Balfour Beatty Construction v Serco Limited 2

United Kingdom

Mr Justice Jackson, Technology and Construction Court

21 December 2004

In considering the question of whether an employer is entitled to set off liquidated damages against monies payable to a contractor under an adjudicator's award, the court must consider the adjudicator's decision:  where it followed from an adjudicator's decision that the employer is entitled to recover a specified sum of money by way of LADs, then the employer could set that off against the sums payable to the contractor as a result of the adjudicator's decision; however, where the entitlement to LADs has not been determined, either expressly or impliedly by the adjudicator, then the question of the employer's entitlement to set off depends upon the terms of the contract and the facts.

The Defendant (Serco) contracted with the Claimant (Balfour Beatty) to design, supply, install and test variable message signs on motorways throughout England.  The work was commenced in March 2001 with completion due on 24th March 2004.  Various events delayed the work.  In particular, delays were caused by the Secretary of State's decision to implement the procedure for environmental impact assessments under the Highways Act 1980.

In October 2003 Balfour Beatty claimed a 29 week extension of time attributable to the delays caused by the Secretary of State in connection with the environmental impact assessments.  Later, in March 2004 it claimed a longer period, encompassing not only the October 2003 claim but further claims for extension of time and loss and expense. 

Part of the claim was settled by a claims management committee in accordance with the contract, but a large part of the claim remained unsettled and was referred to adjudication.  The adjudicator allowed Balfour Beatty's extension of time claim and extended the completion date to 7th June 2004, directing that Serco should pay £620,664 plus VAT.  Serco refused to pay on the basis that practical completion had not yet been achieved and since the adjudicator had only extended time until 7th June 2004, Serco was entitled to liquidated and ascertained damages (LADs) for the period after 7th June 2004.  It followed that, since it was entitled to set off the LADs against the sums awarded by the adjudicator, and since the LADs would exceed the sum payable under the adjudicator's decision, it owed nothing to Balfour Beatty.

Balfour Beatty applied for summary judgment to enforce the adjudicator's decision.  Serco argued that the claim should be dismissed, or at least stayed so that the question of LADs could be referred back to the adjudicator.

The Court heard detailed arguments about what claims had been referred to the adjudicator and what the adjudicator had decided.  Balfour Beatty claimed that the adjudicator had not been asked to consider an extension of time beyond 7th June and so it could not be argued that he had refused to grant an extension beyond the 7th June 2004.  Serco argued that the adjudicator had positively refused any extension of time beyond the 7th June 2004 and that it followed that they were entitled to LADs following that date.

The Court analysed the claim documents and the adjudicator's decision and found that the adjudicator was leaving open the question of what further extensions beyond 7th June 2004 may be due to Balfour Beatty.  The Judge considered that Balfour Beatty's primary case was for an extension to 29th February (although the door was left ajar for the adjudicator to award a shorter or a longer period if he saw fit to do so) and whatever it had said about delays after that date could not have been its entire case on extensions of time after that date so it would have been unfair for the adjudicator to shut out the possibility of further extensions being provided.  Further, the Judge concluded that the adjudicator had clearly indicated that an extension beyond 7th June 2004 was due.

The Judge summarised the case law on the question of set off against monies payable under an adjudicator's award.  He stated that where it follows from an adjudicator's decision that the employer is entitled to recover a specified sum of money by way of LADs, then the employer could set that off against the sums payable to the contractor as a result of the adjudicator's decision (provided proper notice is given).  However, where the entitlement to LADs has not been determined, either expressly or impliedly by the adjudicator, then the question of the employer's entitlement to set off depends upon the terms of the contract and the facts.

The Judge found that the adjudicator in this case had not come to any decision as to the total extension of time due to Balfour Beatty.  No specific entitlement to LADs logically followed from the adjudicator's decision.  Turning to the contract, the Judge noted that the parties were required to give effect forthwith to the adjudicator's decision.  In the circumstances, the Judge ordered Serco to pay the amount awarded by the adjudicator, refusing permission to set off LADs.  In the circumstances the judge did not have to examine the validity of Serco's withholding notice.  The Judge also refused Serco's application for a stay.

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