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Why didn’t the contractor just adjudicate its payment dispute?

One thing that puzzled me when I was reading Gloster LJ’s judgment in Wilson and Sharp Investments v Harbour View Developments is why the contractor repeatedly threatened winding up proceedings, rather than taking the employer’s lack of payment to adjudication.

We all know how that scenario should have played out and, who knows, it may have prevented yet another construction casualty.

If you are unfamiliar with the case, read on.

Wilson and Sharp Investments v Harbourview Developments

This was a case about an insolvency. As with all insolvency cases, the background is long and complicated but, in a (long-ish) nutshell:

  • Wilson and Sharp (the employer) employed Harbour View (the contractor) to construct student accommodation (known as Union House and Hurn House) in Christchurch, Dorset, under two JCT Intermediate Building Contracts, 2011 Edition.
  • In August and September 2013, four interim certificates were issued. No pay less notices were served, so the sums certified became the notified sums and were payable by the final date for payment.
  • The employer paid one certificate late, leaving a balance of £1.2 million. Consequently, the contractor served statutory demands against the employer’s two directors (Messrs Wilson and Sharp) pursuant to a personal guarantee.
  • In November 2013, the parties entered into an agreement whereby the contractor agreed to proceed with the works in return for the £1.2 million being paid in instalments. The first instalment of £200,000 was paid by 13 December 2013.
  • In December 2013, the employer terminated the contract administrator’s (Mr Green) appointment. Mr Dacey was appointed as the new contract administrator.
  • In January 2014, the contractor gave notice of its intention to terminate the contracts under clause 8.9.3. In response, the employer purported to accept the contractor’s repudiatory breach of contract.
  • In early February 2014, the parties reached another agreement whereby the contractor agreed not to present a winding up petition if the employer paid £100,000, which it did.
  • Also in February 2014, the new contract administrator (Mr Dacey) produced an interim valuation of the contractor’s work. This showed it had been overvalued and none of the unpaid sums were said to be due.
  • At the end of February 2014, the contractor threatened further winding up proceedings if the outstanding money was not paid by 7 April 2014. This precipitated the employer to set out its cross-claims, alleging an over valuation of just under £1.2 million and other claims for damages.
  • Another winding up threat was followed by the employer applying to the court for an injunction to restrain the contractor from presenting a winding up petition.
  • The injunction hearing took place on 10 July 2014 but, prior to that:
    • the contractor obtained a moratorium to enable it to put forward proposals for a company voluntary arrangement (CVA), which was rejected, resulting in the appointment of a liquidator to wind up it up (after the injunction hearing, the contractor passed a special resolution to be wound up voluntarily); and
    • Mr Dacey issued an updated valuation, concluding that the contractor had been overpaid by some £240,000.

The injunction hearing

At the hearing, HHJ Hodge QC declined to grant the injunction the employer sought. In reaching this conclusion, he:

  • Considered the parties’ contracts and concluded that clauses 8.5.3 and 8.7.3 only applied if the contract was “still on foot”, but not if it had been terminated prior to the contractor’s insolvency (here, the contract was terminated some months earlier).
  • Decided that the employer did not have a “serious and genuine cross-claim” in an amount exceeding the debt. In particular, he relied on the fact that in November 2013 the employer had acknowledged that the sum of £1.2 million was due and owing. He clearly formed the view that the cross-claim was simply a means to avoid paying the debt, it was “a put-up job, designed to prevent enforcement through winding up proceedings”.

Court of Appeal’s judgment

Gloster LJ allowed the employer’s appeal and granted it a permanent injunction. She did not agree with HHJ Hodge QC’s reasoning or conclusions, finding that he was wrong to:

  • Conclude that clauses 8.5.3 and 8.7.3 did not apply if the contract had already been terminated prior to the insolvency.
  • Place so much emphasis on the fact that the employer acknowledged the £1.2 million was due in November 2013. She said the fact that an employer was obliged to make an interim payment did not preclude it from challenging disputed items later. It was not prejudiced by the lack of a pay less notice when it subsequently raised a “serious and genuine cross-claim”. She also noted that the employer’s cross-claim was “reasonably arguable” and “sufficiently strong to be tested in court proceedings”.

Interestingly, she also rejected the submission that it was the TCC’s “established practice” to refuse to enforce interim payment obligations in favour of insolvent contractors. Rather, she said, it was not an “absolute rule”, but something the court looked at when weighing up all the circumstances and deciding whether the contractor really was insolvent, as the employer alleged.

Why didn’t the contractor adjudicate?

As I said at the start, I don’t understand why the contractor repeatedly threatened winding up proceedings, rather than taking the employer’s lack of payment to adjudication.

Lots of “ifs”

If the contractor had referred the lack of payment to adjudication in, say, November 2013, it may have received the money it was owed by early 2014 and, who knows, it may have completed the project and moved on to the next one.

If it had adjudicated at this early stage, it would have been a “smash and grab” adjudication. We all know how that one goes:

  • The employer fails to serve a pay less notice and then fails to pay the notified sum by the final date for payment.
  • The contractor gets an adjudicator’s decision in its favour and pops off to the TCC to enforce it, which the court usually does.
  • (Up until judgment in ISG Construction Ltd v Seevic College, the employer may have started a cross-adjudication for its cross-claim to be heard, but Edwards-Stuart J has put the kybosh on that one.)

Fairly routine and, given the way the case law has developed, I would have thought it was a fairly “open and shut” payment case.

Even if the contractor had delayed starting an adjudication until sometime in early 2014, I doubt the situation would have been much different.

And, even if the contractor had waited until the summer, the situation may still not have been much different. The only issue then would be how the contractor’s insolvency impacted on its right to bring proceedings (for example, would the liquidator be minded to have started an adjudication that may have ended up with a stay on the basis of the insolvency?) and the sort of security the adjudicator may seek for payment of his fees (is it fair that the responding party should be joint and severally liable in those circumstances?).

I guess even if the liquidator decided to start an adjudication now (the injunction only applies to the “presentation of a petition” against the employer) these factors would still come into play.

MCMS Ltd Matt Molloy

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