The Defendant, Whessoe Oil & Gas and Volker Stevin Construction Europe VE, engaged Ledwood Mechanical Engineering Ltd as a subcontractor for the fabrication and erection of pipework at a liquid natural gas import terminal. A dispute arose in respect of interim Application 19 as the Defendant had withheld £1.5m from the £2.2m claimed. Though the construction operations did not fall within s105(2) of the HGCR Act, the subcontract had incorporated adjudication provisions. The Claimant therefore commenced adjudication.

The Adjudicator held that the Defendant wrongly withheld some £1.2m. The Defendant challenged neither the decision, nor the jurisdiction of the Adjudicator. However, as the contract provided for a risk/reward regime, it claimed that it was entitled to set off against the adjudication decision.

Firstly, as the contract was silent as to when the risk/reward calculations were to be carried out, Mr Justice Ramsey considered whether or not the risk/reward regime applied to all payment applications, or only to those after completion. He held that the reference in pre-contract meeting minutes to ‘calculated and paid on completion’ was not incorporated as an agreed provision, and therefore, the risk/reward mechanism would apply to interim payments.

Mr Justice Ramsey then considered if the Adjudicator’s decision should be given effect by applying his decision to Application 19 or to a subsequent interim application for payment. Application 22 had been submitted before the adjudicator made his decision and a payment notice had been issued by the Defendant. However, once the decision was received, the Defendant issued a revised payment notice, taking into account both the Adjudicator’s decision as well as a deduction for risk and reward which resulted in a negative sum due. Mr Justice Ramsey, referring to the decision of Mr Justice Jackson in Balfour Beatty Construction v Serco, held that the Adjudicator’s decision should be given effect by applying that decision to Application 19, not Application 22. To permit the Defendant to use an adjustment to the payment notice for Application 22 would ignore the wrongful deduction from Application 19 and permit the Defendant to take account of subsequent events and other rights of set-off which it was not entitled to deduct.

Finally, Mr Justice Ramsey considered whether or not the Defendant could set-off a sum in respect of an adjustment for risk/reward if the risk/reward regime applied to applications prior to completion. Did it follow logically that the Defendant was entitled to recover a specific sum by way of adjustment of the risk/reward element? The contract was a target cost contract based on target hours, and it was clear that there was a dispute as to the expended man hours and the revised target man hours. He held that:

“In my judgment, whilst the natural corollary of the Adjudicator’s decision is that it increases the number of expended hours in the “pain/gain” calculation, the calculation of that effect is not undisputed or indisputable. This is not a case like a calculation of liquidated damages which can be made using the number of weeks decided by the Adjudicator and applying the agreed rate. … It does not, in my judgment, give a wider power to set off sums generally against and Adjudicator’s decision.”

The Claimant was therefore entitled to summary judgment.