| Date | 18 June 2003 |
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| Judgment | Shimizu Europe Limited v LBJ Fabrications Limited, TCC 29 May 2003 |
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| The Issue | Whether a withholding notice may be raised after an adjudicator's decision to resist payment of the amount ordered by the adjudicator. |
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| Implication |
Where the contract mechanisms provide that the adjudicator is merely valuing the works and not determining an amount due, it remains open for the paying party to raise a withholding notice prior to the final date for payment of that amount. |
printIt might be assumed that when an adjudicator orders the payment of a sum of money, the paying party will be bound to comply with that decision without a right to apply a set-off or withholding against the sum to be paid. In recent months, however, the courts have been examining this simple proposition in more detail to determine whether there may indeed be circumstances where the paying party may rightfully refuse to pay monies awarded by an adjudicator. The case that perhaps kicked this particular ball into play was Bovis Lend Lease v Triangle Developments in December of last year. In that case, Judge Thornton QC concluded that appropriate terms of the contract could defeat the requirement that immediate effect should be given to an adjudicator's payment decision. The clause which was examined in the Bovis case is a clause which appears in many standard form contracts dealing with the determination of the employment of the contractor. Typicaly, the clause states that following such determination, no further payment shall be made to the contractor until an account of all claims and cross claims is established. The employer, Triangle, contended that it had validly determined Bovis' employment and that accordingly, it was no longer obliged to make further payments to Bovis. Judge Thornton agreed, concluding that the contractual provisions prevailed over the adjudicator's decision. This view, however, appeared to be reversed by the Court of Appeal in January of this year in the case of Levolux v Ferson. Again, the determination provisions of the contract were in issue. A dispute had arisen concerning the amount due to Levolux for interim payment, and in consequence Levolux had suspended its operations on site. Ferson replied by determining the employment of Levolux under the contract. Ferson believed that in accordance with the contract, it did not have to make any further payment to Levolux until after completion of the works and the making good of defects. Contrary to the findings of Judge Thornton in the Bovis case, His Honour Judge David Wilcox rejected Ferson's argument that the determination provisions of the contract should prevail. He held that the contractual scheme, which assumed that no monies would be paid until completion of the works, simply did not apply to an adjudicator's award. This decision then passed on to the Court of Appeal, who agreed with Judge Wilcox. Lord Justice Mantel said: "The contract must be construed so as to give effect to the intention of parliament rather than to defeat it. If that cannot be achieved, then the offending clause must be struck down". It is against this background that the recent case of Shimizu Europe v LBJ Fabrications has discovered a slightly different angle. Shimizu was the main contractor for works at an Oxford Science Park. They had appointed LBJ as subcontractors for the design, supply and installation of louvres and cladding. The contract incorporated the DOM/1 subcontract terms, as amended by the parties. In particular, amended clause 21.2.4 provided that LBJ was required to deliver a VAT invoice in respect of any relevant interim payment before that payment became due under the subcontract. Disputes arose, and these were passed to an adjudicator. The adjudicator valued LBJ's work and decided that Shimizu should pay LBJ the sum of £47,000 plus VAT "without set-off". Following the terms of the subcontract, he ordered that payment should be made by Shimizu not later than 28 days after LBJ had delivered a VAT invoice. The following day, LBJ submitted the necessary VAT invoice to Shimizu. Four days later, Shimizu responded. They gave notice of their intention to withhold payment. Attached was a summary of set-off charges in respect of alleged defects in LBJ's work. These charges amounted to a figure greater than double the amount ordered to be paid by the adjudicator. Shimizu then commenced proceedings for a declaration from the court that they were entitled to make such a withholding. Shimizu's case was that by reason of clause 21.2.4, payment did not become due until LBJ had submitted a VAT invoice. The final date for payment would be 28 days after that. For the purposes of the Construction Act, a withholding notice should be served not later than 5 days before the final date for payment. Accordingly, Shimizu argued their letter was an effective withholding notice against the sum which the adjudicator had ordered Shimizu to pay. LBJ countered this by saying that, although the adjudicator had upheld the requirement of the contract that a VAT receipt should be issued before payment became due, this did not give Shimizu another chance to withhold money. Her Honour Judge Francis Kirkham rejected this contention. The adjudicator's decision had dealt with any set off or withholding which Shimizu had raised in the adjudication, but that decision had no effect on matters which might arise in the future. Judge Kirkham was satisfied that this approach did not contradict the findings of the Court of Appeal in the Ferson case. In Ferson, the starting point was that the money had become due, and the question was whether the contractual provision could override the adjudicator's decision in respect of that amount due. In the present case, the sum had not yet fallen due for payment and it was therefore open to Shimizu to serve a withholding notice after the adjudicator's decision.
CJ-0323
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