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The issue of set-off against adjudicators' decisions has been the subject of many cases recently and remains somewhat unclear. Simply put, set-off arises when one person owes another person money, but is also separately owed a smaller amount by that person. Subsequently it can be possible to simplify the payment process by paying the difference between the two sums.

When an adjudicator decides that money is due without set-off, one might assume that this ruling would be adhered to, and payment without set-off would be guaranteed. However, as the recent case of Shimizu Europe Ltd versus LBJ Fabrications Ltd illustrates, this is not true for those working under contracts which require the submission of a vat invoice or authenticated vat receipt before payment becomes due. Background
LBJ Fabrications Ltd (LBJ) was a sub-contractor engaged by Shimizu Europe Ltd (Shimizu) for the installation of louvres and cladding on a project in Oxford Science Park. The contract between the parties comprised a letter of intent together with a bespoke version of the DOM/1 form of contract and incorporated provisions for adjudication under the TeCSA Rules.

The contract required LBJ to submit interim applications for payment to Shimizu. Payment would not become due until LBJ had also issued a vat invoice or authenticated vat receipt. Shimuzu then had a limited time in which to serve a withholding notice.

A dispute arose following the issue of LBJ's application for interim payment on 16 December 2002. LBJ commenced adjudication proceedings when Shimizu failed to respond to the application. On 20 February 2003, the adjudicator found in favour of LBJ, deciding: "[Shimizu should] pay LBJ the sum of £49,718.39 plus vat as appropriate, without set-off . . . not later than 28 days after LBJ has delivered a vat invoice or authenticated vat receipt".

LBJ submitted its vat invoice to Shimizu the next day. Shimizu served a withholding notice on 25 February 2003, stating its intention to set-off certain sums against the decision. Shimizu subsequently issued court proceedings asking, amongst other things, for a declaration that it was entitled to withhold payment.

Set-off
Given that the adjudicator had specifically stated that Shimizu should make payment "without set-off" one might expect the court to find that Shimizu was not entitled to serve a withholding notice. Indeed, the TeCSA adjudication rules seem to point to a similar conclusion.

The rules state that neither party is allowed to raise the issue of set-off in any enforcement proceedings

The rules state that an adjudicator's decision is binding until the dispute is finally resolved (by a court or by arbitration) and must be implemented without delay. The rules also state that neither party is entitled to raise the issue of set-off in any enforcement proceedings.

However, Her Honour Judge Kirkham found that Shimizu had been entitled to issue a withholding notice because: under the contractual terms, payment could not fall due until LBJ submitted a vat invoice or authenticated vat receipt; the adjudicator had found expressly that the money had not yet fallen due; and although the adjudicator had decided that Shimizu was to pay "without set-off" this could not mean any future set-off because the adjudicator could not predict future set-off and had not been asked to make a decision about any such future set-off.

Essentially, the adjudicator had valued the work, which is what Shimizu should have done, but he could not bypass the rest of the contractual payment mechanism, which stated that payment did not become due until the vat invoice had been provided. As the time for service of a withholding notice did not start until payment became due, Shimizu had acted legitimately and in accordance with the contract.

No doubt LBJ was ready to serve its vat invoice for some time before the adjudicator eventually reached his decision, but it had good commercial reasons for not doing so: the raising of a vat certificate would give rise to problems if LBJ had over-valued the work, as well as advancing the date on which it had to account for vat. Against this background LBJ quite reasonably decided not to issue a vat invoice at the same time as its gross valuation. The judge recognised this, but pointed out that the problem was of LBJ's own creation, in that it had freely entered into the contract which contained these payment provisions.