England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		10/07/2012

Mr Justice Coulson:

1. INTRODUCTION

1. This is an application for summary judgment pursuant to CPR Part 24. It seeks to enforce an adjudicator's decision dated 22 May 2012, in favour of the claimant Squibb, in the sum of £167,531.05. The claim is resisted by the defendant, Vertase, on the grounds that they were entitled to serve and rely on a witholding notice served after the completion of the adjudication on 1 June 2012, and subsequently amended and re-served on 8 June. The application gives rise to a number of interesting issues concerning the interplay between adjudication, set-off and withholding notices.

2. THE SUB-CONTRACT

2. By a sub-contract dated 20 September 2011, Vertase engaged Squibb to undertake the asbestos removal and demolition of existing structures at a site in Leamington Spa. It was a credit sub-contract, to the extent that Squibb paid Vertase £45,000 plus VAT upfront for the site materials following demolition. Squibb were then paid by Vertase for the work done on a monthly basis. The 18 week sub-contract period started on 26 September 2011 and it was agreed that the works were therefore due to finish on 27 January 2012.
3. There were express terms of the sub-contract as follows:

"9.1 The Sub-Contractor shall commence the work on the date stated herein:

26^th September 2011.

9.2 The Sub-Contractor shall complete the Works on or before the date stated herein or in the period stated herein:

Period of 18 consecutive weeks maximum duration, to include demolition and asbestos removal and clearance of all materials from site.

10. Rates and Payment Terms

10.1 Valuations are to be submitted for the attention of the Contractor's Commercial Director (Jonathan Ridgeway) 5 working days before month end. This Sub-Contractor is let on a credit basis, therefore the Contractor will invoice the Sub-Contractor for credit detailed in 10.2.

Payment shall be the gross value of work properly carried out, and certified for payment, less the amount retained as retention, as stated in the appendix to these conditions, less the amount of any agreed discounts less total amounts previously certified in respect of the Sub-Contract Works. Any amounts retained shall be processed for payment after receipt of the Making Good Defects Certificate.

Retention: 0%

Discount: 0%

10.2 Payment Period: 30 days after receipt of invoice from the Contractor to the Sub-Contractor; invoices to be submitted week one, five and nine of the contract. Each invoice will be for £15,000+VAT.

10.3 Liquidated and ascertained damages are applicable under this Sub-Contract and will be levied against the Sub-Contractor at £15,000 per week after the completion date in sections 9.1 and 9.2.

10.3 The Contractor reserves the right to deduct from any payments certified as due to the Sub-Contractor and/or otherwise recover the amount if [of] any bona fide contra accounts and/or claims which he, the Contractor, may have against the Sub-Contractor in connection with breach of this or any other contract, or by any tortuous act or by any breach of statutory duty…

12.2 The Main Conditions of Contract are the ICE Conditions of Contract Design and Construct, 2^nd Edition with amendments. The Sub-Contractor is deemed to have full knowledge of the provisions of the Main Contract – a copy of such terms and conditions is available for inspection. These shall be deemed to be incorporated herein, provided always that if these differ from those embodied in this contract these conditions shall apply and be enforced accordingly. Any conditions contained in the Sub-Contractor's quotations shall be excluded."

4. There were no specific sub-contract terms setting out the final date for payment of the sums due pursuant to the monthly valuations, and no specific terms dealing with when withholding notices were to be served. However, by operation of clause 12.2 of the sub-contract, the ICE main contract conditions then operated to fill those gaps. In this way, clause 60(2) of the main contract meant that Vertase had 28 days to pay Squibb from the date of the valuation in clause 10.1 of the sub-contract, and clause 60(10) stipulated that a withholding notice had to be served in writing not less than 1 day before the final date for payment. In this case, therefore, that would be 27 days after the date of the monthly valuation.

3. THE ADJUDICATION

5. The sub-contract works were not completed on 27 January. It is agreed that they were not in fact completed until 27 April 2012. A dispute arose between the parties as to the responsibility for that delay. Squibb issued an adjudication claim for an extension of time and loss and damage consequential upon the delay. Vertase took jurisdictional points and, in the alternative, maintained that the vast majority of the delay was in fact the responsibility of Squibb themselves. I should note at the outset that those jurisdictional points were abandoned on the service of Vertase's witness statement in these proceedings. Unlike the submissions put forward on their behalf by Ms Bodnar today, it seems to me that Vertase's jurisdictional points were wholly without merit.
6. It is unnecessary to set out large quotations from the adjudicator's lengthy decision, which ran to a total of 33 pages. It is sufficient to note that, amongst other things, the adjudicator decided that:

6.1 The main contract terms, incorporated into the sub-contract by clause 12.2, allowed Squibb to claim an extension of time and additional loss and expense (see sections 8.1.2, 8.1.3 and 8.1.4 of the adjudicator's decision);

6.2 Squibb were entitled to an extension of time of 6 weeks, down to 9 March 2012 (section 9.2.1). Some other matters were found to be their own responsibility (see section 8.1.7 by way of example);

6.3 Squibb were entitled to £167,531.05 by way of additional costs due to the 6 week delay (section 8.4). That sum was to be paid within 14 days of the date of the adjudicator's decision (section 9.2.2);

6.4 There was no withholding notice from Vertase in respect of any cross-claim for liquidated damages (Section 8.2.1);

6.5 In consequence of this, "Vertase have no entitlement to take liquidated damages from any amount that I might decide is due to be paid to Squibb" (last sentence of section 8.2.1). The decision later reiterated: "Squibb shall not be required to pay Vertase the sum of £180,000 or any other amount in respect of liquidated damages." (section 9.3.3);

6.6 Squibb had no entitlement to interest on the £167,531.05 because "until or unless any payment becomes overdue from Vertase to Squibb, no interest can be applicable. Squibb have not, as Vertase point out, claimed that interest is payable. At the present time I find that no payment had become due to which interest could be applied".

7. One contention which arose during these proceedings concerned whether or not Squibb's claim under the sub-contract for loss due to delay had ever been made prior to the adjudication. There was a suggestion that it had not been previously made, which was why the adjudicator did not find that the sum was due forthwith or that interest was payable upon it. I consider that this reads too much into the adjudicator's decision. As a matter of fact, it appears that a claim for loss and additional costs had been made prior to the commencement of the adjudication, which is the logical assumption (because otherwise it would have been said that no crystallised dispute had arisen in respect of such a claim before the adjudication started). Furthermore, the adjudicator ordered the sum due to Squibb to be paid within 14 days, not the 28 days identified in the contract. He made no award of interest, because interest had not been claimed.
8. Following the adjudicator's decision, the sum of £167,531.05 has not been paid. Instead, on 1 June 2012, Vertase purported to serve a withholding notice in the sum of £290,025.72. That included the sum of £13,412.05 said to be an arithmetical error made by the adjudicator in his decision. The adjudicator has since pointed out that there was no such error. Vertase have quite properly abided by that indication, so, a week later, on 8 June, they served a revised withholding notice in the lower sum of £276,613.67. That is broadly divided into two parts: a claim for liquidated damages of £105,000 for the un-extended period of the sub-contract (from 9 March to 7 April 2012); and £171,000 odd by way an assortment of other items, many of which, so it is said, Squibb failed to carry out and for which Vertase say they are now entitled to a credit.

4. THE RELEVANT PRINCIPLES OF LAW

4.1 The Starting Point

9. It is trite law that the system of construction adjudication introduced by the Housing Grants (Construction and Regeneration) Act 1996 requires the courts to respect and enforce the adjudicator's decision. As Chadwick LJ said in Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2006] BLR 15:

"The statutory scheme provides a means of meeting the legitimate cash flow requirements of contractors and their sub-contractors. The need to have the 'right' answer has been subordinated to the need to have an answer quickly. The scheme was not enacted in order to provide definitive answers to complex questions".

4.2 Set-Off Generally

10. Attempts by the unsuccessful party in adjudication to set-off and rely on cross-claims (particularly, but not exclusively, for delay), notice of which was not given until after the adjudicator's original decision, have given rise to a large number of authorities. I have attempted to distil the relevant principles in the following paragraphs.
11. In general, an unsuccessful party to an adjudication cannot seek to avoid the result of that adjudication by relying on the right to set-off any other claims: see VHE Construction PLC v RBSTB Trust Co Ltd [2000] BLR 187. It has often been said that, where there are subsequent cross-claims, the right course is for the losing party to comply with the adjudicator's decision and not withhold payment on the ground of his anticipated recovery in a further claim: see Interserve Industrial Services Ltd v Cleveland Bridge UK Ltd [2006] EWHC 741 (TCC) and Hart v Smith [2009] EWHC 2223 (TCC), a decision of the late, and much missed, HHJ Toulmin CMG QC.
12. Possible exceptions to this general approach were summarised by Jackson J (as he then was) in Balfour Beatty Construction v Serco Ltd [2004] EWHC 3336 (TCC), when he said at paragraph 53:

"a) Where it follows logically from an adjudicator's decision that the employer is entitled to recover a specific sum by way of liquidated and ascertained damages, then the employer may set-off that sum against monies payable to the contractor pursuant to the adjudicator's decision, provided that the employer has given proper notice (insofar as is required).

b) Where the entitlement to liquidated and ascertained damages has not been determined, either expressly or impliedly, by the adjudicator's decision, then the question whether the employer is entitled to ser-off liquated and ascertained damages against sums awarded by the adjudicator will depend upon the terms of the contract and the circumstances of the case."

13. In similar vein, in William Verry Ltd v The Mayor of Burgesses of the London Borough of Camden [2006] EWHC 761 (TCC), Ramsey J said that the right to set-off was generally excluded. As to the particular issue of whether liquidated damages could be deducted when the adjudicator's decision deals with extensions of time, but does not deal with the consequential effect of an undisputed or undisputable claim for liquidated damages, he said that that raised "a distinct question of the manner and extent of compliance with the adjudicator's decision. It does not, in my judgment, raise a question as to the ability to set-off sums generally against an adjudicator's decision."

4.3 The First Possible Exception: The Contractual Provisions As To Set-Off

14. The first possible exception to the general rule turns on the proper construction of the terms of the contract. There will be some cases, such as Parsons Plastics Ltd v Purac Ltd [2002] BLR 334, where the contractual right to set-off may trump the enforcement of an adjudicator's decision. However, such cases will be relatively rare and will depend upon the precise construction of the relevant set-off provision. Clear words permitting the set-off against a sum otherwise due will usually be required. The more common analysis is that set out by the Court of Appeal in Ferson Contractors Ltd v Levolux AT Ltd [2003] BLR 118, where Mantell LJ said that the contract had to be construed so as to give effect to the intention of Parliament, rather than to defeat it, and that if the set-off provision offended the requirement for immediate enforcement of the adjudicator's decision, it should be struck down. He distinguished Parsons on the basis that it was not concerned with section 108 of the 1996 Act and was instead concerned with a rather different ad hoc adjudication procedure.

4.4 The Second Possible Exception: The Nature Of The Adjudicator's Decision

15. The second exception has arisen out of the proper interpretation of the adjudicator's decision. If the adjudicator has decided that a certain sum must be paid by X to Y, often forthwith, it is difficult to see that there could be any room for an effective withholding notice from X, or an allowable set-off of X's cross-claims against the sum found due to Y by the adjudicator. But if the adjudicator's decision is instead in the nature of a declaration as to the proper operation of the contractual payment machinery, and the adjudicator identifies a sum which he says should be the subject of that machinery then, if a withholding notice can legitimately be served in accordance with those contractual payment provisions, the set-off may give rise to an arguable defence.
16. Three examples of that approach have been drawn to my attention. Perhaps the best known is the decision of HHJ Kirkham in Shimizu Europe Ltd v LBJ Fabrications Ltd [2003] EWHC 1229 (TCC). There, the adjudicator did not order payment by a particular date, but instead ordered that an invoice in a particular sum should be sent by the claiming party to the responding party, in order that the contractual machinery for the payment of such invoices should then be set in motion. The judge rejected the submission that the adjudicator's decision in that case required Shimizu to pay LBJ without set-off; on the contrary, she expressly found that the adjudicator's decision recognised that the sum was not yet due in accordance with the contract mechanism, and that the most that could be said was that the adjudicator had decided what was due "and, as it were, plugged the amount into the contractual mechanism". Accordingly, because that same contractual mechanism allowed the service of a withholding notice before the sum became finally due, the judge held that the withholding notice in that case provided a defence to LBJ's claim for summary judgment.
17. Similarly, in Conor Engineering Ltd v Les Constructions Industrielles de la Mediterranee [2004] BLR 212, Mr Recorder Blunt QC found that the adjudicator's decision amounted to a declaration as to when final payment was due under the contract, and that because that was 14 days after the decision, a withholding notice served under the particular contractual mechanism that existed in that case could operate as a defence. It is worth noting that, on the facts, the defence was unsuccessful because the withholding notice was not served in time.
18. More recently, in R&C Electrical Engineers Ltd v Shaylor Construction Ltd [2012] EWHC 1254 (TCC), Edwards-Stuart J concluded that the adjudicator's decision that a sum was payable expressly in accordance with a particular clause of the sub-contract permitted the unsuccessful party to rely on that clause, and other related payment provisions, so as to raise a withholding notice and a counterclaim which had not been considered on its merits by the adjudicator.

5. CAN VERTASE SET-OFF THEIR CLAIM FOR LIQUIDATED DAMAGES AGAINST THE ADJUDICATOR'S DECISION?

19. Despite the excellence of Ms Bodnar's oral and written submissions, I have concluded that Vertase cannot set-off their claim for liquidated damages so as to defeat Squibb's claim for summary judgment. There are a number of reasons for that conclusion.
20. First, as a matter of law, my starting point must be that the right to make such a set-off has been generally excluded, because anything else would be contrary to the 1996 Act and the underlying purpose of construction adjudication. It would, in my view, be contrary to the 1996 Act if, at least in general terms, the effect of an adjudicator's decision could be avoided altogether by the subsequent service of a withholding notice. It would allow the unsuccessful party a defence to the claim merely because the adjudicator gave that party time to pay the sum due, rather than ordering payment forthwith. That is, to say the least, counter-intuitive; it would mean that the unsuccessful party was taking undue advantage of the adjudicator's decision to allow them some time to pay. In reaching that general conclusion I am, I think, doing no more than echoing what Mantell LJ said in Ferson, what Jackson J said in Balfour Beatty, and what Ramsey J said in William Verry.
21. Secondly, reading the adjudicator's decision as a whole as I must, I am firmly of the view that the adjudicator was not giving some kind of declaratory relief as to how the payment mechanism under the sub-contract might operate. He was not providing a declaration as to what sum was payable under the contract mechanism. He was not identifying a sum which he intended to 'plug in' to the contract machinery. Instead, in my view, the adjudicator was deciding a one-off claim in a one-off way. His decision makes plain that he intended the sum of £167,531.05 to be paid by no later than 14 days after his decision, namely by 5 June. On a proper reading of that decision, the adjudicator did not intend that there was to be any set-off or cross-claim in respect of that award. He was, as I have said, merely giving Vertase time to pay.
22. Accordingly, I consider that this is, on analysis, a very different sort of case to Shimizu and the other two cases which I have noted in paragraphs 16-18 above. The adjudicator did not order that the sum was due to be paid pursuant to any particular provision of the contract; that is why he gave Vertase 14 days to pay, not the contractual 28 days. And the adjudicator made no reference at all to clause 60(10), that is to say the provision dealing with withholding notices. On any fair reading of the decision, that clause was not intended by the adjudicator to apply to this decision or the sum awarded.
23. Thirdly, as to the first possible exception to the general approach noted in paragraph 14 above, to the effect that there was an effective set-off provision that permitted Vertase to rely on the subsequent withholding notice, I have concluded, not without some careful thought, that clause 10.3 of the sub-contract does not permit the intended withholding. There is nothing in the words of clause 10.3, and nothing which could be implied into those words, which could allow an unsuccessful party to adjudication to override the effect of the adjudicator's decision, or to deprive the successful party of the sum otherwise due pursuant to that decision. The set-off provision refers to payments which have been certified, whilst this is a one-off payment ordered by the adjudicator, and not a certified sum at all. The set-off provision is, in any event, couched in very general terms. It seems to me the most that can be said of this clause is that it is similar to those in some of the reported cases, such as Ferson, which were not regarded as sufficient to permit the intended set-off.
24. Fourthly, I do not believe that it follows from the adjudicator's decision that Vertase are automatically entitled to liquidated damages for the shortfall period between 9 March and 27 April. It has been repeatedly said that a decision which extends the time for completion, but not for the whole period of delay, will not automatically entitle the employer to set-off liquidated damages for the shortfall: see for example Avoncroft Construction Ltd v Sharba Homes (CN) Ltd [2008] EWHC 933 (TCC) and [2008] TCLR 7. Here, other than a few passing remarks by the adjudicator in which he identified matters which were not Vertase's responsibility, there is, in my judgment, no consideration by the adjudicator of any mirror delay claim by Vertase.
25. Moreover, to be fair to Ms Bodnar, she accepted that. She said that Vertase came within exception (b) in Balfour Beatty v Serco, not exception (a) (see paragraph 12 above), and that this was a case where Vertase's claim for liquidated damages had not been determined by the adjudicator. I consider that to be an entirely realistic submission, but it merely brings us back to the terms of the contract (which I have found do not assist her for the reasons that I have given) and the circumstances of the case (the principal one being that this was a decision that a certain sum had to be paid within 14 days without deduction).
26. Fifthly, I consider that any other conclusion would be contrary to the clear words of the decision itself. I have already referred to paragraph 9.3.3 of the decision in which the adjudicator expressly decided that "Squibb shall not be required to pay Vertase the sum of £180,000 or any other amount in respect of liquidated damages". The italicised part of the decision could not be clearer. The adjudicator was deciding that no sums could be properly payable by Squibb by way of liquidated damages. To allow Vertase to achieve a wholly contrary result would defeat that important element of the adjudicator's decision. It would also be contrary to all the general principles of adjudication enforcement.
27. Accordingly, notwithstanding the care with which these points were developed and presented by Ms Bodnar, I have concluded that the liquidated damages element of the withholding notice does not provide an arguable defence to the claim for summary judgment.

6. CAN VERTASE SET-OFF THEIR OTHER CLAIMS AGAINST THE ADJUDICATOR'S DECISION?

28. Vertase's other claims are principally in respect of items of work which they say Squibb should have carried out, but failed so to do. Some, but not all of them, were matters which the adjudicator considered, at least from a delay perspective, in his decision.
29. The reasoning set out above at paragraphs 20 to 23 applies again to these claims. The adjudicator indicated that the sum of £167,531.05 should be paid immediately, without deduction. There is nothing in the terms of the sub-contract which would allow any such deduction. Accordingly, the alleged cross-claims are not open to Vertase as a means of avoiding payment of the sum awarded by the adjudicator.
30. In addition, it seems to me that, insofar as these items were considered by the adjudicator in one way or another in his decision, then it could not be said that Squibb's liability to pay arose logically or naturally from the adjudicator's decision. On the contrary, it is clear that these items were not even advanced in the adjudication in the way in which they are now put forward in the withholding notices. On the evidence before me, and in view of the submissions that I have heard, it is plain that these matters are hotly contested. That does not mean, of course, that these claims cannot be raised by Vertase and if they are not paid, they can be the subject of a separate adjudication. But they should not prevent the payment of the amount otherwise due to Squibb for the reasons I have given.
31. Likewise, insofar as these items are entirely new matters, then again there is nothing to stop Vertase from pursuing those claims in their own adjudication. Indeed, that is something that they have indicated that they want to do. But again, that cannot prevent the payment of the sums found due by the adjudicator, in accordance with the principle noted in Interserve.

7. CONCLUSIONS

32. For the reasons that I have given, therefore, I have concluded that there is no arguable basis on which Vertase can defend the claim. I therefore give summary judgment in the sum of £167,531.05. That leaves over all questions of interest and costs.