Defences in adjudication

United Kingdom

A recent TCC decision will encourage adjudicators to consider all defences in an adjudication on their merits. Dismissing them on jurisdictional grounds or because they were not raised prior to the adjudication may jeopardise the enforcement of an adjudicator’s decision. The decision also gives useful guidance on the need for withholding notices in interim payment disputes.

Quartzelec commenced an interim payment adjudication against Honeywell seeking an increased valuation for a particular scope change and further payment as a result. After the notice of adjudication, Honeywell realised it had not taken account of certain omissions from scope when issuing its interim payment notice. It therefore sought to have them dealt with in the adjudication and deducted from any amount awarded in respect of Quartzelec’s scope change. Honeywell had not raised these deductions prior to the adjudication and had not issued a withholding notice.

The adjudicator decided he had no jurisdiction to consider Honeywell’s offsetting deductions for the omissions, as they had not been in play prior to the adjudication. He therefore proceeded to make a decision for Quartzelec’s scope change claim with no deduction for Honeywell’s omissions. The Court disagreed with the adjudicator, deciding that he had jurisdiction and that no withholding notice was necessary. As a result, the Court struck down the entire decision.

The Court’s findings will be helpful for those involved with adjudications, especially on interim payment disputes. In particular:

  • The parties are entitled to raise any defence which reduces the amount claimed for. Whilst the Notice of Adjudication defines the limits of the claim made, adjudicators must consider all defences raised to that claim on their merits, regardless of whether they relate to the same subject matter or whether they were raised before the adjudication
  • Any matters relevant to the valuation of the work the subject of an interim payment may be raised in a subsequent adjudication, with or without a withholding notice. Withholding notices are only required for “true contra-charges” deducted from the proper valuation of the work (i.e. defects, liquidated damages, etc). They are not required for matters which affect the valuation itself, such as omissions in scope
  • It is important to note that if the government’s proposed changes to the Construction Act take effect, adjudications over interim disputes may deal less with questions of offsetting items and “true contra-charges”, and more with whether a payer has given timely notice of what it considers the payee is due. If it fails to give a timely or adequate payment notice, it may be required to pay the amount claimed, and an adjudicator may be entitled (or possibly obliged) to ignore any evidence that the payer may wish to introduce in any adjudication concerning the payee’s “true” entitlement

Reference: Quartzelec Ltd v Honeywell Control Systems Ltd (Unreported, TCC, HHJ Stephen Davies, 5 December 2008)