Adjudication – Right of Set-Off Must Be in Contract


The purpose of using an adjudicator to help resolve a building dispute is to provide a quick, effective and inexpensive remedy, not to deal with detailed issues concerning the legal construction of the relevant contract.
Recently, an adjudicator dealt with two construction disputes between the same parties. In the first of these, the claimant builder was awarded unpaid costs from the defendant.
In the second dispute, the defendant alleged that the builder had not completed the works and he was therefore entitled to certificates of non-completion as regards them and either to be paid damages or to have these deducted from the sum due to the builder following adjudication of the first dispute. The counter-claim amounted to more than £71,000.
The adjudicator ruled that the claim in the second dispute was valid and a repayment should be made by the builder. In respect of part of the claim that related to a defective wall, the adjudicator ruled that a sum should be withheld from the payment due to the builder under the first claim. Certificates of non-completion were ordered to be issued.
However, the adjudicator refused to order payment of the part of the claim relating to liquidated damages (i.e. damages for commercial loss) by the defendant in relation to the non-completion of the works as the contract did not provide for their payment by way of set-off. These, the adjudicator ruled, could not be paid until the appropriate certificates had been issued. At the time when the adjudication took place, this had not occurred. The defendant therefore brought an action to the court to enforce the right of set-off.
The normal position is that where a specific sum is entitled to be recovered by way of liquidated damages, that sum can be set off against a sum payable to the contractor (builder in this case). Where the sum due in liquidated damages has not yet been determined, whether or not an amount can be set off depends on the terms of the contract.
The issues were whether the counterclaim for liquidated damages followed logically from the adjudicator’s decision and, if so, whether or not the amount claimed could be set off against the adjudicator’s award in the first claim.
The court ruled that in this case the sum claimed in liquidated damages was not deductible – the logical decision on the facts of the case was that the contract administrator should issue certificates of non-completion and, on receipt of those, the claim for liquidated damages could then be pursued.
Says <<CONTACT DETAILS>>, “The right of set-off of liquidated damages could have been incorporated in the contract terms. Because it was not, the defendant was left to make a separate claim for them. With the building industry in a rather parlous state, failing to have a right of set-off could represent a significant commercial risk.”
We can help you make sure your commercial risk is minimised in your contractual arrangements.

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