Can an Employer set-off monies for defects against an architect’s interim certificate

Thursday 31 January 2013

Facts

 

S&R Motors (“Employer”) entered into an agreement with Bradley Construction ("Contractor”) on 24 June 2004 to construct a car showroom in Donegal town. The Conditions of Contract were the Royal Institute of Architects of Ireland 2002 edition. The Contractor had issued summary proceedings for payment of architect's interim certificates 11 and 12 together with interest in the sum of €233,098.34.  The Employer had not made payment due to an alleged uneven and defective floor to the showroom and proceeded to issue a motion seeking to stay the High Court proceedings pending arbitration. However the Employer's motion to stay was fixed for a later date than the date fixed for the Contractor's motion for judgment. When the Contractor's motion for judgment came on before the master the Employer requested an adjournment to enable their application to stay be first considered by the court. The Employer hadn't filed a replying affidavit in the motion for judgment because if they had done so it would have amounted to a step in the proceedings and therefore they would have jeopardised their stay application. The Master refused to adjourn the motion for judgment and in the absence of any affidavit from the Employer grounding a bone fide defence he gave liberty to enter judgment in favour of the Contractor. The appeal and the application to stay came before Mr Justice Clarke.

 

Mr Justice Clarke was satisfied that the Master was not correct in going ahead with the motion for judgement in circumstances where there was already pending before the court an application for a stay pending arbitration.

 

The judge identified that the real issue before him was whether the Employer was obliged to pay the architect’s certificates.

 

The Employer contended that they should not be required to discharge the certificates because they had a bona fide cross claim which would in principle entitle them to defend the Contractor's summary proceedings but the matter should be stayed because under the terms of the agreement the cross claim should be referred to arbitration.

 

Had the defendant established a defence to the plaintiff's claim?

 

The court referred to the ruling of the Supreme Court in Aer Rianta-v-Ryanair Ltd [2002] 1 ILRM 381 which held that the test to be applied in deciding whether a party should be given leave to defend a summary judgement application was whether, looking at the whole situation, the defendant has satisfied the court that there is a fair and reasonable probability that he has a real and Bona fide defence. The test does that mean that the party must establish that it has a defence which will probably succeed, rather it must establish that it is probable that it has a bona fide defence.

 

As noted above however, the Employer in this case had not delivered a defence to the Contractor’s summary proceedings.

 

Mr Justice Clarke noted that where the defendant does not establish a bona fide defence to the claim but avers that he has a cross claim against the plaintiff then different considerations may apply and the first question which needs to be determined is as to whether the cross claim would give rise to a defence in equity.

 

Test to be applied in deciding whether a cross claim gives rise to a defence in equity

 

Mr Justice Clarke stated it was clear from the Supreme Court decision in Prendergast-v- Biddle (unreported; 21 July 1957) that the test as to whether a cross claim gives rise to a defence in equity depends on whether the cross claim stems from the same set of facts (such as the same contract) as gives rise to the primary claim. If it does, then an equitable set-off is available so that the debt arising on the claim will be disallowed to the extent that the cross claim can be made out but he also stated that a defendant seeking to assert an equitable set-off must also himself do equity.

 

However, if the cross claim arises from an independent set of circumstances then the claim (unless it can be defended on separate grounds) will have to be allowed and judgment entered. But the court recognised the possibility that a defendant may be able to establish a cross claim in due course for an amount greater than the judgment. In those circumstances the issue for the court is whether the judgment should be stayed pending the hearing of the counterclaim?

 

How does the court exercise its discretion as to whether judgement should be stayed pending the hearing of the independent cross claim?

 

Mr Justice Clarke noted the words of Kingsmill Moore J in Prendergast-v-Biddle: “A judge in exercising his discretion may take into account the apparent strength of the counterclaim and the answer suggested to it, the conduct of the parties and the promptitude with which they have asserted their claims, the nature of their claims and also the financial position of the parties.”  

 

Review of existing jurisprudence in relation to set off against an architect certificate

 

Mr Justice Clarke noted that the issue as to whether an employer can set off against an architect's certificate had come before the courts on a number of previous occasions. The issue centred on whether in construing the terms of the contract it can be said that the parties have agreed to curtail or extinguish a right to set-off.

 

He then went on to review the case law.

 

In John Sisk & Sons Limited-v-Lawter Products BV (Unreported, High Court, Finlay P., 15 November 1976) Mr Justice Finlay reviewed the RIAI conditions of contract and concluded that there was not an entitlement to set off against an architect’s certificate. The judge was influenced by the fact that, the contract allowed the contractor to suspend the works if he was not paid and the arbitration clause in the contract provided that a reference could only commence after practical completion and therefore if the employer was entitled to set off a disputed sum against an interim certificate the arbitration clause would be frustrated because the contractor could only refer the dispute to arbitration after practical completion. He therefore found that a right of set off inconsistent when construed against the other express terms of the contract.

 

Conversely, in PJ Hegarty & Sons Limited-v-Royal Live Friendly Society [1985] IR 524 Mr Justice Murphy held that the terms of the RIAI conditions of contract were not inconsistent with the rights of set-off and therefore the employer was entitled to set off this claim against a certificate. In arriving at his decision the judge was influenced by the propositions set out in the House of Lords ruling in Modern Engineering-v-Gilbert-Ash [1974] AC 689 : a certificate "enjoys no special immunity” from a right of set-off; the starting point is each party to a building contract is entitled to all those remedies for its breach as will arise by operation of law; the parties can by express agreement extinguisher or curtail a right of set-off.  

 

Later, in Rohan Construction Limited-v-Antigen Limited [1989] ILRM 783 Mr Justice Costello referred to the previous two decisions as “an unfortunate difference of opinion” and sided with Finlay J with regard to the construction of the contract.

 

Having reviewed the authorities, Mr Justice Clarke observed that the default position is that a party is entitled to a set-off in equity in relation to any cross claim arising out of the same contract. However a question then arises, which may displace the prima facie position, whether the parties have by virtue of the terms of the contract curtailed or extinguished that right to set off.

 

Mr Justice Clarke favoured the rationale of Mr Justice Murphy in PJ Hegarty and said "I am not satisfied that the balance of the authorities favours the view that the current standard form RIAI template does give rise to an agreement to exclude set-off, at least….. In circumstances where the contract is completed to a stage of a certificate of practical completion having been issued by the architect and where, therefore, any entitlement to arbitration on the part of the employer is immediate."

 

 

Applying the Law to the Facts

 

Mr Justice Clarke held that the employer had not established a prima facie defence in the proceedings as a defendant seeking to assert a defence in equity must also himself do equity and he found that the employer had not done equity due to its delay in quantifying the set-off or pursuing their cross claim by arbitration in a timely manner.

 

He did however find that the defendant had established a prima facie cross claim and therefore the principles set out in Prendergast-v-Biddle were to be applied as to whether the judgment should be stayed. He found that the employer’s delay in quantifying the claim or pursuing it in arbitration was a factor to be taken into account together with the fact that no basis had been put forward by the employer for suggesting that the contractor would not be in a financial position to meet any award which an arbitrator might make in favour of the employer arising out of the defective floor claim.

 

In conclusion, Mr Justice Clarke held, that in the absence of a defence, the claim for payment on foot of the certificate must be allowed and judgment entered but he placed a stay on the execution of any sum in excess of €100,000 until the determination by arbitration of the employer’s claim relating to the defective floor. He gave the contractor liberty to apply to remove the stay if the employer did not expedite the commencement of the arbitration proceedings.