FK Construction Limited v ISG Retail Limited

By its application notice dated 8 March 2023, the Claimant (“FK”) seeks summary judgment to enforce the adjudication decision of Mr Allan Wood dated 27 February 2023, directing the Defendant (“ISG”) to pay £1,691,679.94 plus interest and costs.

ISG resists enforcement purely on the grounds that this is a case in which it is said that 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.

ISG is the main contractor in relation to a project in Avonmouth in Bristol (referred to by the parties as Project Barberry). The employer is RB Avonmouth Developments Limited.

On or around 28 September 2021, ISG engaged FK on a bespoke ISG sub-contract in relation to roofing and cladding works on Project Barberry for the contract sum of £3,400,000 (“the Sub-Contract”). Pursuant to the Sub-Contract, FK issued its Application For Payment 16 (“AFP 16”) on 27 September 2022 in the amount of £1,691,679.94. ISG failed to issue a Payment Notice (“PN”) in respect of AFP 16 but it submitted a Pay Less Notice (“PLN”) on 28 October 2022. No payment was made by ISG in relation to AFP 16.

Clause 30(2) of the Sub-Contract provides that any dispute or difference arising under the Sub-Contract may be referred to adjudication in accordance with the Scheme for Construction Contracts (England and Wales) Regulations 1998 (“the Scheme”). As required by section 108 of the Housing Grants Construction and Regeneration Act 1996, as amended (Footnote: ¹), (“the 1996 Act”), clause 30(4) provides that the decision of the adjudicator “shall be binding until the dispute or difference is finally determined by legal proceedings in the English Courts” (Footnote: ²).

By a Notice of Adjudication dated 19 January 2023, FK referred to adjudication a dispute as to the validity of ISG’s PLN in response to AFP 16 relating to the period September 2022. Mr Wood was appointed adjudicator and issued his decision on 27 February 2023 (“the Wood Decision”). In summary, he determined that (i) AFP 16 was a valid notice complying with section 110A(3) and given pursuant to section 110A(2) of the 1996 Act; (ii) ISG did not issue a PN in respect of AFP 16; and that (iii) ISG’s PLN was out of time and thus invalid. He directed ISG to pay FK £1,691,679.94 plus VAT and interest (at a daily rate of £289.67 from 25 October 2022 to the date of the decision in the sum of £36,208.75 and ongoing at such daily rate until payment) within 7 days of the date of his decision. He also directed ISG to pay his fees and expenses in the sum of £8,120 plus VAT.

ISG did not comply with the Wood Decision causing FK to issue these proceedings for the sum of £1,691,679.94 plus interest on 8 March 2023. It is accepted by FK in its Particulars of Claim that, despite Mr Wood’s findings, there is no VAT applicable to AFP 16 and, accordingly, it makes no claim to VAT in these proceedings.

The Wood Decision is not the only adjudication decision concerning these parties arising in respect of Project Barberry. Three other adjudication decisions were referred to in the context of the hearing and may be summarised as follows:

Pausing there, Mr Simon Hale, acting on behalf of ISG, made various points in his written skeleton argument in relation to the background context to the Wood Decision, including as to the “smash and grab” nature of the adjudications to which I have referred, the duplicative effect of the Shawyer, Wood and Ribbands Decisions (recognised in the Ribbands Decision) and the potential for FK to make a substantial windfall if all 3 decisions were to be enforced. He also pointed to the fact that in approximately 8 weeks’ time the court will be called upon to determine the s.110B(4) Issue which, if ISG succeeds on that issue, will likely render all of these decisions unenforceable.

However, save that these matters are said to be relevant to the exercise of the court’s discretion (to which I shall return later), Mr Hale did not contend that they were in themselves sufficient grounds on which to defeat enforcement proceedings in respect of the Wood Decision.

In addition to Project Barberry, FK and ISG are also engaged on another project, referred to as Project Triathlon, which relates to works for a new logistics and distribution facility in Essex. ISG has been employed on Project Triathlon by DHL Real Estate (UK) Limited and has itself engaged FK on a materially similar set of bespoke ISG sub-contract terms to those used on Project Barberry (“the Triathlon Sub-Contract”). However, Project Triathlon is taking place in a different location from Project Barberry, involves different works and a different ultimate employer.

Three adjudication decisions in respect of Project Triathlon (together “the Triathlon Decisions”) were referred to by the parties at the hearing:

It was common ground at the hearing that the net effect of the Triathlon Decisions, taken at face value, is that FK owes to ISG a figure of £66,620.68 in respect of the Triathlon Sub-Contract works.

Part 8 proceedings in relation to Project Triathlon have also been commenced by ISG and (owing to the materially identical nature of the sub-contract terms) are due to be heard at the same time as the Barberry Part 8 Proceedings.

FK contends that ISG has no real prospect of successfully defending the claim to enforce the Wood Decision because the claim is for enforcement of a valid adjudication decision which is binding by reason of the provisions of section 23(2) of the Scheme. FK says that there is no other compelling reason why the case should be disposed of at trial.

ISG makes no arguments on natural justice or jurisdiction and it does not contest the enforcement of the Wood decision. However, it contends that it has a valid “set off” which the court should take into account in the exercise of its discretion.

The parties both served witness statements in connection with application, which I bear in mind in arriving at my determination.

The applicable legal principles relating to adjudication enforcement are well established and not in dispute. They were recently set out by O’Farrell J in BexHeat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC) at [35]-[38] and there is no need to repeat them here. Suffice to say that the courts take a robust approach to adjudication enforcement and there are only limited circumstances in which the court will refuse an application for summary judgment.

One such circumstance (the only one relevant in the context of this application) may be where it is appropriate in the court’s discretion to permit a set off or withholding.

I was referred to various authorities on the subject of set off, and can summarise the principles they expound in the following way:

In this case, ISG seeks only to rely upon the third exception. In the circumstances, I need to look more closely at the decisions in HS Works and Sentosa.

HS Works involved two adjudication decisions made respectively in February and March 2009, a year or so after completion of the works or termination of the contract. In the first adjudication, the adjudicator decided that approximately £1.8m should be paid by Enterprise in respect of contra-charges. In the second adjudication the adjudicator decided and declared that the proper valuation of the contract works allowing for contra-charges was approximately £23m. Akenhead J recorded that “[t]he effect of this Second Decision could mean that all or part of the sum decided to be due under the First Decision should be repaid, if paid at all”. Each party issued proceedings in relation to the adjudication decision in its favour alleging invalidity on grounds of jurisdiction or natural justice and each party then issued a summary judgment application. The court directed that these applications should be heard together.

Against that background, the first issue for the court was how it should deal with two adjudication enforcements which decided different things but which might or did impact upon each other. Akenhead J referred (at [39]) to the passage in Interserve at [43] to which I have already made reference above. He noted that in Interserve the sum due under the later adjudication had not fallen due for payment, albeit that the later decision had been issued during the course of the proceedings for the enforcement of the earlier decision.

Akenhead J also referred to YCMS, a case in which he had followed the approach adumbrated by Jackson J in Interserve and rejected the submission that what was referred to as a third adjudication decision should be set off against the decision under consideration in circumstances where it had been issued “relatively recently” and where a jurisdictional challenge had been taken at the third adjudication and might subsequently be maintained in any enforcement proceedings. In YCMS, Akenhead J observed that he:

“did not consider that the fact that a Third Decision has been reached which on its face allows to the defendants a net recovery is a special circumstance which justifies departing from the general rule that valid adjudicator’s decisions should be enforced promptly. Things might be different if there were effectively simultaneous adjudications and decisions”.

Having considered these two cases, Akenhead J observed in HS Works (at [39]) that YCMS was a similar situation to that in Interserve “with the added complication that it was unclear whether the later decision was valid or likely to be challenged as invalid”. He went on to point out that “[i]n neither case had the defendant sought to enforce the later decision by separate proceedings”.

Against that background, Akenhead J formulated the following steps (at [40]) which, in his view, needed to be considered before making a decision to permit a set off:

“(a)

First, it is necessary to determine at the time when the court is considering the issue whether both decisions are valid; if not or if it cannot be determined whether each is valid, it is unnecessary to consider the next steps.

(b)

If both are valid, it is then necessary to consider if, both are capable of being enforced or given effect to; if one or other is not so capable, the question of set off does not arise.

(c)

If it is clear that both are so capable, the court should enforce or give effect to them both, provided that separate proceedings have been brought by each party to enforce each decision. The court has no reason to favour one side or the other if each has a valid and enforceable decision in its favour.

(d)

How each decision is enforced is a matter for the court. It may be wholly inappropriate to permit a set off of a second financial decision as such in circumstances where the First Decision was predicated upon a basis that there could be no set off”.

Akenhead J went on to determine that both the first and second adjudication decisions in HS Works were valid and enforceable and, furthermore, that although in the second adjudication the adjudicator “only made a declaration as to the net value of the final account” (as opposed to any directive decision as to payment by one party to another), nevertheless, section 108 of the 1996 Act requires the contract between the parties to be read as requiring the parties “to comply with and abide by the valid decision of the adjudicator” such that even where a decision was declaratory “it must still be complied with by the parties”. Against that background, Akenhead J held that the parties were bound to comply with the decision in the second adjudication, that there had been no attempt to raise any additional claims in that adjudication and that “[i]t follows that, if the parties are to give effect to Mr Smith’s decision, as they are required to do contractually, as soon as the sum payable pursuant to [the first] decision is paid [by Enterprise], a balance will then be due back to Enterprise”. Akenhead J determined (at [63]) that accordingly:

“(a)

Both adjudicators’ decisions are valid and enforceable.

(b)

The parties and the court are required to give effect to both decisions.”

Akenhead J then observed that the court was left in “a difficult position as to how to deal procedurally with what has happened”, a difficulty which he then resolved (at [65]) by the exercise of his discretion as to “how any order or orders on judgments should be drawn”. In this case, the “pragmatic” approach was to draw the orders so as to reflect the net effect of the judgment because:

“it would be pointless, at least administratively, for Enterprise to hand over the net sum (allowing for the belated payment) due pursuant to the First Adjudication decision to be followed by HSW having to hand back all or the bulk of what had just been paid to it to Enterprise”.

Pausing there, in my judgment it is important that, unlike Interserve and YCMS, the facts of HS Works involved a determination as to the validity and enforceability of the two adjudication decisions with which the court was dealing “simultaneously” and in respect of which a set off was ultimately ordered. The parties were required to give effect to both decisions and so the pragmatic approach was to provide for a set off in the ultimate orders made by the court.

The facts of Sentosa, in which Coulson J (as he then was) also decided that a set off was appropriate, were in many ways similar. Again the court was dealing together with two sets of enforcement proceedings in respect of two separate adjudication decisions. It was accepted that a first adjudication decision for a payment of £300,000 was valid and enforceable, but it was contended that a second adjudication decision determining an entitlement to claim £180,000 by way of liquidated and ascertained damages should be set off against the first adjudication decision. Although the set off was disputed, there was no issue as to the validity or enforceability of the second adjudication decision (beyond an issue as to whether the enforcement proceedings could be defended by raising a claim for a full entitlement to an extension of time – an argument that was swiftly rejected by the Judge).

In the circumstances, the court was left with two valid adjudication decisions, one requiring payment of a sum of money and one permitting a party to make a claim for a sum of money. The Judge held that, simply having regard to the equitable jurisdiction to the effect that judgments or orders for payment can be set off against each other, there was no reason not to order a set off. He also held that, in any event and on the particular facts of the case, such a result would be consistent with the second exception to which I have referred, expounded by Jackson J in Balfour Beatty at [53]. Indeed on the facts of Sentosa, the position was even stronger than postulated in Balfour Beatty because the second adjudicator had decided that there was an entitlement to liquidated and ascertained damages in clear and unequivocal terms. Although HS Works does not appear to have been cited in Sentosa, I can see nothing in the case which suggests that it is in any way inconsistent with the decision in HS Works; aside from the fact that the second exception applied, the two adjudication decisions in Sentosa were valid and enforceable, separate proceedings had been brought in respect of each decision and a set off was accordingly appropriate.

ISG invites the court to exercise its discretion and to order a set off in this case of (i) the gross valuation of FK’s works identified in the Molloy Decision; and/or (ii) the net sum of £66,620.68, due from FK to ISG further to the Triathlon Decisions, against the sum arrived at in the Wood Decision. Mr Hale realistically accepted in his oral submissions that by reason of the relatively low value of the net sum due to ISG on the Triathlon Decisions, his primary case must be directed towards the Molloy Decision.

The effect of a ‘set off’ involving the Wood Decision and the Molloy Decision (taking both at face value), would be to ensure that ISG makes no over-payment having regard to the gross valuation arrived at in the Molloy Decision of £3,736,679.72 (Footnote: ⁴). By my calculations (and in circumstances where ISG has already paid £2,829,941.55), enforcing the Wood Decision would result in an overpayment to FK of £784,941.70 (Footnote: ⁵), a sum which ISG contends would therefore become immediately repayable to it.

Accordingly, I understand ISG to be inviting the court to enforce the Wood Decision only up to the value of £906,738.20 (thereby reflecting the Molloy Decision) and further to deduct from that figure the sum of £66,620.68 reflecting the net sum due to it pursuant to the Triathlon Decisions, to arrive at a figure of £840,117.52.

However, having considered the authorities with care, I do not consider this to be an appropriate case in which to exercise my discretion to order a set off (or withholding) either in respect of the Molloy Decision or the Triathlon Decisions.

It is not in dispute that set off provisions in the Sub-Contract cannot be construed so as to be consistent with the intent of the 1996 Act and further that there is nothing in the Wood Decision which predicates the potential for a set off. On the contrary, the Wood Decision makes plain that the adjudicator intended the sum of £1,691,679.94 to be payable within 7 days of the decision. On a proper reading of the Wood Decision, the adjudicator did not intend there to be any set off or withholding in respect of that award. Furthermore, there is nothing in the Molloy Decision which alters that position. This is not an auspicious start to ISG’s campaign to persuade the court of its entitlement to a set off or withholding. However, I must next turn to consider the steps identified by Akenhead J in HS Works. It is common ground that this is a necessary exercise for the purposes of determining this application.

Applying the guidance given by Akenhead J at [40] in HS Works:

For the sake of completeness, I add that Mr Hale suggested that it was relevant to the exercise of my discretion that FK had pursued a purely tactical campaign of serial “smash and grab” adjudications for the same (duplicative) sum of money and that such conduct was patently far removed from the legitimate aim (as encouraged by the 1996 Act) of facilitating cash flow in construction projects. He pointed, as I have said, to the imminent hearing of the Barberry Part 8 Proceedings and their potential to overturn reasoning in the Shawyer Decision which was followed in the Wood and Ribbands Decisions. He also made the overarching point that the court should not permit FK to enforce an adjudication decision which will permit it to benefit from a substantial overpayment.

In my judgment, however, none of these submissions takes matters any further and I did not understand them to be advanced as stand-alone impediments to enforcement. The court is being invited to enforce only one of the adjudication decisions made in respect of the Barberry Project, such that the question of duplication of value does not arise. Furthermore, the fact that the basis for an adjudicator’s decision is to be challenged in other proceedings is of itself seldom, if ever, a ground for resisting enforcement (J&B Hopkins v Trant Engineering Ltd [2020] EWHC 1305 (TCC) at [16], citing PBS v Bester [2018] EWHC 1127 (TCC)). Indeed the court has already rejected ISG’s request to delay this hearing pending the outcome of the Barberry Part 8 Proceedings. In her order of 31 March 2023, O’Farrell J recorded her reasons as follows:

“The court’s starting point is that adjudicator’s decisions should be enforced subject to any issues of jurisdiction, breach of the rules of natural justice or other exceptional circumstances. The existence of the Part 8 claim for declaratory relief…is not a ground for delaying the determination of an adjudication enforcement claim, particularly where the Part 8 claim has been listed for a later date and would involve material delay to the Part 7 claim”.

Whilst I echo the observations of Coulson J (as he then was) in JPA Design and Build Limited v Sentosa (UK) Limited [2009] EWHC 2312 (TCC) at [51] to the effect that serial (and obviously tactical) adjudications are unlikely to represent the most efficient means of achieving a comprehensive and binding resolution of the numerous disputes between the parties (much less of dealing with them in a cost-effective way), the various adjudications in this case provide no 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 (Footnote: ⁷).

Indeed in my judgment it is important that parties are not encouraged to raise arguments over potential set off and withholding as a means of seeking to defeat (or mitigate the effects of) otherwise legitimate enforcement proceedings, save in the very limited circumstances identified by the exceptions to which I have referred. In HS Works, Akenhead J was prepared to exercise his discretion to permit a set off only in narrow factual circumstances, defined by the steps he identified in [40]; a similar situation pertained in Sentosa. Mr Hale described these steps as a “useful framework” but sought to suggest that the court could ignore (or moderate) them on grounds of unconscionability – in other words where (as here) the facts suggest that enforcement of a first adjudication decision is likely to result in the accrual of an early windfall to one party or another by reason of the terms of a second adjudication decision.

However, I consider that such an approach would not only be inconsistent with existing authority, but it would also undermine the “pay now, argue later” purpose of the 1996 Act, which is unconcerned with the potential for an immediate windfall. As Stuart-Smith J observed in PBS v Bester, it is “routine to enforce decisions that require substantial allocations of cash to one party or another in the knowledge that it may prove to be merely an interim measure”.

It follows that I reject Mr Hale’s submission that a refusal to have regard to the Molloy Decision at this enforcement hearing would be “unconscionable and wrong”. To my mind there is nothing unconscionable or wrong in enforcing a valid adjudication decision (in the form of the Wood Decision) which is binding on the parties. Furthermore, the facts of this case are far removed from those in HS Works and Sentosa. In my judgment those facts do not begin to justify the exercise of the discretionary approach adopted by Akenhead J in HS Works. I can see no “clear parallel” between the facts of HS Works and this case, notwithstanding Mr Hale’s valiant attempts to persuade me otherwise.

It is common ground that the impact of the Triathlon Decisions, even if accepted as a valid set off, is limited to a relatively small sum. In the circumstances, the parties did not spend a great deal of time on this point in their oral submissions and I can address it swiftly.

I reject the submission that it would be appropriate to apply the net result of the Triathlon Decisions to the Wood Decision by way of set off for the following reasons (which again draw on the steps identified in HS Works at [40]):

In its evidence for the application, there was some (rather oblique) suggestion from ISG that it harboured “growing concerns” over FK’s financial position and, in particular, that FK would be unable to repay any over-payment made to it by ISG. The evidence relied upon in support of this proposition (in the form of a credit risk report) was wholly inadequate and, in the face of a robust response from FK (Footnote: ⁸), I did not understand ISG to pursue this suggestion at the hearing. Accordingly I need address it no further. There was no application by ISG for a stay of execution.

For the reasons set out above, I reject ISG’s arguments on set off/withholding. ISG has no defence to the application for enforcement of the Wood Decision and FK is entitled to summary judgment in the sum of £1,691,679.94 plus interest. The parties are invited to prepare an agreed Order to be made by the court on hand down of this judgment.