Ledwood Mechanical Engineering Ltd v Whessoe Oil and Gas Ltd [2007] EWHC 2743 (TCC)

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(a) Where a dispute regarding an interim payment is referred to adjudication under the Scheme for Construction Contracts (the “Scheme”), the adjudicator’s decision must be applied to the interim payment that was originally in dispute and should not be applied to a later interim payment falling due after the adjudication was commenced.  (b) The paying party to an adjudication may set off an amount against monies payable to the receiving party pursuant to the adjudicator’s decision only where it follows logically from the adjudicator’s decision that the paying party is entitled to recover that specific amount. Set off will not be permitted where the quantum of the sum that the paying party seeks to set off is disputed. 

Technology and Construction Court, Ramsey J

Background

The claimant (“Ledwood”) was engaged by the defendants (the “Joint Venture”) to act as subcontractor for the fabrication and erection of pipework at the Dragon liquefied natural gas terminal at Milford Haven.  The bespoke contract contained a so-called “risk/reward” regime, which was intended to incentivise LedwoodLedwood made interim Application 19 in July 2007.  The partes fell into dispute concerning the value of Application 19 and Ledwood commenced adjudication pursuant to the procedure set out in the Scheme, which was expressly incorporated into the subcontract.  Before the Adjudicator made his decision there were three further applications for interim payment, Applications 20, 21 and 22. Application 22 was made on 4 October 2007, and, on 11th October 2007, the Joint Venture issued a revised payment notice showing an amount of £267k plus VAT due to Ledwood.  No adjustment was made at that stage in respect of risk and reward.  The Adjudicator found that the Joint Venture had wrongly withheld £1.2m (ex VAT) from Ledwood.  Neither party challenged the decision of the Adjudicator, and both agreed that it should be enforced.  When the Joint Venture received the Adjudicator’s decision, it issued a further revision in relation to the payment notice in relation to Application 22, in which they gave effect to the Adjudicator’s findings on deductions, but assessed a deduction for risk and reward in the sum of £1.8m.  That revised notice stated that a negative sum of £224k was due to Ledwood, with the result that no further payment was made by the Joint Venture.  Ledwood subsequently sought to enforce the decision by way of summary judgment. 

Issues

The Court was asked to address the following issues:

  • Whether the risk/reward was to be applied to all applications or just those after completion.

  • Whether the Adjudicator’s decision should be given effect by applying his decision to Application 19 or to Application 22.

  • In the event that the risk/reward regime applied to applications before completion, could the Joint Venture set off a sum in respect of an adjustment for risk/reward.

Decision

The Court held:

  • A proper reading of the risk/reward mechanism showed that it applied to all applications, not just those after completion.

  • Although the Adjudicator did not say in terms that the effect of his decision was that Ledwood should be entitled to payment, he was deciding whether the Joint Venture was entitled to make the deductions which they had made in respect of Application 19.  In deciding that the Joint Venture had wrongly withheld £1.2m plus VAT and that they should pay interest on that amount to “the date of actual payment”, the adjudicator was clearly intending that the sum withheld should be paid.

  • In addition, paragraph 21 of the Scheme, as incorporated into the subcontract, provided that “in the absence of any directions by the adjudicator relating to the time for performance of his decision, the parties shall be required to comply with the decision “on delivery of the decision to the parties”.  The Adjudicator’s decision meant that, as at the date for payment of Application 19, a further sum should have been paid but was not paid because of the wrongful deductions made by the Joint Venture.  The claiming party is entitled to receive the payment that it should have received at the date of the interim payment without taking into account subsequent events or other claims for set-off.  Accordingly, the Adjudicator’s decision should be given effect by applying that decision to Application 19 and not Application 22.

  • Pursuant to the judgment in Balfour Beatty Construction v Serco Ltd, a paying party to an adjudication may set off an amount against monies payable to the receiving party pursuant to the adjudicator’s decision only where it follows logically from the adjudicator’s decision that the paying party is entitled to recover that specific amount.  In the present case, although the logical consequence of the Adjudicator’s decision was that it increased the number of expended hours in the risk/reward calculation, the precise effect on the calculation was disputed.  Accordingly the Joint Venture was not entitled to set off a sum for the risk/reward against the Adjudicator’s decision relating to Application 19.

  • Ledwood was therefore entitled to summary judgment in the sum awarded by the Adjudicator.

  • Although Ledwood had ultimately been successful in its application for summary judgment, the issue of whether or not risk/reward can be applied on an interim basis has been considered and determined in favour of the Joint Venture and was a matter which needed resolution.  In those circumstances, the appropriate way to proceed with regard to costs was to allow Ledwood 70% of its costs and summarily assess those on a standard basis.

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes

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