In the case of Beck Interiors Ltd v Classic Decorative Finishing Ltd, [2012] EWHC 156 (TCC) Mr Justice Coulson, enforced an adjudicator's decision, refusing to allow set-off of sums allegedly arising under an unrelated project in a different jurisdiction.

The Facts

On or around 7 February 2011, Classic Decorative Finishing Limited ("CDF") were engaged by Beck Interiors Ltd ("Beck") under a subcontract to carry out internal and external decoration works at 1 Cambridge Gate, London.

Disputes arose between the parties during the course of the works and Beck referred its claim to adjudication. The adjudicator issued his decision on 11 May 2012 finding that Beck was entitled to the sum of £35,901.45 plus VAT from CDF.

CDF refused to pay. In its defence CDF argued that the sum was not due as Beck owed CDF the sum of EUR 59,156.23 under a final account for works undertaken by CDF for Beck at Danesmoate House in Dublin.

Beck issued enforcement proceedings. CDF did not attend the hearing and cited failure of Beck to comply with TCC directions, noted by the court to be incorrect, and logistical difficulties as the reason for non attendance. The TCC determined that in the circumstances it was proper and appropriate to proceed to consider the merits of Beck's application for enforcement.

The Issue

Was CDF entitled to set-off against the adjudicator's decision sums they claimed were due under a separate contract in Dublin? In the absence of a contractual right to set-off, did CDF have any equitable set-off rights?

The Decision

Mr Justice Coulson held that the matters raised by CDF were not an arguable defence to Beck's claim. The Judge reached his conclusion for the following reasons:

  1. The general principle is that it is rare for the court to permit the unsuccessful party in an adjudication to set-off against the sum awarded by the adjudicator some other separate claim. To permit set-off in such circumstances would defeat the purpose of the 1996 Housing Grants (Construction and Regeneration) Act. Reference was made to VHE Construction PLC v RBSTB Trust Co Ltd [2000], as endorsed by the Court of Appeal in Levolux AT v Ferson Contractors [2003];
  2. There were two possible exceptions to this general principle, firstly where there were express set off provisions in the contract, and secondly wherethe adjudicator did not order immediate payment, instead giving a declaration as to the proper operation of the contract. Reference was made to Shmizu Europe Limited v LBJ Fabrications [2003];
  3. Neither of the exceptions applied in the circumstances of the current proceedings. There was no express contractual set-off provision in the subcontract and the adjudicator had "wanted the sum paid by CDF to Beck without further ado".
  4. In the absence of any express right to set-off, consideration was given to whether CDF had any right of equitable set-off. Reference was made to the Judgment of Lord Denning MR in Federal Commerce & Navigation Limited v Molena Alpha Inc [1978] 1 QB 927 page 974 summarising the point:

It is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. It is only cross-claims which go directly to impeach the plaintiff's demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim."
  1. CDF's cross claim concerned a contract in Dublin and did not arise out of the same transaction that lay behind the claim to enforce the adjudicator's decision. Further, they were different contracts, entirely different projects, in two separate countries (and therefore two separate jurisdictions) and in two separate currencies. CDF did not therefore have any entitlement to equitable set-off.

Comment

The decision reached by Mr Justice Coulson is not unexpected and emphasises the difficulty in relying on set-off as a defence to enforcement proceedings. Mr Justice Coulson also sets out the general principles of equitable set-off. The decision is in line with Mr Justice Coulson's findings in the case of Squibb Group Limited v Vertase FLT Ltd [2012] EHWC 1958 (TCC) handed down a few days earlier.

This article is one of a series contributed by Fenwick Elliott to the Building website. To see further articles in this series please go to www.fenwickelliott.com/legal-briefing.

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