Set Off and Defences after Assignment
Welcome to the next in the occasional series of topics in construction law. Last time we looked at general issues arising from the assignment of construction documents. Today we review the particular issue of sets off and defences.
Following the assignment of a construction document such as a building contract, the party acquiring the rights is subject to the same rights of set off and other defences which were available against the original party.
That is, if a developer assigns a building contract to a buyer, any claim by the buyer against the contractor will be subject to any right of set off that the contractor may have had against the developer. This may include an unpaid or overdue interim valuation under the building contract and/or any defence the contractor may have had against the developer, i.e. a cap on certain liabilities under the building contract will apply to that buyer.
However after notice of this assignment, the person owing the money to the contractor cannot by payment or otherwise reduce the rights of the person taking the benefit of the building contractor which existed when the notice was given.
To illustrate, a developer completes an engineering project and assigns the benefit of the engineering contract, including the right to sue, to the buyer of the completed project. This assignment is permitted under the building contract and is notified to the contractor.
The engineering contract requires the contractor to pay liquidated damages (LDs) to the owner if the completed project did not meet the performance specification. Unfortunately, the completed project does not do so, however the contractor has worked with the buyer before and they have a difficult business relationship. The contractor does not want to have to deal with the buyer so it pays the damages to the owner.
BUT the contractor’s payment to the owner after the buyer’s notice does not diminish the buyer’s rights to payment of damages. So, if the buyer claims the damages from the contractor, the contractor cannot use its payment to the owner as a defence to that claim.
In practice, this type of situation is often resolved in three party proceedings before the Court. This also demonstrates why construction enquiries before contract should ask whether there is a dispute, an incomplete final account, an unpaid retention or other sum due from a developer to a building contractor or professional consultant to protect the buyer.