opportunity to make submissions on the question of contract formation, the adjudicator had acted in breach of the rules of natural justice with the consequence that the court would be slow to give summary judgment to enforce the decision.
- The TeCSA Rules did not have the effect of preventing a party from asking the court to construe a decision, or from applying to the Court for a declaration that an adjudicator had no jurisdiction to make the decision that he did.
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