To set off or not to set off...

That was the question put to the Technology and Construction Court (TCC) in the recent case of FK Construction Limited v ISG Retail Ltd [2023] EWHC 1042 (TCC) where the court was asked to exercise its discretion to set off an award in favour of one party in one adjudication against other adjudication awards between the same two parties.

Background

• In or around September 2021 ISG engaged FK in relation to roofing and cladding works for a project referred to as Project Barberry with a contract sum of £3.4m.
• On 27 September 2022 FK issued application for payment 16 (AFP 16) in the sum of approximately £1.7m. ISG submitted a pay less notice on 28 October 2022.
• FK disputed the validity of ISG’s pay less notice and referred the dispute to adjudication. By a decision dated 27 February 2023 the adjudicator (Mr Wood) found that the pay less notice was out of time and invalid and awarded FK the full value of AFP 16 plus interest.
• There were three other adjudication awards between the parties in relation to Project Burberry dated 17 November 2022, 7 March 2023 and 14 April 2023. The last adjudication (the April adjudication) determined a gross valuation of the sub-contract of £3,736,679.72. The net result of the April adjudication was that FK was entitled to £906,738.20 in respect of the Project Barberry sub-contract works.
• There were further adjudications between the parties in relation to a separate project, referred to as the Triathlon Project, which taken together at face value would mean that FK owed ISG a figure of £66,620.68 in respect of the Triathlon sub-contract works.
• ISG failed to pay the AFP 16 adjudication award sum and FK brought enforcement proceedings in the TCC for payment of the approximate £1.7m.
• ISG resisted enforcement of the full amount of the award on the unusual grounds that this was a case where the court has a discretion to order a set off or withholding against the adjudicator’s award by reason of other adjudication decisions affecting the same parties. In requesting set off, ISG referred to both the other adjudications for Project Barberry and the adjudications for the Triathlon Project. If successful, this would have resulted in a figure to be paid by ISG of approximately £840,000, roughly half of the sum claimed by FK in the enforcement proceedings.

The decision

The court rejected ISG’s argument for set off and enforced Mr Wood’s decision in full. In coming to this decision, the court gave a helpful analysis of where set off would be appropriate and why it was not appropriate in the circumstances of this case.

The court analysed the authorities for set off in respect of adjudication enforcement, including the judgment in HS Works Ltd v Enterprise Managed Services Ltd [2009] EWHC 729 (TCC) and noted four tests which are required in order for set off to apply as between two adjudication awards between the same two parties:

1. Validity – it is necessary for both decisions to be valid. If they are not both valid, then the argument fails and there is no need to consider any further points.
2. Enforceability/effect – if valid, then both decisions must be capable of being enforced or given effect to.
3. Separate proceedings – if both valid and enforceable, the court should give effect to both, provided that separate proceedings have been brought by each party to enforce each decision.
4. Discretion – if the above three tests are satisfied the court has a discretion (but not an obligation) to allow set off to apply, where appropriate.

Ultimately ISG’s case centred around the last April adjudication, which had been awarded only a short time before the hearing. Considering ISG’s arguments in relation to the April adjudication, the court found that ISG’s case fell at the first hurdle. The court was only asked to consider the validity of the enforcement proceedings in the adjudication by Mr Wood, and not any of the other adjudications, including the April adjudication. The court was also aware that FK intended to raise a jurisdictional challenge in relation to the April adjudication. On the basis that the court could not determine whether the other adjudications (including the April adjudication) were valid, then the question of set off did not arise.

Also, importantly, no separate enforcement proceedings had been brought in respect of the April adjudication, which would enable the court to determine (on a properly articulated and pleaded case) its validity or enforceability.

The court also rejected the argument that enforcement should be refused on the basis that FK would benefit from a substantial overpayment. The court commented that while a tactic of serial "smash and grab" adjudications was unlikely to reflect the most efficient means of achieving a resolution of disputes between the parties, this did not provide a basis for deviating from the well-established law and practice that, in general, valid adjudicators’ decisions are to be enforced without set off or withholding.

Finally, the court noted that this case raised the novel suggestion that an adjudication award in relation to one construction project could be set off against an adjudication award in relation to another construction project between the same two parties. The court noted that this was a point of some interest, but did not need to be determined in relation to this application. This point therefore potentially remains open for argument in the future.

Key takeaways

• This case confirms the established position that valid adjudication awards will be enforced by the courts and can only be resisted (in whole or in part) in very limited circumstances.
• The case sets out clear guidance as to where the court may exercise a discretion to allow set off between two (or more) adjudication awards affecting the same parties.
• If a party is in a position where it may wish to request set off in relation to the enforcement of an adjudication award against it, separate enforcement proceedings need to be taken to establish the validity and enforceability of the award in its favour in order for set off to potentially be available.
• The argument as to whether an adjudication award in relation to one project can be set off against an adjudication award in relation to a totally different project (but between the same two parties) remains to be decided by the courts.

Enforcement of adjudication awards continues to be strongly supported by the courts with limited options available to resist. While set off remains a potential option where there are more than one competing awards between two parties, parties must make sure that they have taken the necessary steps to comply with the tests set out by the court, in order to have any chance of success.