Can a counterclaim trump a notified sum?

All too often, legal disputes can drag on, and slow proceedings can prove disastrous for subcontractors caught in the delay.

Section 111 of the Housing Grants, Construction and Regeneration Act 1996 provides substantial assistance to subcontractors in such a position by enforcing the key obligation to pay the notified sum.

Over the years, the courts have reinforced this obligation by developing the principle of 'subjugation', whereby an employer could not refer a matter to adjudication until it had paid the notified sum.

In VMA Services Limited v Project One London Limited [2025] EWHC 1815 (TCC), the High Court has provided further support to subcontractors. In certain circumstances, a subcontractor could raise non-payment of a notified sum not only as a defence but also to invite the adjudicator to make an award on its counterclaim.

The subcontractor not only secured the High Court's support for enforcement but also recovered all its legal costs incurred for that enforcement, having instructed counsel on a direct access basis.

By the time of the Court of Appeal decision in S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448, it was clear that the employer's right to seek an adjudication was 'subjugated' by its obligation to first pay a notified sum.

As Lord Justice Jackson put it at paragraph 107:

'The immediate statutory obligation is to pay the notified sum as set out in section 111.[…] As a matter of statutory construction and under the terms of this contract, the adjudication provisions are subordinate to the payment provisions in section 111.[…]

The Act cannot sensibly be construed as permitting the adjudication regime to trump the prompt payment regime. Therefore, both the Act and the contract must be construed as prohibiting the employer from embarking upon an adjudication to obtain a re-valuation of the work before he has complied with his immediate payment obligation.'

This case was followed by decisions in M Davenport Builders Ltd v Greer [2019] EWHC 318 (TCC) and Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC).

In the case of Bexheat, Mrs Justice O'Farrell summarised the principle of subjugation as follows:

'(i) where a valid application for payment has been made, an employer who fails to issue a valid Payment Notice or Pay Less Notice must pay the "notified sum" in accordance with section 111 of the 1996 Act;  

(ii) section 111 of the 1996 Act creates an immediate obligation to pay the "notified sum";

(iii) an employer is entitled to exercise its right to adjudicate pursuant to s 108 of the 1996 Act to establish the "true valuation" of the work, potentially requiring repayment of the "notified sum" by the contractor;

(iv) the entitlement to commence a "true value" adjudication under s 108 is subjugated to the immediate payment obligation in section 111;

(v) unless and until an employer has complied with its immediate payment obligation under s 111, it is not entitled to commence, or rely on, a "true value" adjudication under section 108.'

Decisions since then have further developed the principle. In AM Construction Ltd v The Darul Amaan Trust [2022] EWHC 1478 (TCC), Roger ter Haar KC determined that no prior adjudication award was required to entitle a contractor to resist a referral for an adjudication.

In Henry Construction Projects Limited v Alu-Fix (UK) Limited [2023] EWHC 2010 (TCC), District Judge Baldwin held that a referral that started at a time when a notified sum remained outstanding was a nullity, even if payment was made before its conclusion.

What was unusual about VMA was that the adjudicator had made a positive award in favour of VMA Services on the basis of a counterclaim in relation to a referral by the employer, Project One London, for a 'true value' adjudication.

Adrian Williamson KC, sitting as a Deputy High Court Judge, determined that enforcement would be available to the subcontractor. In doing so, he confirmed that the adjudicator had the power to grant an award on the counterclaim. 

Notably, he rejected the argument that there was a general power in relation to awards on counterclaims.

For this, he relied on a non-binding remark by Lord Briggs at paragraph 44 in Bresco Electrical Services Ltd (in liq) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25:

'The set-off may be advanced by way of defence to the exclusion of the claim referred to adjudication, but not as an independent claim for a monetary award in favour of the respondent to the reference.' 

Whether that is the law is an argument for another day.

However, what is of importance is that different considerations apply where there has been a determination that a payment was 'immediately due'.  

Deputy Judge Williamson KC accepted that paragraph 23(2) of The Scheme for Construction Contracts (England and Wales) Regulations 1998, in particular, rendered the making of a further referral to vindicate the liability on the notified sum an 'arid exercise'.

Therefore, the effect would be quite contrary to the policy of the Housing Grants and Construction Regeneration Act 1996 and the Scheme, which is to improve cash flow and encourage the rapid, but temporary, resolution of disputes.

Accordingly, legal costs were kept low. There was no 'detailed assessment' and the contractor was not ultimately out of pocket in respect of its legal costs.

Though relatively few barristers offer their services on a direct access basis specifically for construction enforcement, the Bar's direct access model is tailor-made for relatively streamlined processes, such as the enforcement of adjudications.

Whereas more complex disputes are likely to necessitate the dual retention of solicitors and counsel, direct access alleviates the need for retaining intermediary lawyers, with the contractor and the barrister sharing the tasks at the latter's direction that would otherwise be carried out by solicitors or legal executives.