NEC3 ECC: Can money owed to a Contractor on one contract be used for payment for the rectification of defects by others on another contract?

We have a very aggressive client who asserts that there are defects on one contract. He refuses to engage in discussion on, what we believe to be the true cause of the defects (bad design). He is now threatening to have the defects rectified by others, which will destroy our evidence. He is holding retention, but this will not cover the cost of the “rectification”. He also holds money (for work done to date) on some of our other contracts (where no defects exist) and is threatening to use that to pay others to rectify the defects on the first contract. This is an NEC 3 option B job with no special Z clause that gives him the right to do this.

If he deducts the cost of the defect repairs for one contract from what he owes us for another contract, is he in breach on the job that is free from defects?

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Most UK government contracts have such a clause that allows money owed on one contract to be deducted from another.

However, seeing as there is not this clause, then I am pretty sure that they are not allowed to do this.

The answer maybe, I am afraid, that yes it is possible. There are, essentially, two methods through which such a deduction (known as a set-off) can be made. The first, as Jon has described, is a contractual set-off. In other words, a contractual right in one contract to use monies in another contract. In addition, there is a second method of equitable set-off where a number of projects are very similar. The test is whether the claim for defects is so closely related to you claim for money on another project that it would be manifestly unjust to allow the claim for payment without taking into account the claim for defects.

I am afraid that this can be quite complicated to work out and is very fact sensitive. However, where you have different works, at different locations for different types of projects would make an equitable set-off extremely unlikely. Usually you need more connection than just the parties being the same to get over the “manifestly unjust” hurdle.