"Set off" in the Enforcement of an Adjudicator's Decision

On Friday, 5 May 2023, the Technology and Construction Court ("TCC") handed down its Judgment in the case of FK Construction Ltd v ISG Retail Ltd.

The Judgment acts as a reminder of the few situations in which set off may arise in proceedings to enforce an adjudicator's decision.

Background 

ISG Retail Limited ("ISG") was engaged as the main contractor on a project in Bristol, referred to as Project Barberry.

ISG entered into a bespoke sub-contract with FK Construction Ltd ("FK") on or around 28 September 2021 in respect of roofing and cladding works ("sub-contract").

In accordance with the sub-contract, FK issued Application for Payment 16 (PA16) on 27 September 2022, requesting payment of £1,691,679.94.

ISG failed to submit a Payment Notice and submitted a Pay Less Notice ("PLN") on 28 October 2022. ISG did not make payment to FK in relation to PA16.

The terms of the sub-contract entitle the parties to refer any dispute or difference to adjudication in accordance with the Scheme for Construction Contracts (England and Wales) Regulations 1998.

The sub-contract also provides that the adjudicator's decision will be binding until legal proceedings determine the dispute or difference.

In addition to Project Barberry, ISG had also engaged FK on Project Triathlon ("Project Triathlon"), which related to work for a new logistics and distribution facility in Essex.

There had been three other adjudications relating to Project Barberry (excluding the Wood Decision) and three adjudications on Project Triathlon, and the parties had failed to comply with any of the adjudicator's decisions.

Joanna Smith J emphasised the fact that there are only limited circumstances in which the Court will refuse an application for summary judgment, one of which may be where it is within the Court's discretion to permit a set-off.

By reference to various authorities, she summarised the general position relating to set off as follows:

• Unless there is a valid jurisdictional or natural justice ground which renders enforcement inappropriate, the adjudicator's decisions regarding direct payments of money should be enforced "summarily" and "expeditiously".
• Where the parties have engaged in numerous successive adjudications, in the absence of special circumstances, the losing party cannot withhold payment on the ground of anticipated recovery in a future adjudication based upon different issues.
• There are three limited exceptions to the general position.

The exception that ISG sought to rely on was where there were two valid, enforceable adjudication decisions involving the same parties and one party sought to set off one adjudicator's decision against the other.

Joanna Smith J referred to Akenhead J's Judgment in HS Works Ltd v Enterprise Managed Services Ltd ("HS Works").

In applying Akenhead J's four steps set out in HS Works, the TCC concluded that ISG was not permitted to resist enforcement of the Wood Decision.

Joanna Smith J applied the steps set out in HS Works as follows:

• Validity – The Court confirmed that ISG fell at the first hurdle of validity, as the Court was unable to declare the validity of the Molly Decision on enforcement proceedings relating specifically to the Wood decision.
• Enforceability/Effect – the TCC concluded that it was unable to give effect to the Molloy decision as it had not yet been declared enforceable.
• Separate Proceedings – The Court noted that separate proceedings had not been issued in respect of the Molloy Decision.
• Discretion – the TCC denied the suggestion that they had any discretion to permit a set-off or withholding as the facts of the case were not within the territory of the exception that was envisaged by HS Works, as referred to above.

In relation to the Project Triathlon adjudication decisions, the TCC summarised the position briefly as their financial impact was relatively small.

Joanna Smith J rejected the submission that it would be appropriate to apply the net result of the decision on Project Triathlon to the Wood Decision by way of set-off as the steps set out in HS Works were once again not satisfied.