REUTERS | Neil Hall

Revisiting set-off against an adjudicator’s decision

Earlier this year, I wrote about set-off in adjudication, particularly set-off and withholding notices following the judgment in Working Environments v Greencoat.

More recently in both Squibb Group v Vertase FLI Ltd and Beck Interiors v Classic, Coulson J in the TCC looked at the question of set-off against an adjudicator’s decision. Perhaps unsurprisingly, on both occasions he rejected the paying party’s attempt to reduce the sum due under the adjudicator’s decision.

As an adjudicator, I seldom get involved in such issues post-decision (although parties may counterclaim for liquidated damages or other items during the adjudication process), but I think both of these judgments are worth looking at, especially Coulson J’s summary of the law of set-off in Squibb. They act as yet another reminder of the court’s willingness to support the adjudication process and demonstrate some of the difficulties a paying party faces if it doesn’t want to pay.

Squibb Group v Vertase FLI Ltd

In Squibb, Coulson J rejected the contractor’s attempt to set-off sums included in a withholding notice issued after the adjudicator’s decision.

The adjudicator had decided that Squibb, the sub-contractor, was entitled to an extension of time for delay and additional costs of around £168,000. The contractor refused to pay this sum and issued a withholding notice, seeking to withhold just over £276,000 (some £105,000 for liquidated damages and £171,000 for other items).

Coulson J carried out a review of the relevant principles relating to set-off in adjudication, highlighting the fact that, generally, the paying party cannot avoid paying up by relying on the principles of set-off. He then went on to look at some of the exceptions, such as:

  • If there is a clear contractual right to set-off (see Ferson Contractors v Levolux).
  • The nature of the adjudicator’s decision is such (for example, it gives declaratory relief) that the contractual machinery (including the issue of a withholding notice) can still be operated (see Shimizu Europe v LBJ Fabrications Ltd).

In Squibb, Coulson J decided that:

  • There was no contractual right to set-off (that only arose if the payments had been certified).
  • The adjudicator had decided “a one-off claim in a one-off way”, rather than granting declaratory relief as to how the contract mechanism may operate. He allowed a 14-day period for payment, but that was simply giving the contractor time to pay.

Specifically on the liquidated damages point, Coulson J held that the contractor had no automatic right to claim liquidated damages beyond the date of the adjudicator’s extension of time award. Further, the adjudicator had expressly decided that the sub-contractor should not pay liquidated damages to the contractor. If the contractor was allowed to set-off liquidated damages, that would be contrary to what the adjudicator awarded and contrary to the general principles of adjudication enforcement.

Beck Interiors v Classic

In Beck, Coulson J rejected the sub-contractor’s attempt to set-off sums arising on a totally unrelated project (which was in a different country) after the adjudicator’s decision.

The adjudicator had decided that Beck, the contractor, was entitled to around £43,000 for work carried out at a project in London. The sub-contractor refused to pay this sum and, during the enforcement proceedings, sought to set-off EUR59,000 from a project in Dublin.

Coulson J again looked at the principles applicable to set-off (as he did in Squibb). He also considered whether the situation gave rise to an equitable set-off, finding that it did not, as the cross claim could not be said to be “so closely connected” that it would be “manifestly unjust to allow the claim without taking into account the cross-claim” (it was a different contract, jurisdiction and currency).

That looks to me like it’s 2:0 to the unpaid party!

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