Can you rely on a set-off or cross-claim to resist enforcement of an adjudicator’s decision? In the recent case of Squibb Group Limited v Vertase F.L.I. Limited, the Technology and Construction Court (TCC) provided useful guidance as to the limited circumstances in which this will be possible.
Squibb were employed by Vertase to demolish existing structures as part of a development in Leamington Spa. The sub-contract specified a completion date of 27th January 2012, with liquidated damages of £15,000 per week payable in the event of late completion. Vertase had a contractual right to deduct bona fide contra accounts from payments due to Squibb for breach of contract.
The works were not completed until 27th April 2012, and a dispute arose as to the reasons for this delay. Squibb referred this dispute to adjudication claiming an extension of time to 27th April 2012 plus loss and expense.
The adjudicator decided that the date for completion should be extended until 9th March 2012 (but not to 27th April 2012 as claimed), and ordered that Vertase pay Squibb the sum of £167,531.05.
Vertase were required to make payment within 14 days of the adjudicator’s decision, but refused and instead served a withholding notice which purported to set-off against the adjudicator’s decision the sums Vertase claimed were due to them from Squibb.
The withholding notice totalled £276,613.67 and consisted of (a) liquidated damages of £105,000 for the un-extended period of the sub-contract (i.e. 9 March 2012 to 27 April 2012); and (b) £171,613.67 being the alleged cost of an assortment of other works which Vertase alleged that Squibb had failed to complete. Squibb applied to the TCC to enforce the adjudicator’s decision.
The TCC’s decision
The TCC ruled that the general position is that an adjudicator’s decision should be respected and enforced. An unsuccessful party to an adjudication could not avoid complying with the adjudicator’s decision by relying on a set-off based on his anticipated recovery of a future claim under the sub-contract. Anything else would be contrary to the spirit of the Construction Act 1996 and the underlying purpose of construction adjudication.
However, the TCC did identify two scenarios (though neither were applicable here) where a set-off against an adjudicator’s decision may be possible:
Exception 1 – Where the contract allows set-off
The first exception is where a contractual right to set-off ‘trumps’ the enforcement of an adjudicator’s decision. Such circumstances will be rare, and will depend on the precise interpretation by the court of the relevant contract clause. The court will be quick to strike down such contractual provisions unless they are drafted very tightly.
Exception 2 – The nature of the adjudicator’s decision
Normally an adjudicator will order that a specific sum is to be paid by X to Y. If so, then it will be difficult for X to serve an effective withholding notice or to argue that there should be a set-off. However, an exception arises where the adjudicator’s decision is deemed to be a ‘declaration’ as to the sum due which should be ‘plugged’ into the payment machinery in the contract, e.g. where an adjudicator has ordered that, rather than awarding payment of a specific sum, an invoice for a set amount should be sent to a responding party so as to trigger the contractual machinery for payment of such sum. In such circumstances, a contractual set-off provision may be enforceable.
The key points to remember
The TCC’s decision raises four key issues:
- In this current economic climate, paying parties will want to avoid releasing monies to financially vulnerable parties where a contractual right of set-off exists. It is important that contractual terms regarding payment and set-off are tightly drafted and leave no room for any doubt as to whether a set-off is permitted.
- Whether an adjudicator’s decision is an order to pay monies or merely a declaration makes a significant difference to the enforceability of the decision. It is vitally important that a referring party frames the referral to the adjudicator in such a way as to ensure that the adjudicator’s decision is enforceable and not vulnerable to challenge.
- This ruling emphasises the importance of serving a valid Pay Less Notice at the right time. The timing of such notices can prove critical when considering whether the paying party can rely on a contractual set-off to avoid enforcement.
- Construction companies should regularly review their standard contractual terms to ensure that they put themselves in the strongest possible position in the event that a dispute, which may ‘turn’ on the enforceability of these terms, is referred to adjudication. It is vitally important to ensure all contracts have been updated to comply with the Construction Act (as amended).