Adjudication set-offs of the third kind: CNO Plant Hire v Caldwell Construction

On 21 August 2024, HH Judge Kelly, sitting as a High Court Judge in the TCC at Leeds, gave judgment in C.N.O Plant Hire Ltd v Caldwell Construction Limited [2024] EWHC 2188 (TCC) (available to read here).  The judgment addressed CNO’s application for summary enforcement of an adjudication decision dated 5 March 2024 (the “First Decision”).  Caldwell opposed this application inviting the court to exercise its discretion to set off or withhold enforcement of the First Decision based on a second adjudication decision dated 14 April 2024 (the “Second Decision”). 

This case is an interesting example of the questions that can arise out of multiple adjudications and related issues concerning multiple interim payment cycles.

Summary of adjudication proceedings

CNO was Caldwell’s sub-contractor. CNO initiated the first adjudication on a “smash and grab” basis relating to its payment application made in December 2023, to which Caldwell had not issued a payment notice or a pay less notice.  The first adjudicator decided that Caldwell was liable to pay £253,425.56 plus interest along with the Adjudicator fees. 

Caldwell did not pay the amount under the First Decision and commenced a second adjudication.  In this adjudication, Caldwell sought a “proper valuation of the final account” and repayment of any sums overpaid to CNO. The second adjudication included a decision on the valuation of CNO’s earlier interim application, made in September 2023; though CNO pointed out to the adjudicator that this interim application related to the same works as contained in the December 2023 interim application, and referred the adjudicator to a copy of the First Decision.

On that basis, CNO challenged the Adjudicator’s jurisdiction in the second adjudication on the grounds that this dispute related to the same or substantially the same subject matter as the First Decision.

The Adjudicator rejected CNO’s challenge and decided that the Caldwell must pay £89,480.94 plus VAT to CNO, part of which was paid.

Subsequently, CNO applied for summary judgment in the TCC seeking enforcement of the First Decision, and Caldwell sought to rely on the Second Decision to invite the court to exercise its discretion to set off or withhold enforcement of the First Decision. 

High Court’s analysis and decision

HH Judge Kelly, sitting as a Judge of the High Court, granted CNO summary judgment to enforce the First Decision and rejected Caldwell’s attempt to set off the sum due under the Second Decision. 

The Judge began her analysis by summarising the law that was applicable to the dispute, citing the non-exhaustive three categories of set-off in relation to adjudications described by Smith J in FK Construction Ltd v ISG Retail Ltd [2023] EWHC 1042 (TCC):

1. first, where there is a specified contractual right to set-off; 
2. second, where it logically follows from the adjudicator’s decision that the adjudicator is permitting a set-off; and 
3. thirdly, and relevantly here, the Judge’s discretion to permit a set-off where there are two valid and enforceable adjudication decisions between the same parties, requiring monies to be paid each way.

This was a case of the third kind: 

1. The Judge has a discretion to order a set-off against an Adjudicator’s decision, but it is limited (HS Works Ltd v Enterprise Managed Services Ltd [2009] EWHC 729 (TCC)) 
2. The principle of discretionary set-off only applies when there are two valid decisions involving the same parties.  The determination of such validity and enforceability can be made only when separate proceedings are commenced in respect of each decision – giving the court an opportunity to assess the decisions.
3. Following the decision of Justice O'Farrell in Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC), the Judge noted:
   1. an employer must pay the notified sum if no valid payment or pay less notice is issued;
   2. a failure to pay gives the contractor the right to seek adjudication for the owed monies;
   3. compliance with the resulting Adjudicator’s decision is required, unless directed otherwise; and
   4. the courts must take a robust approach towards enforcing an Adjudicator’s decision, unless made in excess of jurisdiction or in breach of natural justice.

Caldwell agreed with the established principle that if a party fails to pay the notified sum in an adjudication decision, it may not commence a true value adjudication in respect of a dispute of the same payment.

However, Caldwell posited that, as a factual matter, the Second Decision did not relate to the same subject matter, because it related to a different payment cycle. Caldwell argued the Second Decision was a true valuation of the earlier September 2023 payment application. The First Decision, on the other hand, was a “smash and grab” decision concerning the December 2023 interim payment application, a separate payment cycle.

In rejecting this argument, the Judge noted that Caldwell’s analysis is “too simplistic”.  It was clear from the facts that the First and Second Decisions were based on the same subject matter and the sums claimed were the same, as the works for the September and December interim payment application had been completed by mid-2023. 

The Judge pointed out that in arriving at the Second Decision, the Adjudicator had observed that Caldwell had not issued a payment notice or a pay less notice and further did not provide any credible authority to establish that incorrect amounts included in an interim application invalidated the application.  Thus, when everybody agreed that the payment application by CNO in September and December 2023 were for the same works, it cannot be accepted that these payment applications were for different payment cycles; and the Judge described this assertion as “wholly artificial” where the parties were in a final account process.

Further, since CNO objected to the second Adjudicator’s jurisdiction, both in the adjudication and before the court, this was relevant to exercise by the Judge of her discretion to set-off as no application to enforce the Second Decision had been made.  Thus, the Judge did not have the benefit of evidence or arguments in relation to the jurisdictional validity of the Second Decision. 

Therefore, the Judge accepted CNO’s position that an order taking into account the Second Decision by way of set-off, without requiring payment under the First Decision, would undermine the policy of swift enforcement of an Adjudicator’s decision. The Judge granted summary judgment in respect of enforcement of the First Decision without set-off.

Comment

The legal principles involved in the set-off of multiple adjudication decisions are now well-established, and the Judge in this case applied their discretion to the facts.

It is an intriguing feature of the case that, as is often the case, two interim applications contained requests for payment in respect of the same work (noted by the Judge as having been completed by mid-2023), and this gave rise to specific submissions. As the court did not permit set-off, and there had been part payment under the Second Decision, there appears to be a risk of double recovery.

There is no direct authority for a question that follows: where two payment cycles give rise to two notified sums required to be paid to a contractor, and those notified sums contain claims for the same work carried out by the contractor, would the court permit enforcement of both decisions? Would the court reject that as double recovery, which is prohibited by common law as part of the law of damages? Did the Construction Act 1996 create a statutory right to double recovery, without express wording to that effect? After all, would not the employer have the right to refer to and take account of any such double recovery in subsequent payment notices and pay less notices? 

In this case, it was also relevant – and led to the Judge’s criticism of the distinction between the two payment cycles as “wholly artificial” – that the parties were in a final account process. It may be thought the final account process provided the Judge with comfortable cover to let matters “come out in the wash”. What if the parties were not in a final account process, and the works were ongoing, or if the circumstances were outside the final account norm? If the works were ongoing, again as noted above regarding potential double recovery, future interim payment cycles would give an employer a chance to avoid overpayment by accurately reflecting the payment position in subsequent cycle documents.

The courts have not yet given us answers to these questions. The extent of enforceability of adjudication decisions continues to be tested and clarified.

For further information, please contact William O'Brien, Alicia Ogborn or Prateek Sharma.