Ledwood Mechanical Engineering Ltd v Whessoe Oil and Gas Ltd & Anor

Risk/reward provisions in a construction subcontract apply to interim payments where the contract makes interim payment subject to adjustments and does not incorporate a completion-only calculation. An adjudicator’s decision on a particular interim application must be given effect against that application. The paying party cannot instead revise a later application to account for subsequent events or different set-off rights. A consequential adjustment may be set off only where it follows logically from the adjudicator’s decision and is undisputed or indisputable. A disputed calculation requiring further assessment of hours and target hours does not fall within that limited exception.

The claimant subcontractor sought summary judgment following an adjudicator’s decision concerning deductions from Interim Application 19. The adjudicator found that the defendants had wrongly withheld £1,215,067.64 plus interest. The defendants accepted the adjudicator’s decision but attempted to give effect to it through a revised payment notice for Application 22, while making a risk/reward deduction. The court had to determine when the contractual risk/reward regime operated, whether the adjudicator’s decision applied to Application 19 or Application 22, and whether a disputed risk/reward adjustment could be set off against the adjudicated sum.

1. Risk/reward regime. Clauses 14.1(a) and 14.2 made payment subject to the subcontract price, target cost and necessary adjustments. The interim payment mechanism therefore required the risk/reward regime in Exhibit E to be applied to interim payments. The reference in Exhibit E to details in Exhibit F did not incorporate the parenthetical reference to calculation and payment on completion, because that provision was not shown to have been agreed or included in Exhibit E.
2. Application to which the adjudication related. The adjudicator had determined the deductions from Application 19 and intended the wrongly withheld sum to be paid. Under paragraph 21 of the Scheme for Construction Contracts (SI 1998 No. 649), the decision had to be complied with immediately. The adjudicated sum therefore had to be applied to Application 19, not to the later Application 22. The purpose of adjudication of interim payments is to secure cashflow without subsequent events or unrelated set-off claims altering the payment position.
3. Risk/reward set-off. The court considered the principles summarised in Balfour Beatty Construction v Serco [2004] EWHC 3336. A consequential sum may be set off where it follows logically from the adjudicator’s decision and is specific, undisputed or indisputable. That limited exception does not create a general power to set off sums against an adjudicator’s decision. Here, both the expended man hours and revised target hours were disputed, so the risk/reward adjustment could not be set off.
4. Ledwood was awarded summary judgment for £1,215,067.64 plus applicable VAT and interest. It received 70% of its costs, summarily assessed on a standard basis.

First instance decision. No appellate history is stated in the judgment.