| Date | 5 March 2008 |
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| Judgment | Ledwood Mechanical Engineering Ltd-v-Whessoe Oil and Gas Ltd & Volker Stevin Construction Europe BV, TCC 20 November 2007 |
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| The Issue | Was the Enforcement of an adjudicator’s decision made in favour of a subcontractor subject to set off arising from a pain and gain regime? |
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| Implication |
The essential purpose of adjudication of interim payments is to allow a party to obtain cashflow. Generally, payment decided by an Adjudicator should be made in full without taking into account subsequent events and other claims for set-off. |
printLedwood Mechanical Engineering, the subcontractor for the fabrication and erection of pipework at the Dragon liquid natural gas import terminal at Milford Haven, brought proceedings against the main contractor, a joint venture comprising Whessoe Oil and Gas and Volker-Stevin Construction, to enforce an adjudicator’s decision that the joint venture had wrongfully withheld a sum of £1.2 million and that interest should run on this amount. The subcontract between the parties was not subject to the Housing Grants, Construction and Regeneration Act 1996 as the operations concerned were not construction operations within the meaning of the Act. However, the subcontract contained a provision that any dispute may be referred to adjudication in accordance with the Scheme for Construction Contracts. The dispute arose out of JV’s deduction of some £1.5 million from Ledwood’s interim payment Application 19. By the time the JV received the adjudicator’s decision that £1.2m of that withholding was wrongful, it was now dealing with payment Application no 22. Accordingly, the JV issued a revised payment notice in respect of Application 22, in which it gave effect to the adjudicator’s decision on deductions, but assessed a further deduction for risk and reward resulting in a negative sum due to Ledwood of £224,099. The issues before Mr. Justice Ramsey in the TCC concerned whether; (1) the risk/reward regime, which applied to the target hours expended by Ledwood, applied to all payment applications or only those after completion; (2) Should the adjudicator’s decision be given effect by applying it to Application 19 or Application 22; and (3) If the risk/reward regime applied to applications for payment prior to completion, was the JV entitled to set off any sums calculated in respect of this regime? The Judge decided that the risk/reward applied to interim payments. He then considered whether Application 19 or 22 was the appropriate application. The JV contended that the Adjudicator did not decide that any payment was due and accordingly they were entitled to treat his findings as applying to Application 22 and to revise the payment notice so that no net payment was due. The Judge commented that although the Adjudicator did not say in express terms that Ledwood was entitled to payment, he had determined that the JV had wrongly withheld approximately £1.2 million and that the JV should pay interest on that amount to “the date of actual payment”. The Adjudicator had clearly intended that the sum withheld should be paid. The Judge also referred to paragraph 21 of the Scheme which provides that in the absence of directions from the Adjudicator relating to the time for performance of his decision, the parties were required to comply with his decision immediately on delivery of the decision. The Judge considered that the Adjudicator’s decision meant that, at the date for payment of Application 19, a further sum should have been paid but was not because of wrongful deductions made by the JV. The Judge said the essential purpose of adjudication of interim payments was to allow a party to obtain cashflow and in general the claiming party was entitled to receive the payment it should have received at the date of the interim payment without taking account of subsequent events or other claims for set-off . His view was that to permit the JV to use an adjustment to the payment notice for Application 22 to give effect to the Adjudicator’s decision would ignore the wrongful deduction from Application 19 and permit the JV to take account of subsequent events and other rights of set-off which it was not entitled to deduct from payment due on Application 19. He decided that the Adjudicator’s decision should be given effect to by applying that decision to Application 19. The JV had one further issue it required the judge to consider. Since the Adjudicator had found that Ledwood was entitled to be paid for 28,486 hours expended on the works, these hours should be added to the risk/reward regime and a corresponding deduction under that regime should now be made in respect of Application 19. The JV argued that the application of the risk/reward was the logical result of the Adjudicator’s decision. This followed from the decision in the 2004 case of Balfour Beatty v Serco, where it was held that when an adjudicator had made a decision on extensions of time, the employer was entitled to make a corresponding deduction for liquidated and ascertained damages where such a deduction logically flowed from the adjudicator’s decision. The Judge queried whether in this case it followed logically from the Adjudicator’s decision that the JV was entitled to recover a specific sum by way of adjustment of the risk/reward element. The Judge said that whilst the Adjudicator’s decision increased the number of expended hours, the risk / reward calculation which followed was not undisputed or indisputable (both the overall man hours expended and revised target hours were disputed). This case was not as straightforward as the calculation of liquidated damages where the number of weeks decided by the Adjudicator could simply be multiplied by an agreed rate. In his view the Balfour Beatty case was a particular exception relating to the manner and extent of compliance with the Adjudicator’s decision which in his judgment did not give a wider power to set off sums generally due against an Adjudicator’s decision. The Judge held that the JV could not set off a sum for the risk/reward adjustment.
CJ-0809
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