Neutral Citation Number: [2009] EWHC 2017 (TCC)

Case No: HT-09-279

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

TECHNOLOGY AND CONSTRUCTION COURT

St Dunstan’s House

133- 137 Fetter Lane

London EC4A 1HD

Date: Tuesday, 28th July 2009

Before:

MR JUSTICE COULSON

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Between:

Miss Serena Cheng (instructed by Messrs Wheelers LLP) for the Claimant.

Mr Alan Steynor (instructed by Messrs Fladgate LLP) for the Defendant.

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Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

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Mr Justice Coulson :

A. BACKGROUND

1. Pursuant to a contract, dated 18th August 2004, the Claimant, Workspace Management Limited, engaged the Defendant, YJL London Limited, to carry out construction works at Clerkenwell Workshops, London EC1. The contract incorporated adjudication provisions and an arbitration clause. Disputes have been referred to an Adjudicator, Mr Malloy, and subsequently an Arbitrator, Mr Bingham. On 2nd March 2009, the Arbitrator issued an award in respect of costs in the Claimant’s favour in the sum of £85,000. The Defendant has paid £28,856.66 against that sum, leaving unpaid an amount of £56,143.34.

2. It is the Defendant’s case that this further sum is not due by operation of a set-off arising out of an Adjudicator’s decision, dated 2nd January 2009, and which therefore predated the Arbitrator’s award. That adjudication concerned the same parties, the same contract and the same issues as are being canvassed in the arbitration. The principal point for me today is whether the Defendant is entitled to set off the sum of £56,143.34. On analysis, this deceptively simple point raised a variety of novel arguments, and I am grateful to both Counsel for their very helpful submissions.

B. THE ADJUDICATIONS

3. There have been a total of three adjudications between these parties on the project. Each time the Adjudicator was Mr Malloy. In the first adjudication, he resigned because he did not feel that he had the necessary jurisdiction. In his second adjudication decision, dated 6th June 2007, he decided that the Defendant was only entitled to an extension of time down to 30th December 2005 as against a date of practical completion of 13th June 2006. As a result, there was a lengthy period of culpable delay and he found that the Defendant was liable to pay the Claimant £285,000 by way of liquidated damages, together with £126,192 by way of repayment of loss and expense previously paid by the Claimant to the Defendant.

4. Some 18 months later, the Claimant sought to refer a further dispute to the Adjudicator (adjudication 3) even though, as we shall see, there was by then a full-blown arbitration between the parties dealing with delay, extensions of time, loss and expense and liquidated damages. The background to adjudication 3 was this. The Claimant’s architect had issued Interim Certificate 27, which was in the negative sum of £356,971 gross, which, having taken into account the £126,192 previously repaid by the Defendant and referred to in paragraph 3 above, required the Defendant to pay a further sum of £230,779 to the Claimant. The Defendant refused to pay that amount, so the Claimant issued adjudication proceedings.

5. The Notice of Adjudication said expressly that:

“The dispute is over

l Architects’ Certificate No. 27, dated 16th October 2007;

l Sums to be repaid by the Respondent;

l Interest.”

6. The Adjudicator’s decision in adjudication 3 recorded at paragraph 5 the Defendant’s case that, on a proper analysis, the sum of £123,578 was actually due from the Claimant to the Defendant. Following a detailed valuation of the matters covered by Certificate 27, the Adjudicator’s conclusion was much closer to the case advanced by the Defendant than to the position adopted by the Claimant. At paragraph 24, he said:

‘The amount included by the quantity surveyor against YJL prolongation/disruption and S/C prolongation/disruption in Architect’s Certificate No. 27 is £194,660. Therefore, based on my calculation of the loss and expense which should have been included, Architect’s 27 should be increased by £277,599.30 (£474,259.30 - £194,660). This would revise the negative balance of Architect’s Certificate No. 27 from £356,971 to £77,371.70 (£356,971 - £277,599.30). As YJL has already repaid £126,192 in respect of “prolongation time, loss and expense”, it follows that Workspace is not entitled to repayment of sums pursuant to Architect’s Certificate No. 27.’

7. In other words, the Adjudicator found that the true negative balance of the certificate, namely £77,371.70 was less than the amount which the Defendant had already repaid to the Claimant of £126,192. As a matter of simple maths, this meant that the Defendant had overpaid the sum of £48,820.30 plus VAT, a total of £56,143.35. That is, of course, the specific sum which the Defendant has set off against Award No. 2.

8. In his conclusions, the Adjudicator found that the Defendant “has not improperly or otherwise unlawfully withheld sums repayable” to the Claimant. The Adjudicator did not order the repayment by the Claimant to the Defendant of the £56,143.35. When that point was put to him by the Defendant’s solicitor, he replied on 6th January to say this:

“Having considered the request, I confirm that the reason for my finding at paragraph 25 of my decision that Workspace is not entitled to repayment of sums pursuant to Architect’s Certificate No. 27 was as a result of the application of my finding in paragraph 21 that the calculation of the amount of loss and expense which should have been included in Architect’s Certificate No. 27. As a result, I found that Architect’s Certificate No. 27 should be increased by £277,599.30. Whilst it follows from my finding that YJL should be entitled to a further amount of £48,820.30, due to the scope of the Adjudication Notice and the redress sought, I considered that I was unable to decide or direct that the amount was due.”

C. THE ARBITRATOR’S AWARD NO. 2

9. The arbitration was commenced by the Defendant, on 3rd October 2007, mainly in response to the Adjudicator’s second decision, which was of course largely adverse to the Defendant. The Notice of Arbitration made clear the wide nature of the disputes being referred to arbitration because they included:

“1. To what extension of time is YJL entitled under the building contract?

2. What sums are due to YJL under clause 26 of the building contract?

3. What sums are due to YJL in respect of variations which have been instructed under the contract? …”

10. The first arbitration hearing took place in April 2008. I am told that it lasted for four days and was apparently concerned with an issue raised by the Defendant concerning estoppel. The Arbitrator’s award (Award No. 1) in respect of that issue was dated 17th June 2008. As I understand it, it was in the Claimant’s favour.

11. On 16th December 2008, the Claimant sought its costs of Award No. 1. I understand these are said to be in excess of £300,000. There was a hearing in relation to this application on 26th February 2009. On 2nd March 2009, the Arbitrator made an award (Award No. 2), pursuant to section 39(2)(b) of the Arbitration Act 1996, that the Defendant should make an interim payment on account of the costs of Award 1. That interim payment was capped at £85,000. The award was said to be a ‘provisional award’ because, as I understand it, the Adjudicator is going to undertake the task of a detailed costs assessment at a later date.

12. As previously noted, £28,856.66 has been paid against Award No. 2, leaving the £56,143.34 referred to above. On 1st May 2009, the Arbitrator issued a peremptory order in respect of the outstanding monies, pursuant to section 41(5) of the Arbitration Act 1996. The sum was still not paid and, therefore, these proceedings were issued on 3rd July 2009.

D. THE ISSUES

13. There were a variety of issues between the parties and, borrowing from the formulations of both Counsel, I summarise them as follows:

(a) Did the Adjudicator decide that the Claimant owed the Defendant £56,143.35?

(b) If so, did he have the jurisdiction to reach that decision?

(c) If so, is the Adjudicator’s decision trumped by the Arbitrator’s Award No. 2 such that the former cannot be set off against the latter?

(d) Should Award No. 2 be enforced and, if so, should there be a stay pursuant to RSC Order 47?

E. ISSUE 1 - THE ADJUDICATOR’S DECISION

14. It seems to me clear beyond doubt that, in paragraph 24 of his decision, the Adjudicator decided that (a) the Defendant had “already repaid” a sum that was in excess of that which should have been repaid; (b) his detailed valuation demonstrated that the amount of the over-repayment was £48,820.30 plus VAT, or £56,143.35.

15. Should there have been any doubt about that, it seems to me that the Adjudicator’s letter of 6th January 2009, to which I have previously referred, makes that point crystal clear. He says there that “it follows from my finding that YJL should be entitled to a further amount of £48,820.30”. That sum, of course, is exclusive of VAT.

16. It is of course right, as Miss Cheng points out, that Adjudication Decision No. 3 did not require this sum to be repaid by the Claimant to the Defendant but, so it seems to me, that does not prevent the Adjudicator’s findings in paragraph 24 of his decision from forming an important and express part of that overall decision. In any event, if I was wrong about that, and his findings were not express, it seems to me that they follow logically from the decision itself. They are, in other words, a necessary and indispensible result of the Adjudicator’s overall decision.

17. There are a number of authorities dealing with what might be properly inferred from an adjudicator’s decision. The vast majority of them are concerned with claims for liquidated damages in circumstances where an adjudicator has found that a period of delay (for which the contractor claimed an extension of time) was in fact a period of culpable delay for which liquidated damages were appropriate. In Balfour Beatty Construction v Serco Limited [2004] EWHC 3336 TCC, Jackson J (as he then was) reviewed all of those authorities and he derived two principles dealing with what can and cannot be safely inferred from such a decision. He said:

“(a) Where it follows logically from an adjudicator's decision that the employer is entitled to recover a specific sum by way of liquidated and ascertained damages, then the employer may set off that sum against monies payable to the contractor pursuant to the adjudicator's decision, provided that the employer has given proper notice (insofar as required).

(b) Where the entitlement to liquidated and ascertained damages has not been determined either expressly or impliedly by the adjudicator's decision, then the question whether the employer is entitled to set off liquidated and ascertained damages against sums awarded by the adjudicator will depend upon the terms of the contract and the circumstances of the case.”

18. Adopting a similar approach in an earlier case, David McLean Housing Limited v Swansea Housing Association Limited [2002] BLR 125, HHJ Humphrey Lloyd QC said that, because the claim for an interim payment included an element of loss and expense:

“…the entitlement to extension of time is included as a necessary and indispensible precursor to the direct loss or expense and, as it may be, the establishment of a proper or new rate or price, to enable the rules for valuation of variation to be properly applied, or indeed, perhaps, for the adjustment of rates of prices for measured work.”

19. In my judgment, Mr Steynor is right to say that, in this case, the Defendant is in an even stronger position than the claiming party in McLean and the responding party in Balfour Beatty. Here, the Adjudicator’s decision means that, as a result of the inexorable logic of his valuation, the Claimant has been overpaid by the Defendant in the sum of £56,143.35. Accordingly, I conclude that either the Adjudicator’s decision that the sum was due to the Defendant is express, or it is to be reasonably inferred from the inevitable and logical consequences of his valuation.

F. ISSUE 2 - JURISDICTION

20. The second issue is whether if, as I have found, the Adjudicator has decided the amount of the overpayment by the Defendant to the Claimant, did he have the necessary jurisdiction to reach such a decision? The Claimant maintains that he did not have that jurisdiction because the dispute in Adjudication 3 was limited to the amount to be paid by the Defendant to the Claimant and no part of that dispute touched on sums that may be due from the Claimant to the Defendant. The best point in support of that argument, so it seems to me, is the Adjudicator’s own view, as set out in his letter of 6th January 2009. However, on analysis, I conclude that it is wrong.

21. The starting point for any consideration of jurisdiction is the Notice of Adjudication: see Jerome Engineering Limited v Lloyd Morris Electrical Limited [2002] CILR 1827. Here, the dispute set out in the Notice of Adjudication was said to be “the proper valuation of Certificate 27”. That was the dispute that the Adjudicator decided. He arrived at a figure that was considerably less than the amount shown on the certificate, and that calculation demonstrated that, once allowance had been made for the sums already paid by the Defendant, the Claimant had been overpaid. That was the result of the dispute which the Adjudicator was obliged to decide, and he did not stray beyond his jurisdiction in so doing.

22. Miss Cheng submitted that the Adjudicator had the jurisdiction to reach a nil valuation of Certificate 27, but not the jurisdiction to go on and consider whether any sum was due to the Defendant from the Claimant. As she put it, “Once he got to nil, he could stop.” I consider that that argument takes an unrealistic view of the valuation process that the Adjudicator went through. He carried out his detailed valuation. It was only when he totalled up the figures and compared the result with what had been already paid that he would have become aware that the sum due was less than the amount that had already been repaid by the Defendant to the Claimant. He could not do part of that valuation and then stop. It was a composite exercise and had to be completed in full.

23. On this point, Mr Steynor drew my attention to paragraph 15 of the witness statement of Ms Alderson in support of the Defendant’s position. That says:

“… Workspace consistently claimed a net sum giving the result of the benefit of the payment made by YJL in compliance with the second adjudication decision. The Adjudicator’s third decision, therefore, inevitably required him to take into account that payment made by YJL. If he had not done so, then he would still have concluded that a payment of £77,371.70 was due to Workspace. The Adjudicator was therefore addressing not only the valuation of Certificate 27 but also the balance of the account between the parties. Although he states that he cannot decide that the balance of £48,830.30 plus VAT was due, he has in fact done so in his decision. He clearly found that the payment of £126,192 was made and that the sum of £77,371.70 was due or he could not have deducted it against the negative valuation. There is no basis in his decision for distinguishing between any part of the payment made as a sum due.”

I agree with and accept that analysis. It seems to me that the Adjudicator was expressly addressing ‘the balance of the account’ between the parties.

24. Accordingly, I conclude that the Adjudicator had the necessary jurisdiction to decide that, as a result of his valuation of Certificate 27, the Defendant had overpaid the Claimant and was entitled to a sum in return on the balance of the account between them. He could, therefore, have ordered that this sum be paid by the Claimant to the Defendant.

25. In reaching that conclusion, as I have said, I am conscious that I have reached a conclusion which is different to that of the Adjudicator. He felt, by reference to his letter of 6th January, that the Adjudication Notice had been issued by the Claimant and obviously did not identify any claim by the Defendant for overpayment (and thus the return of sums from the Claimant to the Defendant). He, therefore, concluded that he did not have the jurisdiction to make such an order. However, as a matter of principle in these circumstances, the Court is obliged to consider the Adjudicator’s jurisdiction afresh whatever view he or she may have reached: see Grovedeck Limited v Capital Demolitions Limited [2000] BLR 181, and the many subsequent cases on this point, including R Durtnell & Sons Limited v Kanduna Limited [2003] BLR 225.

26. It is right to note that, in the vast majority of those cases, where the Court has reached a different view on jurisdiction from that advanced by the adjudicator, the result has been that, where the adjudicator has concluded that he did have the necessary jurisdiction to reach the decision that he did, the Court has taken the contrary view. But there is no reason why, in principle, the approach should not also be applicable to a situation in which the Adjudicator has concluded that he did not have the necessary jurisdiction. In my judgment, in this case, the Adjudicator was, if anything, a little too modest in his view of his own jurisdiction.

27. In David McLean, HHJ Lloyd said at paragraph 13:

“The adjudicator was entitled therefore to arrive at his decision about the extension of time as it affected the payment and, thus also, the amount of liquidated damages to which the defendant claimed to be entitled. The claimant has to accept the consequences of its own reference on this point.”

In similar vein, it seems to me that the Adjudicator was entitled to arrive at his decision about valuation and overpayment as a result of the exercise that he performed on Certificate 27, and thus the Claimant has to “accept the consequences of its own reference on this point”.

G. ISSUE 3 – SET-OFF

28. The next issue is, therefore, concerned with set-off. I have concluded that there is a valid and therefore binding adjudication decision in relation to the £56,143.35. Can that be set-off against Arbitration Award No. 2? Miss Cheng argued that, even if she was wrong about the two issues, as I have found that she was, the Adjudicator’s decision as to overpayment could not be used as a set-off against Arbitrator’s Award No. 2. Amongst other things, she maintained that, in effect, the arbitration award trumped the Adjudicator’s decision.

29. There can be no doubt that generally a defendant cannot endeavour to raise a counterclaim as a means of defeating a claim to enforce an adverse arbitral award. The cases cited to me by Miss Cheng make that plain. Thus, in Margulies Bros Ltd v Dafnis Thomaides & Co (UK) Ltd [1958] 1 Lloyds Rep 250, Diplock J (as he then was) said:

“No authority has been cited to me in which the existence of a counterclaim has been held to be a good reason for refusing to allow an award to be enforced as a judgment. I do not think that the existence of a counterclaim is a good reason. I think that it would be contrary to the purpose of Sect. 26 of the Arbitration Act, 1950, if, in a case where the validity of the award and the right to proceed upon it is beyond doubt, it should be given less effect than a judgment. I think that the cases in which an award will not be enforced as a judgment are correctly set out in Russell on the Law of Arbitration, 16th ed., at pp. 269 to 271, and that the existence of a prima facie counterclaim is not one of them. Even, therefore, if I thought that a prima facie counterclaim were established, I should not regard it as a good ground for refusing to allow the applicants to enforce the award in the same manner as a judgment, and, a fortiori , as a good ground for refusing to remit the award to the Board of Appeal so that it may be amended to a form in which the applicants can apply to some other Judge for leave to enforce it in that manner.”

30. This passage was subsequently cited with approval by Lord Denning MR in Middlemiss & Gould (A Firm) v Hartlepool Corporation [1973] 1 AER 172. In that case, he said:

“Once an award has been made — and not challenged in the court — it should be entered as a judgment and given effect accordingly. It should not be held up because the losing party says he wants to argue some point or other or wants to set up a counterclaim or anything on that sort. He would not be allowed to do so in the case of a judgment not appealed from. Nor should he do so in the case of an award that he has not challenged.”

31. It does seem to me that, in the present case, the situation is rather different. First, unlike the situation in those two cases, the Defendant does not merely assert the existence of a prima facie counterclaim. In this case, he contends that there is a decision by an adjudicator which is binding on the Claimant, at least for now, to the effect that the Claimant should pay the Defendant the sum in question. As noted, that sum was found to be due before Arbitration Award No. 2 was even formulated. It is, therefore, less a prima facie counterclaim and more a binding decision that a debt is due from the Claimant to the Defendant.

32. Secondly, I consider that Mr Steynor is right to say that, on analysis, this is a simple mutual set-off of debts. The Claimant owes the Defendant £56,143.35 by reason of the Adjudicator’s decision and the Defendant owes the Claimant the same sum by reason of the Arbitrator’s award. Each decision requires the permission of the Court to be enforced. They, therefore, cancel each other out provided that (as we shall come to investigate) they can be regarded as giving rise to an equitable set-off.

33. Miss Cheng took the point that, because Award No. 2 was final and binding and Adjudication Decision 3 was, at most, only temporarily binding, Award No. 2 therefore trumped that decision, and should be enforced regardless of the position in Adjudication Decision 3. There are a number of reasons why I am unable to accept that submission.

34. First, both decisions are, as of today, binding on the other side. One does not have greater status than the other. They are both capable of being the subject of the judgment of this Court.

35. Secondly, the award is described on its face as both ‘provisional’ and ‘interim’ because, for the reasons that I have given, the Arbitrator is still tasked with the exercise of assessing the detailed costs. It does not seem to me, therefore, that such an award should be elevated to a status that is in some way greater than and different to the decision in Adjudication 3.

36. Thirdly, it seems to me that, standing back from the individual decisions and looking at the case in the round, it would be artificial to allow the Claimant to ring-fence the award simply because it is not subject to potential challenge (which an adjudicator’s decision might be), in circumstances where, for reasons best known to themselves, the parties are conducting simultaneous arbitration and adjudication proceedings. As I pointed out to Miss Cheng, it was open to the Claimant to have raised the question of Certificate 27 in the arbitration. It was the Claimant who chose to commence separate adjudication proceedings in adjudication 3. It cannot now, so it seems to me, ask the Court to ignore the outcome of those proceedings merely because the result was not to its liking.

37. For the avoidance of doubt, I should say that, in my view, these mutual debts do arise out of the same transaction and do give rise to an equitable estoppel. They arise, it is common ground, out of the same building contract. They also arise, so it seems to me, out of the same underlying disputes. Those disputes are concerned with delay. The only difference between them is that one is in respect of direct costs, that is to say the loss and expense suffered by the Defendant in respect of the delay, and the other is in respect of indirect costs, namely the costs of arguing unsuccessfully about one aspect of the delay disputes in the arbitration.

38. In Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] 1 QB 927, Lord Denning MR said:

“It is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff’s demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim.”

39. In my judgment, for the reasons that I have set out, it would be manifestly unjust to allow the Claimant to enforce payment without taking into account the cross-claim based on Adjudication Decision 3. The principles of equitable set-off are, in my view, triggered in the present case.

H. ISSUE 4 – ENFORCEMENT/STAY

40. As noted, I decline to enforce Arbitration Award No. 2. It is, therefore, unnecessary for me to deal in detail with the arguments as to the stay of execution. However, I should say that, in my view, if I had entered judgment for the Claimant, I would have stayed execution pending the outcome of the arbitration. There would have been two reasons for that.

41. One reason, of course, arises from the general merits of the situation, which I have endeavoured to set out above. For those reasons, it seems to me that it would have been inequitable for any sums to be paid to either party at this stage of their many and various disputes.

42. The second separate reason arises out of the ongoing arbitration. I am told that, during the course of the last two or three weeks, the parties appeared before the Arbitrator on a further four day hearing which was addressing the questions of extensions of time and liquidated damages. An award is apparently imminent. Thus, the overall accounting position between the parties is very likely to change within the course of the next few weeks.

43. In those circumstances, for reasons which are not dissimilar to those noted by me in Kier Regional v City & General (Holborn) Limited [2009] BLR 90, I would have been persuaded to exercise my discretion in favour of a stay.

44. However, for the reasons set out in the earlier sections of this Judgment, I decline to enforce the claimed judgment based on Award No. 2. Thus the question of the stay does not arise.

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