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Adjudication: a Pioneering decision…

The Wimbledon v Vago principles to be applied on an application for a stay of execution of an adjudicator’s decision are familiar to all. Indeed, most practitioners would consider there was nothing left to be worked out by the courts.

However, in his decision in Pioneer Cladding Ltd v Graham Construction Ltd, Coulson J had to consider a “novel” point.

Wimbledon v Vago principles

As we know, there are three essential questions that the court will consider on an application for a stay:

  • Is it probable that the claimant would be unable to repay the sum ordered if that was the outcome any later proceedings to challenge the adjudicator’s decision?
  • Is the claimant’s financial position the same or similar to its financial position at the time that the contract was made?
  • Is the claimant’s financial position due either wholly or in significant part to the defendant’s failure to pay the sums awarded by the adjudicator?

Pioneer Cladding v Graham Construction

In Pioneer, the “novel” point arose in relation to the second issue, namely whether the court should consider the actual position of the claimant (Pioneer) at the time the sub-contract was made, or the financial position that the claimant suggested it was in at that time.

At the stay hearing, Pioneer submitted that its financial position was unchanged: its accounts for the year ending November 2011 showed a very small profit, as did its accounts for the year ending November 2012. On that basis, Pioneer argued that Graham could not complain that its financial position was unstable as at the date of the hearing, because Graham knew that Pioneer’s financial condition was unstable when it entered into the sub-contract in June 2011. As such, the application for a stay of execution should fail.

The facts

Pioneer was one of two nominated sub-contractors for cladding and curtain walling packages of works at the “Pools on the Foreshore” project, in South Shields. Graham was the management contractor. Graham had never sub-contracted with either of the nominated sub-contractors and, even though they were the employer’s preferred sub-contractor, Graham took steps to ensure that Pioneer was financially sound.

The picture painted by Pioneer was of a “financially healthy” company, with a substantial order book and a raft of “glitzy” projects that it had completed. The wrinkle was that Pioneer was a phoenix company, but Pioneer explained that the previous entity had gone onto liquidation in consequence of a bad debt.

It was therefore not a surprise when Graham obtained a credit report that suggested the company was not trading but nevertheless it asked further questions of Pioneer, took up references with the project architect and material supplier, and visited Pioneer’s factory. In Graham’s own words, it took steps to ensure it had “robustly vetted” Pioneer before contracting with it.

Graham’s application for a stay

Graham submitted that Pioneer had actively misled Graham into thinking that Pioneer was a much more substantial and successful entity than it actually was, and that the sub-contract was therefore entered into on a false premise. As such it would be unjust if Pioneer could rely on its true financial position as at the date of contract to avoid the stay of execution, as it would effectively create a “blagger’s charter”.

The court accepted that submission, stating at paragraph 27 of the judgment:

“However, I am also satisfied that Graham entered into that sub-contract on a false premise. The various exchanges with Pioneer demonstrated to Graham that Pioneer were a substantial company and financially stable. That was incorrect. Whilst Pioneer’s turnover (then and now) still remains uncertain, they were not making any significant profit, as the subsequent accounts demonstrate. They did not have the cash reserves that they were suggesting. In all those circumstances, Pioneer cannot defeat Graham’s application for a stay on the basis that Graham knew what they were getting into when they sub-contracted with Pioneer. On the contrary, they had no proper idea, because Pioneer misled them. Accordingly, I decide the second issue in Graham’s favour.”

A welcome decision

The outcome of this case is, as a matter of common sense, a sensible decision that should be welcomed by the industry as it recognises the practicalities that are faced when engaging unknown entities or new companies. While there is no concept of “good faith” as a matter of contract law, this decision underlines the fact that the courts take a dim view of those that “massage the truth” to secure their own advantage, and then seek to resile from those representations as and when it suits them.

That said, the onus remains on the employer to investigate the financial position of those it is considering engaging so as to satisfy itself of the financial health of the proposed contracting party. I would tentatively suggest that should an employer take a party’s representations at face value without undertaking any investigations of its own, that it would be unlikely to be able to resist enforcement. As HHJ Humphrey Lloyd QC observed in Herschell Engineering Ltd v Breen Property Ltd (unreported, 28th July 2000):

“It is very easy (and prudent and relatively inexpensive) to carry out a search or to obtain credit references against a company whose financial status and standing is unknown. Not to do so inevitably places a person at a significant disadvantage. It has only itself to blame if the company selected by it proves not to have been substantial (as opposed to a material deterioration in its finances since the date of contract).”

The reality is that in relation to any contractual relationship, one must have a weather eye on whether a contracting party has the financial means to fund the project. In turn, this raises the question of what happens if it all goes wrong and the parties end up on the opposite sides of an adjudicator’s decision. Rather than leaving issues of financial health to the enforcement stage, for the prudent employer the advice remains not so much buyer beware, but “contractor beware”.

Anna represented the defendant, John Graham Construction Ltd, in the enforcement proceedings.

2 thoughts on “Adjudication: a Pioneering decision…

  1. There are always so many things to consider when bringing up a contract, it seems like construction law never works out. But that’s just ignoring all the times that nothing happens and the work gets done and paid for.

  2. There are always so many things to consider when bringing up a contract, it seems like construction law never works out. But that’s just ignoring all the times that nothing happens and the work gets done and paid for.

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