If you owe me money, and I owe you money, does it make sense to just pay the difference? Let's see how two barristers and a judge sort out this tricky problem …
I'm obliged to Mary Herbert and Paul Shenton of Eversheds' construction team in Cardiff for letting me have the judgment in Sir Robert McAlpine vs Pring St Hill. It is another example of a party trying to defeat an adjudicator's decision by claiming something called set-off. Let me explain. Nobody here was saying the decision was wrong or beyond the adjudicator's powers. The losing party in the adjudication said, quite rightly, that the decision was binding. But it said the winner still owed it a wad of money, and that this wad could, in law, be deducted or "set off" from the cash due under the adjudication (see my column, 1 February and 15 March).

Here is the story: Sir Robert McAlpine was the main contractor for a building in Cardiff Docks. Pring St Hill was the subcontractor for the steelwork for a brise-soleil, a welded structure. Sadly, the building's glazing was damaged by weld marks. McAlpine sent the bill to Pring St Hill. The adjudicator agreed with McAlpine and ordered the subcontractor to pay £140,000 for replacement glass. The subcontractor didn't stump up, and McAlpine asked the court to enforce the adjudicator's announcement.

Counsel for the subcontractor argued that by dint of general principles of law it was right to set off from sums due to one party sums due and owing to the other party. And since McAlpine owed the subcontractor a substantial sum for work done, it was right not to pay some or all of the £140,000 due to McAlpine. In any case, said counsel, another adjudication had just been set in train by Pring St Hill and it was proper to "stay" the £140k payment pending that outcome.

McAlpine's counsel responded that, if that was true, Pring St Hill was in default of the Construction Act because it had failed to issue a special notice warning McAlpine that it was withholding payment. The whole idea of the act is to tackle the difficulty of one party withholding "sums due under the contract" from the other. Yes, that's true, said Pring St Hill's counsel. It is also true that the act is quite strict about a party having to issue a this warning (which I call the amber notice) when it intends to withhold money. But, counsel argued, these rules do not apply when a party wishes to withhold from a sum due for compensation or damages. Put another way, the withholding notice does not apply unless the money from which you wish to withhold arises "under the contract", and in this case the damages of £140k, did not.

At first I thought this argument was too clever by half. But if you read the payment provisions in the Construction Act, you can see the attraction of it

It is an ingenious argument. In essence what was said was that the withholding notice in the act is only used when a main contractor wants to withhold money from a subcontractor. It does not apply when money is due from the subbie to the main contractor. At first I thought this argument was too clever by half. But if you read all the payment provisions in the Construction Act, you can see the attraction of it. The new payment rules, when read together, call for one piece of machinery: interim accounts, a date for final payment for each interim, a notice to say what will be paid in the interim and a notice for withholding from the interim for a set-off account. There is merit in the argument that none of this machinery is for a debt due from the subcontractor to the main contractor.

The judge wouldn't have it, though. He said that the £140k owed by the subcontractor was a sum arising under the contract and therefore the notice regime applied. It followed that if the subcontractor wanted to withhold money due to the main contractor, it first had to issue the amber notice. It hadn't done that and therefore the £140k must be paid.

That only left the argument that because the subcontractor had begun its own adjudication for the money due to it, the judge should stay or postpone an order to pay the £140k. Can't do that, said the judge; the Construction Act says the decision is binding.