Adjudication? Pay Less? Set Off? Exhausted? – This case has it all!
DC Community Partnerships Limited (“DCCP”) v Renfrewshire Council (“the Council”), a decision of 22 November 2017 from Lord Doherty sitting in the Outer House of the Court of Session determined that an Adjudicator had failed to exhaust his jurisdiction and as a result, his decision was reduced. This is an important case not least because only in very limited circumstances will an Adjudicator’s decision be reduced, but it also determined that the Council did not need to issue a pay less notice where it had advanced the defence of set-off.
The Council employed DCCP for the construction of a special needs school in Linwood. The contract incorporated the provisions of NEC3 Engineering and Construction Contract (June 2005) as amended (“the Contract”). During the course of the works, DCCP submitted its payment application no. 33 providing a cumulative value for the works just shy of £19m.
The project manager issued its payment certificate no. 33 in respect of payment application no. 33 and provided a cumulative value for the works of just over £15m. After deduction of previous payments and retention, payment certificate no. 33 found the Council liable to pay £287,075.07 (“the Notified Sum”). The Council duly paid the Notified Sum to DCCP.
As I am sure you’ve guessed, DCCP were not happy. It considered the project manager had under-valued items in its payment application no. 33. DCCP referred the matter to adjudication and the Adjudicator decided that payment certificate no. 33 should be revised so as to increase the sum due to DCCP by over £800k. DCCP then raised enforcement proceedings in the Court of Session to get the Council to pay up.
The Council’s Position
In the latter part of the adjudication, the Council submitted in its surrejoinder that if the Adjudicator was minded to award further sums to DCCP in respect of its payment application no. 33, due regard should be given to the Council’s contractual right (under Option X7 of the Contract) to set off sums in respect of delay damages against any sums found due to DCCP. The amount due to DCCP should therefore be reduced by approximately £450k.
An Adjudicator’s jurisdiction is determined by the referring party’s notice of adjudication together with the respondent’s submissions in defence of the claim. In the Court of Session proceedings the Council submitted that the Adjudicator had failed to “exhaust his jurisdiction” by failing to deal with its set-off defence in respect of delay damages and his decision should therefore be reduced.
It was DCCP’s position firstly that the Adjudicator had exhausted his jurisdiction. Failure to exhaust jurisdiction will only be held in “the plainest of cases” and that “the court should not be overly critical of the Adjudicator’s reasons”. Secondly, set-off was not a defence the Council could run because it had not issued a pay less notice in response to payment certificate no. 33.
Had the Adjudicator Exhausted his Jurisdiction?
No. Lord Doherty found that in order to exhaust his jurisdiction the adjudicator had “to give at least some brief, intelligible explanation of why the defence of set off was being rejected”. In fact the Adjudicator made no explicit reference to the set-off defence in his decision. While Lord Doherty was critical of the Council for failing to raise the set-off defence until the later stages of the adjudication the fact remained that the defence had been raised and DCCP had an opportunity to respond to it but did not. Lord Doherty considered this to be one of the “plainest of cases” where the Adjudicator had not exhausted his jurisdiction and his decision fell to be reduced.
Did the Council need to issue a PLN?
No. In these circumstances, Lord Doherty considered that neither the relevant legislative or contractual provisions required the Council to have issued a pay less notice. The Council paid the notified sum and in terms of the Contract there was no reason for it to give a pay less notice unless it intended to pay less than the notified sum. Lord Doherty found that “by advancing the set-off defence in the adjudication the defender did not alter its position in relation to the notified sum. Rather, it sought to set off delay damages against any additional sums that the adjudicator might decide were payable”. In Lord Doherty’s opinion, the sums claimed by DCCP were in addition to the notified sum and the Council were entitled to run the set-off defence.
- Check your contract, are there contractual provisions for set-off? If so, when and how do they kick in?
- This decision does not necessarily negate the statutory obligations to issue valid and timeous pay less notices were set off is involved. As ever, each case turns on its own facts.
- Not everyone will agree with this decision which makes it important to err on the side of caution. If in doubt, issue a pay less notice!