Jacob Austin 00:00:00 Hey, they're all Jacob Austin here. And welcome to episode 165 of The Subcontractors Blueprint, the show where subcontractors learn how to ensure profitability, improve cash flow, and grow their business. Today's episode is all about a controversial subject of cross contract set off. What happens when a main contractor takes money off you on one job because of something that's gone wrong somewhere else, and when they're actually allowed to do that, and how you might be handing them the right to do it without even realizing. So let's dig in. Picture this situation. You've got two jobs running with the same main contractor. The first one is finished four months ago and there was a problem at the back end of it. A leak. A snag that they say that you never came back for a bill for another trade. To put that right, and because it was a leak, there were some consequential issues as well. You disagree with it, but it's all gone quiet. Then your payment notice lands on your current job and £22,000 has vanished.
Jacob Austin 00:01:29 Not for anything on that job, but for the job that finished four months ago. And the phone call goes exactly the same way every time. It's the same money. It's all one account with us and you owe is on the other job. So you owe us here. Now that phrase, it's all one account. It's doing quite a bit of work there because legally, it usually isn't one account. Two contracts are two separate contracts with separate obligations two payment regimes, two sets of notices, even two adjudications if it comes down to it. And sometimes they can set off money between two different jobs. What decides whether they can do that isn't fairness or how long you've worked together? How long the commercial manager has known your business, but it's what your contract says. What have you done since the problem arose, and whether a valid pay less notice has turned up on the job they're taking the money from. The middle point is worth making an issue of, because there's a Court of Appeal case where a subcontractor created the connection between two separate contracts through its own conduct, and then handed the main contractor a set off opportunity that it wouldn't have otherwise had.
Jacob Austin 00:02:47 And the thing that did it is something that I've seen subcontractors do plenty of times thinking that they're being firm. So we'll explore that and the other two routes that contractors can use. The notice that sits across everything and what to say when it happens, and of course, what to do up front to prevent it from happening. So the mechanism. There are only three ways that a main contractor can lawfully take money from one project off of another. Everything else is them bluffing and getting away with it. Route one is an express statement in your subcontract. This is the most common one, and this is probably something. If you signed your order without reading it, that's sat there in the main contractor's bespoke terms or their schedule of amendments, and you'll probably be able to find wording along the lines of the contractor may deduct or set off from any sum due or due to be cloned by the subcontractor, whether under this specific subcontract or under any other contract between the parties. And that last part is what does the damage? Any other contract between the parties? If that sentence is part of a clause in your order, then the contractor has bought himself the right to do exactly what he's doing.
Jacob Austin 00:04:10 Also, watch out for the phrase claimed to be due, because it means that he doesn't have to establish his own loss first. He can assert that there has been a loss. Then deduct it and leave you to chase the money up before he's even paid out against an invoice or otherwise. Now the good news if this goes the distance, then the courts read clauses that take money away from you and take your payment rights away from you. Very seriously. That principle goes back a long way to a case between Gilbert Ash and Modern Engineering in the House of Lords in 1974. The court decided there that you don't presume parties have given up their ordinary Remedies. If they want to change the normal position, they have to say so in clear words. So vague wording tends to be read narrowly to give you the benefit of the doubt. But on the flip side of that, if the statement is really clear, then those clear words do the work. If the clause says any other contracts, then it means any other contract, and some interpretation probably isn't going to help you.
Jacob Austin 00:05:23 Something that is worth knowing is that the standard unamended JCT subcontract doesn't give the contract to the right to cross contract. Set off the deduction provisions in the standard forms operate on sums due under the single subcontract that you're operating under. So if you're on an unamended JCT subcontract and money has been taken off for you from another job, there's a decent chance that the contractor has no contractual right at all and is just relying on a habit. Route two is equitable set off. This is the fallback when there's no clause, and it's where most contractors think they're stronger than they are. The leading case on this is Geldof. Metal constructively against Simon Carves limited. It's a case that went to the Court of Appeal in 2010, and Lord Justice Rix set out a test that has two parts, but it's relatively simple. It says that the cross claim has to be so closely connected with the claim that the money is due under, that it would be manifestly unjust to allow payment to be enforced without taking that into account. So the two tests are the close connection and the manifest injustice.
Jacob Austin 00:06:46 Now, that connection doesn't have to come from the same contract. That much is clear and that's settled. But the starting point for two genuinely separate jobs that are tendered separately on different sites at different times, is that that connection isn't there? A retail fitout in Leeds and a school refurb in Derby, and not closely connected. Just because two companies have signed the same contracts on both. So on an ordinary case with an ordinary situation, equitable set off across contracts is quite hard for the contractor to make all that argument together on. That's good news. So hold on to that point. The third route is insolvency set off, and this is one that you can't do anything about. So I'll make it quick. Once a company goes into administration or liquidation, the insolvency rules require an account to be taken of all the mutual dealings between the two parties. Everything gets netted off across every contract and only the balance is provable and that's paid. It's mandatory and it happens whether your contract said anything about it or not.
Jacob Austin 00:08:00 That matters in one practical way, because if a contractor is wobbling, the money they're owed on job A stops being ring fenced from whatever you say they are on job B the moment an administrator is appointed. So if you're carrying a live issue of some type of cross contract claim with a contractor and you're worried about their financial viability, that is one to look into and get settled up rather than let it park and the administrator do the dirty work on it. Now, whatever the situation, cross contract setup has to be properly administered. If there is a condition in your contract, the deduction still has to be made properly with a valid notice on the job. The deduction from section 111 of the Construction Act is super clear on this. The payer must pay the notified sum by the final date for payment. Unless a valid pay less notice has been given, the notice has to arrive in time. It has to state the sum the payer considers due, and it has to state the basis on which that summit is calculated.
Jacob Austin 00:09:08 So it's worth running the checks on the job the money's being taken off of. Why is there a pay less notice at all, or just a reduced payment notice and some dodgy phone call? Did it arrive before the deadline in the ISO contract? Does it call itself a Payless? Notice quite clearly, and does it have a clear basis on which the valuation has been calculated? If any of those things are missing, then the argument about whether cross contracts set off applies or was available never get started. The notified sum is due. You don't have to win an argument about the other job. You win on the notice, and the other job goes back to being a separate issue under a separate contract, exactly where you want it. There's a second place we might be able to go to construct an argument, and that is section 110 one A of the Construction Act that says that a contract doesn't contain an adequate payment mechanism if it makes payment conditional on the performance of obligations under another contract. That provision is there really to cover pay one paid clauses.
Jacob Austin 00:10:19 But if the contract is arguing that what you get paid on this job is tied to another job where you've underperformed or there's a defect, then it technically is worth raising and few subcontractors know that exists. One thing that I do need to clarify is abatement. Your contractor might try and muddy the water and call a cross contract set off abatement, but abatement applies to the contract that you're working on, and it basically covers where your work is worth less money because you've either baked in a defect or you've done something different. Maybe you've substituted a product for a lesser product and it's validly worth less money. All of that is to do with the value of the current contract that you're working on. It can't move from one job to another. So if the reduction is on the current job you're working on, but it's actually described as if it's abatement for somewhere else, then it can't be that. And you should absolutely be saying so now where can you get caught out? Let's go back to the Geldof case with the two contracts with Simon Carves.
Jacob Austin 00:11:29 One was to supply pressure vessels and one to install storage tanks. There were two separate tenders and they were signed five months apart. Who's on the same site with the same parties? And that was about it. On those facts, you might expect the contracts to be treated separately and in the first instance, the judge did exactly that and gave Geldof a summary judgment. Then Geldof stopped to work on the installation contract and refused to go back until the outstanding invoices on both contracts were paid up. So that there created the moment in the judge's mind where the linkage occurred. The Court of Appeal decided that by making payment under the supply contract a condition of resuming work under the installation contract, that Geldof had brought the two contracts together into what it called an intimate relationship with one another. Simon Calves then terminated the installation contract, which made the relationship inseparable. The connection that the law requires had been created not by the contracts, but by the conduct of the two parties, and then the appeal succeeded and the set off was allowed.
Jacob Austin 00:12:43 Now, I've heard this argument before. some subcontractor suspending performance on my job because some debt is outstanding on a job in a completely different region or vice versa. And that there builds a link, as we've just demonstrated by case law, that the main contractor can use for cross contract setup. That's misconception number one. And it's big because if withholding performance on one job to get paid on another job feels like it might be a strong move, but it's actually building a linkage that then builds cross contract set of rights. Misconception two is that there are two different jobs, so they can't touch anything. Well, if your contractor has cross contract set off as a standard amendment in their suite and let's face it, they probably do. Then the reality is that they can they've got a right and this is one that you can negotiate out. So go and have a look before you sign up to the terms. Misconception three They've done it before, so it must be allowed. Yes. Everything that the main contractor does must be allowed.
Jacob Austin 00:13:53 They wouldn't try anything on now, would they? Just because they've done something doesn't mean that they've got the contractual right. So go and check your terms and conditions and don't sign up to cross contracts set off if it's work for them once, it doesn't have to work with you again. Misconception four running a single account with them. If you send one statement that covers two jobs, if you know, go straight one settlement figure across the both of them. If you let their commercial manager talk about your overall position with their business and you start using the same language back, all of that is evidence of the dealings flowing from one contract to another. And that is exactly the close connection test that the judge would be looking for if there were a court case about it. So your job is to keep the paperwork apart. To keep the jobs apart. Misconception five adjudication will sort it all in one go. Well, it probably won't. An adjudicator gets his jurisdiction on one particular contract. He can decide disputes under that contract.
Jacob Austin 00:15:05 Two contracts mean two separate adjudications in EFCC construction against ISG retail in 2023, the TCC declined to set off an adjudication award relating to one project against awards in the same names or between the same parties on another contract. The courts and force decisions. They won't net them off across projects to be helpful, but that's a situation that cuts both ways. Is a limitation on the one hand, and it's protection against the same thing on the other hand. Now let's revisit our pretend example from earlier and run the whole thing through the two jobs. We've got the retail fitout contract that finished in May. There's an argument about a leak that they say costs them £22,000 to put right after you've left. You say it wasn't your pipe work and nobody gave you the chance to come back and fix it. It's been sitting in an email chain since June, and actually it's starting to think the issue has gone dormant and it's gone away. But then on the second job, the school refurbishment, which is live, you've got 145 grand package.
Jacob Austin 00:16:17 Your application for September is 38,000 and less, say £400. The contractor doesn't argue that all of that is due, but still they come back with a payment notice at 16,400 and the notice says deduction of £22,000 in respect to a remedial costs incurred at the retail project. So what do you do? Well here's three questions to ask yourself in this order. First the notice. When did it arrive? If you measure it properly against the final date for payment in the scores subcontract, is it to time and does it have a proper basis of calculation? If that notice is a day late, or if it gives you figures and a project name and nothing else, then a notified sum of £38,000 400 is payable and there's a smash and grab route, route or adjudication. And you can run that inside a 30 day period to get your hands on your money. You haven't got to argue about the leak at all. Second, the clause. Open up your subcontract of the payment section and look for the words any other contract.
Jacob Austin 00:17:28 If the score job is on an unamended JCT subcontract, those words certainly aren't going to be there. So the contractor then has no contractual route. But knowing main contractors. They're likely working under amendments or their own terms, and they probably have established that right. Only you could answer that for your specific contract by reading your order. Third, this is your own conduct. Go back through your emails. Did anyone in your business link the two jobs? Did your contracts manager tell their site team you'd be pulling off labor on the school until the retail money was sorted? Who you sent? One statement that shows both accounts owed to your company under one debt. If the answer is yes, then you've made their equitable set of argument for them. And you need to know that before you start writing letters. Let's say the notice was late. You can write a short letter for lines. Maybe the notified some under the September payment cycle is £38,400. No valid pay less notice was given by the final date for payment.
Jacob Austin 00:18:38 So the sum is due. Any claim arising under the retail contract is a separate matter under a separate contract, and will respond to that, of course, separately. The last sentence is important because it's demonstrating you're not refusing to deal with the leak. You're just refusing to deal with it here. And if they hold the money anyway, you'll be adjudicating under the school contract alone. Under the narrow question of the notified sum and the lack of payment against it. Narrow disputes tend to win quickly. The question is straightforward. It's simple to come to an answer on wide ones will probably give the adjudicator room to get interested in the leak, and that's a place that you don't want to go. So what's next is how to protect yourself. First things first before you sign up to your contract, you read it. I feel like I say this every week. Read your subcontract and search for the phrases. Any other contract. You can do that in literally seconds on a PDF. If you get a hit, then you know that this contractor in there amendments are likely on every single job you work with.
Jacob Austin 00:19:49 Them have the right to set off across contracts. If you're willing to carry that exposure, then carry on. But the reality is, if you've been working with them for years, an old skeleton falls out of a closet somewhere could leave you scrambling on a current job unless you negotiate that position out. And that is the second thing that you should do try to get it struck out. And if you can't try to cap it, a contractor who won't remove a cross contract set off deduction will sometimes agree that it only applies to sums that have been agreed or determined, rather than claimed to be due. That single amendment takes away the ability to just assert that there's a debt and deduct it, and it's an easier ask than deleting the clause altogether. Third thing to do keep the jobs physically separate in your own paperwork. That means separate applications, separate reference numbers, separate correspondence, different email threats, separate meetings if you manage it and never use a statement to account that covers more than one contract. If their share sends you one reply on a per job basis.
Jacob Austin 00:21:00 The fourth is the lesson from the Geldof case never to suspend or slow down on one job because of money on another. If you're not being paid on job A, then your remedy is on job. Use it on the right job. Downing tools on another job isn't a stronger version of the same move. It's a different move, and it's one that implies that cross contracts set off can take place. The fifth, and the smart thing to do is to deal with cross claims when they're still small. And whilst the relationship is intact. A 2200 £0 allegation sitting unanswered in an email chain isn't necessarily a dormant issue or something that everybody's forgotten about. It's probably just ammunition that's being stored. If the contract is going quiet about it, that might mean they're setting their ducks in a row, ready to strike later. Your strongest way forward is to answer in writing on that contract with your position and any evidence. Even if they don't reply, a contemporaneous written denial is worth a great deal more than some of these dodgy recollection.
Jacob Austin 00:22:08 After several pints, several hot dinners, several nights sleep months later. The sixth thing to do is to watch your exposure across your whole relationship with that contractor. If the same single contractor represents a large share of your turnover across several live jobs, a single cross contract deduction could turn all of that into one huge risk. And if they become insolvent, the insolvency roars or net off across every contract, whether you like it or not. The final thing that probably nobody wants to admit to themselves. Sometimes the answer if you can't negotiate a sensible position, is you stop working from a contractor who does it. It's not a gesture, but as a calculation. If you've done ten jobs for a client and then he starts deducting from whatever he likes from whichever contract he says has money in it, then you're not running ten jobs. You're running one combined exposure with ten chances in the raffle that it goes wrong. So there we have it. That's cross contract set off. And as with a lot of things, the strongest time to have the argument about cross contracts set of clauses is upfront before you stuck a spade in the ground, before you fix the single joist, or before you first fixed a plot, get it right before you get to site and you reduce your risk across the board.
Jacob Austin 00:23:36 I hope that helps you all. My mission with this podcast is to help the million small contractors working out there in our industry. If you've taken some value away from today's show, then I really need your help to share the show and pass that on to somebody else who would benefit from hearing it so I can help as many people as possible. And thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.SubcontractorsBlueprint.uk and we're also on all your favourite socials again at Subcontractors Blueprint. And remember, miss the contract detail and the commercial risk falls on you. Thanks all. I've been Jacob Austin and you've been awesome.
