Squibb Group Ltd v Vertase FLI Ltd

In this case the court rejected the paying party's attempts to set off against the adjudicators' decision. Vertase engaged Squibb to undertake asbestos removal and demolition of existing structures at a site in Leamington Spa. By operation of the Institution of Civil Engineers main contract conditions, Vertase had 28 days to pay Squibb from the date of the valuation. This was subject to any withholding notice being served in writing not less than one day before the final date for payment (i.e. 27 days from the date of the monthly valuation).

The works completed three months late and the parties disputed responsibility for that delay. The adjudicator decided that Squibb was entitled to an extension of time of six weeks and £167,531.05 by way of additional costs due to the six week delay (to be paid within 14 days of the date of the decision).

He also decided that there was no withholding notice from Vertase in respect of any cross-claim for liquidated damages; that Vertase had no entitlement to take liquidated damages from any amount that he might decide was due to be paid to Squibb; and that Squibb was not required to pay Vertase the sum of £180,000 or any other amount in respect of liquidated damages.

Vertase did not pay the awarded sum of £167,531.05 but on 1 June 2012 purported to serve a withholding notice in the sum of £276,613.67 (broadly divided into £105,000 for liquidated damages for the un-extended period of the subcontract and approximately £171,000 for other various items).

The judge reviewed the case law on adjudication set-off. The starting point was that an unsuccessful party in an adjudication cannot seek to avoid the result of the adjudication by relying on the right to set-off any other claims. The paying party should comply with the decision and not withhold payment on the ground of his anticipated recovery in a further claim.

However, there is an exception where it follows from the adjudication decision that the employer is entitled to recover a sum of liquidated damages. In these circumstances, the employer may set-off that sum against monies payable to the contractor pursuant to the decision, provided that the employer has given proper notice (exception A). The situation differs where the entitlement to liquidated damages has not been determined (either expressly or impliedly) by the adjudicator's decision. Here, the employer's entitlement to set-off liquidated damages will depend on the terms of the contract and the circumstances of the case (exception B).

The judge explained that it was also necessary to consider the nature of the decision which could simply be that a certain sum is to be paid forthwith. Alternatively, the decision may be 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.

In those latter circumstances, if a withholding notice can legitimately be served in accordance with the contractual payment provisions, the set-off may give rise to an arguable defence. In other words, adjudicators might identify sums to be "plugged in" to the contractual machinery.

Ultimately, the judge decided that Vertase could not set-off its claim for liquidated damages, for various reasons:

  • As a general principle, set-off should be excluded because it is contrary to the underlying purpose of construction adjudication.
  • The adjudicator was not giving any kind of declaratory relief as to how the payment mechanism under the subcontract should operate. Instead, the adjudicator was "deciding a one-off claim in a one-off way" and the decision was also clear that the sum of £167,531.05 was to be paid within 14 days and that no set-off or cross-claim was intended: the adjudicator was "merely giving Vertase time to pay".
  • The subcontract did not permit withholding against the decision.
  • It did not follow from the adjudication decision that Vertase was automatically entitled to liquidated damages for the unextended period (exception A (see above)). He also found that Vertase could not avail itself of exception B (see above).
  • The language in the decision itself was clear: "Squibb shall not be required to pay Vertase the sum of £180,000 or any other amount in respect of liquidated damages".

In relation to the other items which Vertase sought to set-off, the judge rejected Vertase's argument. These items could be adjudicated at a later date, should not hold up enforcement but for present purposes "were not even advanced in the adjudication in the way in which they are now put forward in the withholding notices". Squibb's liability to pay these sums did not arise logically or naturally from the adjudicator's decision.

Commentary

This decision provides useful guidance on the difficulties in successfully setting-off sums against an adjudicator's decision. Set-off will only be allowed in very limited circumstances and unless the paying party falls within these exceptions he might usefully save the time and money involved in seeking to resist enforcement and concentrate on fresh adjudication proceedings.