18 July 2024

In Morganstone Ltd v Birkemp Ltd [2024] EWHC 933 (TCC), Judge Keyser KC determined that the Adjudicator had taken “an erroneously restrictive view of his jurisdiction” by failing to consider certain cross-claims advanced by the Responding Party as part of its defence to a claim for payment.

The adjudication concerned deductions made by the main contractor, Morganstone Ltd, to the interim payment application submitted by the sub-contractor, Birkemp Ltd. The sub-contractor’s Notice of Adjudication defined the dispute narrowly, requesting that the Adjudicator consider the value of certain identified “inappropriate deductions” and make a corresponding award in its favour. In its Response, the main contractor raised two new cross-claims which were not included in its pay less notice that gave rise to the deductions.

The Adjudicator accepted the sub-contractor’s argument that advancing new cross-claims was an impermissible attempt to widen the scope of the adjudication beyond what had been referred. He decided that he did not have jurisdiction to consider the cross-claims and awarded payment to the sub-contractor.

The main contractor challenged the enforcement of the Adjudicator’s award on the basis that he had “failed or refused to consider certain defences by way of set-off that it advanced before him and that he thereby took an erroneously restricted view of his jurisdiction” where the Adjudicator did not think he could consider the new cross-claims at all.

This challenge was upheld by Judge Keyser KC in the TCC. In reaching this decision, Judge Keyser relied on the following principles set out by Justice O’Farrell in Global Switch Estates 1 Ltd v Sudlows Ltd [2020] EWHC 3314 (TCC): 

“viii)  If the adjudicator fails to consider whether the matters relied on by the responding party amount to a valid defence to the claim in law and on the facts, that may amount to a breach of the rules of natural justice.

ix)  Not every failure to consider relevant points will amount to a breach of natural justice. The breach must be material and a finding of breach will only be made in plain and obvious cases.

x)  If there is a breach of the rules of natural justice and such breach is material, the decision will not be enforced”.

The Adjudicator’s deliberate disregard for the main contractor’s cross-claims was considered to be a material error which could have had “a very significant effect on the overall result of the adjudication”.

Judge Keyser KC attributed this breach of natural justice to the behaviour of the sub-contractor, stating that:

“…the error was brought about by Birkemp's deliberate attempt to achieve a tactical advantage by confining the scope of the adjudication in such a manner as to exclude potentially relevant defences to the claim for payment”.

This decision could be seen as a somewhat harsh result. Arguably, there was a credible basis to say that where the cross-claims were not referred to in the pay less notice they had no contractual standing and therefore would not have had a significant effect on the overall result of the adjudication.

Nevertheless, the key point is that where adjudicators are dealing with a claim for payment they should consider all lines of defence advanced, including all cross-claims based upon a right of set-off. If the adjudicator does not accept any line of defence and explains why (such as the fact that it was not included in the pay less notice), that decision will likely be enforceable – whether the adjudicator’s reasoning is right or wrong.

Kate Ross, Trainee Solicitor: kro@bto.co.uk / 0141 221 8012

Fraser Hopkins, Partner: fho@bto.co.uk / 0141 221 8012