The Courts Approach to Enforcement and the Setting-Off of Adjudication Decisions

In the case C.N.O v Caldwell, sub-contractor C.N.O was asked to provide earthworks at a site in Sefton for the main contractor, Caldwell. Following the completion of the works, the sub-contractor submitted an interim payment application (IPA). This was dated September 2023. On 31 December before issuing a further application and recalling its first application. When Caldwell failed to issue a payment notice, pay less notice or pay the notified sum, understanding that there had been no application, C.N.O referred the dispute to adjudication. In adjudication terms, this is what’s known as a ‘smash and grab’ or technical adjudication. This is because it’s brought on the technicality that a part of the contract / dispute process has been missed.

The adjudicator decided in their favour – a clear smash and grab. Or so it may seem.

Not So Simple…

The terms of the Caldwell subcontract required the subcontractor (CNO) to provide delivery tickets for all imported material. CNO failed to provide delivery tickets for half of its claim. They proceeded to include the unproven tickets in their application.
The first adjudicator decided that this windfall could have been rectified by a payment notice and not that the application was invalid. His decision, correctly or incorrectly, resulted in a manifest unjust windfall to CNO. This is the worst case scenario of the smash and grab adjudication, two wrongs making a third wrong.

Caldwell sought a proper valuation of the works in order to pay the true value. Perhaps, this is what adjudications ought to be about and not benefitting from an aspect of law to receive a windfall.

Caldwell disagreed that the third wrong was right. They referred the issue to a second adjudication, this time with a different adjudicator. Now, it is generally the case that you cannot refer the same (or substantially the same) dispute to a second adjudication. C.N.O therefore raised a jurisdictional challenge.

Caldwell argued that the dispute related to a different IPA issued in December 2023. The adjudicator accepted this and found that Caldwell owed C.N.O £90k. This was far less than the notified sum of £253k from the first adjudication. Caldwell went on to pay £64k to C.N.O stating that they had the right to withhold statutory CIS payments.

C.N.O made an application to the court for a summary enforcement in relation to the first adjudication. Caldwell then asked the court to set-off or withhold enforcement due to the second adjudication.

When Can You Get Set-Off?

There are usually three acceptable reasons why a court might apply their discretion and set-off an award. These are:

  1. If there is a contractual right to do so
  2. If the adjudicator has given the right to do so in their award
  3. At the discretion of the court, when there are two enforceable adjudication decisions involving the parties.

You’ll notice I have added emphasis to the word enforceable above. Caldwell had not issued enforcement proceedings for the second adjudication. Of course, C.N.O wanted to be paid the larger sum of £253k. Their enforcement proceedings therefore related to the first adjudication.

Therefore, the court was unable to consider whether to allow Caldwell to set-off the payment from the second adjudication. This was because there was no application relating to this adjudication in front of the court.

The judge did decide that the two IPA’s dated September and December were related to the same works. But it could make no decision on whether the adjudicator had jurisdiction in the second adjudication. This was because Caldwell had not referred the case to the TCC for enforcement.

Therefore, the judge did not permit the set-off. However she also noted that even had Caldwell issued enforcement proceeding, she would not have permitted a set-off stating,

“an order taking account of Mr Lord’s decision in the second adjudication without requiring payment of the notified sum decided by Mr Latham in the first adjudication would seriously undermine the policy of swift enforcement of adjudicators’ decisions. I would not therefore, in any event, have ordered a set off in the circumstances of this case.”

Conclusions

Ultimately, this case was a costly reminder that the courts take a hard line to due process. The correct processes must be followed when it comes to dispute resolution.

Caldwell’s failure to pay the sums due following the first adjudication, before commencing the second was the first failure. As the judge put it in her judgement, “if the party fails to pay that sum, it may not start a true value adjudication in respect of a dispute in the same payment cycle.” Therefore, Caldwell should pay the £253k based on the decision by the first adjudicator.

Because enforcement proceedings had not been brought before the court, Caldwell could not ask for a set-off of the sums already paid. It may be likely that they look to enforce the decision of the second adjudication further down the line. However, this will come at further expense and delay.

Follow The Process

If you find yourself in a similar situation, follow the process as it should be followed. Do not start a true value adjudication, without paying the notified sum from the first adjudication. Courts will look to enforce adjudication decisions, except for in the rare circumstances of jurisdiction or breach of natural justice.

It is clear from this adjudication that the courts are reluctant to right the wrongs in the contractor and subcontractor process. They will support a (perceived) wrong provided it is part of a due process.

Be aware of any party who makes inflated claims and seeks to rely on the smash and grab process. The courts will support windfalls.

The courts have missed an opportunity to change the direction of the smash and grab here and prevent a third wrong becoming a right. The key takeaway is that the direction of adjudication is premised on legal argument and not valuation principles.

Thankfully in this matter, the judge did not make an order against Caldwell for payment preferring to allow the parties to reconcile the terms of the order. This allowed a settlement discussions to take place and be made for a lesser sum albeit not the true value.

This area of construction disputes has seen the movement of disputes of value taken into arguments as to the legal merits. Ultimately, a party can only be paid in accordance with the terms of the subcontract, not what the legal argument evinces. For example, if you supply 5 litres of paint and apply for 500 litres of paint, you still only supplied 5 litres of paint, but the court can find itself supporting the 500 litres of paint.

If you find yourself needing help with the settlement of final accounts, resolving disputes or going to adjudication, get in touch today.