The ability to set off in Adjudication is extremely limited

Published 29 junio 2023

In FK Construction v ISG Retail [2023] EWHC 1042 (TCC) the Court considered whether it was permissible for a party to set-off the sums owed to it from a sum it owed to the other party as a result of competing adjudication decisions.

Facts

ISG, the Main Contractor appointed FK as the cladding and roofing sub-contractor on a development named Project Barberry.

FK issued an application for payment in the sum of around £1.6 million, which ISG responded to with a Pay Less Notice. FK subsequently issued a 'smash and grab' adjudication against ISG on the basis that the Pay Less Notice was not valid.

The adjudicator found in FK's favour and ordered payment by ISG of the notified sum (the 'Wood Decision'). ISG failed to make payment in accordance with the adjudicator's decision. Accordingly, FK issued proceedings to enforce the Wood Decision.

ISG sought to argue that it had a right to set-off the sums owed to it by FK against the sum it had to pay in the Wood Decision.

A number of adjudication decisions had been made in relation to various disputes between the parties. This included two decisions regarding different applications for payment which found that FK was owed further notified sums in or around £3 million in relation to Project Barberry.

ISG sought to rely on other adjudication decisions relating to disputes between the parties. More particularly, it referred to: i) a decision that the net value of the Project Barberry Sub-Contract was around £906,000 (the 'Molloy Decision') and ii) decisions in relation to a different project called Project Triathlon that FK was to pay sums to ISG (the 'Triathlon Decisions').

On this basis, it asked the Court to exercise its discretion and grant ISG the right to deduct sums owed to it from the amount to be paid in the Wood Decision to avoid any overpayment being made to FK .

Decision

Applying the principles set out in HS Works Ltd v Enterprise Managed Services Ltd [2009] EWHC 729 (TCC), the Court did not consider that ISG was entitled to set-off sums owed to it by FK pursuant to the Molloy Decision from the sums it owed to FK pursuant to the Wood Decision on the following basis:.

• First, the Court was not being asked to consider the enforceability of the Molloy Decision, unlike HS Works, where the court had before it two sets of enforcement proceedings which it heard together, determining that each adjudication decision under consideration was valid and enforceable.

• Secondly, the Court had not heard any argument as to whether the Molloy Decision was in fact enforceable and could not make such a determination for the reasons outlined above.

• Thirdly, no separate proceedings had been issued in relation to the Molloy Decision so there was no scope to consider if it was valid and enforceable.

The Court did comment that, even if urgent Part 8 proceedings had been issued before the hearing, the Court would not have been dealing with the two adjudication decisions simultaneously and is unlikely to have been in a position to determine whether the Molloy Decision is valid and enforceable. It considered this to be "a key factor underlying Akenhead J's willingness to contemplate the exercise of the court's discretion in favour of a set off in HS Works".

Further, notwithstanding the above, the Court was also not minded to exercise its discretion in ISG's favour on the basis that (i) there is no suggestion in the Wood Decision that there might be a set off or withholding against the sum due; (ii) no payments are due or flowing from the Molloy Decision, and (iii) such an order would "plainly undermine the policy of enforcement of adjudicators' decisions as developed and applied in the TCC over the last 20 years".

The Court similarly decided that there was no right of set-off for sums owed to ISG in the Triathlon Decisions on the basis that:

I. the decision it relied on was non-binding and the Court was not being asked to decide on the validity of that decision;

II. there were no separate proceedings in respect of the Triathlon Decisions; and

III. there was nothing in the Wood Decision which was predicated on the basis that there could be a set off.

Comment

This is another example in which the Courts have sought to maintain the principle that an adjudicator's decision is final and binding, and helpfully sets out the limited circumstances in which a contractor may granted a right of set-off.

It is notable that the Court declined to give a ruling on whether it was possible that an adjudication decision in relation to one construction project can be set off against an adjudication decision in relation to another construction project.

It will be interesting to see how or if the Courts deal with this issue in the future when considering the Judge's rationale in this case, particularly where the parties have agreed to cross-contract set-off provisions, as was the case here.