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Partial stay as “claimant is now an SPV with no P”

Coulson J has a certain turn of phrase, one that will be sadly missed from TCC judgments when he moves up to the Court of Appeal next month. My title is borrowed from the discussion on whether there ought to be a stay execution, hidden away at paragraph 71 of his judgment in Equitix ESI CHP (Wrexham) Ltd v Bester Generacion UK Ltd. It made me smile when I came across it.

Equitix ESI CHP (Wrexham) Ltd v Bester Generacion UK Ltd

Equitix was created specifically for the project to build a biomass-fired energy generating plant in Wrexham and Bester was engaged to design and build it.

Work started sometime in 2016, but progress was slow. By February 2017, Equitix had referred to adjudication a dispute over whether Bester was entitled to an extension of time. The adjudicator decided it wasn’t. This meant that Bester was responsible for the delays to the project.

By July 2017, it seems that Equitix had had enough. It terminated the contract and gave notice that it was not continuing with the project. By this stage, it had paid some £8 million to Bester. An interim account prepared after the termination sought the return of this £8 million, along with another £3 million for other claims.

There was a dispute over the termination and interim account, which was referred to adjudication. Again Mr Blackburne was appointed and he decided that Bester should pay some £9.8 million to Equitix. Cue adjudication enforcement proceedings when Bester failed to pay.

Enforcement proceedings

One thing I found interesting in the enforcement proceedings was the extent of the arguments advanced by the parties.

When I first read the judgment, I thought the fact that the parties had agreed a contractual adjudication clause was a sensible way around the issues that the exceptions in section 105(2) of the Construction Act 1996 can give rise to. After all, this was a contract for a power plant, which means that at least some of the activities on site would be excluded. However, other activities would not, because section 105(2) talks about the “assembly, installation or demolition of plant or machinery”, but does not exclude the sort of activities envisaged by section 105(1)(e), such as preparatory operations like “site clearance, earth moving, excavation…”.

It is a complicated issue and the judgment gives over several paragraphs to the debate about hybrid contracts, like this one. Coulson J said the real issue was whether Bester had carried out any excluded works. On the facts, it was clear that the project had not moved beyond the preparatory stages. Excavation had not started and “no plant, machinery or steelwork had ever been assembled, installed or erected on site”.

This led to Coulson J looking at precisely what he thought preparatory works in section 105(1) covered. He concluded that bonds and business plans were just like the drawings that Ramsey J had referred to in Cleveland Bridge (UK) Ltd v Whessoe-Volker Stevin JV. It was wrong to focus on works that were “physical site works”. Thus, as nothing more than preparatory works had been carried out, no excluded operations were included in the scope of the dispute referred to the second adjudicator. This meant there was no jurisdictional issue.

It seems to me that it was a pity that the adjudication clause the parties agreed was somehow defective, but the parties seemed content to proceed on the basis that the Scheme for Construction Contracts 1998 applied to the two adjudications instead. I guess the non-compliance point would not matter for the excluded works (as that would just be a contractual adjudication), but would be important for those works that were covered by section 105(1). As Coulson J noted, the parties overcame this by agreeing to two ad-hoc adjudications.

Perhaps it would have been easier if the parties had just agreed to refer any dispute to adjudication under the Scheme, rather than trying to draft their own provisions. They could still have had TeCSA as the nominating body, and factored in giving a notice of dissatisfaction if they wanted to challenge a decision. Hindsight is a wonderful thing!

 Reservation of rights

The only thing I wanted to say about the debate about whether Bester had made a suitable reservation of its jurisdictional rights in the second adjudication (it hadn’t), was in relation to Coulson J’s observation that Bester may well have made a “clear and unqualified acceptance of the adjudicator’s jurisdiction” when it accepted the adjudicator’s terms and conditions of appointment.

Coulson J referred to Jefford J’s judgment in Dacy Building Services Ltd v IDM Properties LLP, where there was a debate about whether a party’s jurisdictional objection could be waived by agreeing to the nomination of an adjudicator. As she said at the time:

“Although there may well be circumstances in which that was the case, I cannot see that the mere agreement to the nomination of an adjudicator can have that effect. Parties may often want to agree the identity of a putative adjudicator rather than leave it in the lap of a nominating body but something more would be needed for that to amount to agreement to his appointment with jurisdiction over a particular dispute.”

It is a reminder to parties to ensure any nomination agreement is made without prejudice to any jurisdictional challenges that may arise.

SPV with no P

Finally, I want to mention the manifest injustice point that Edwards-Stuart J referred to in Galliford Try Building Ltd v Estura Ltd, where he decided that it would be unfair to enforce an adjudicator’s decision in full (he ordered some £1.5 million of the £4 million in dispute to be paid).

I think this is the first time we’ve seen that judgment applied. That may be because this was an “unusual case”. As Stuart-Smith J said in LXB Ltd v Squibb Group Ltd, it is “not remotely unusual” for construction projects to be carried out by SPVs. However, they usually see the project through to the end. Here, the SPV had lost its P because it had elected not to continue with the project. Without a purpose, there was no incentive for Equitix to:

“… remain in existence for a minute longer than it needs to, once it has repaid its debts to its parent, but that it is also overwhelmingly likely that [Equitix] will be wound up sooner rather than later. Thus, the risk of overpaying and never being repaid faced by [Bester] is very real and could not have sensibly been predicted when the contract was agreed.”

There was also an issue as to when any final accounting process may take place, since the contract was silent on when that should take place. Therefore, Coulson J felt some form of stay was necessary and that “broad justice” would be done if Bester paid £4.5 million and another £1 million into court.

At the time of Galliford Try v Estura, I said that although Edwards-Stuart J may think a partial stay was “appropriate only in rare cases”, I could see the arguments being written by paying parties. I wondered how rare these exceptional cases would prove to be. Since then, I have seen manifest injustice arguments run in some smash and grab adjudications, which I’ve always deferred to the courts to deal with rather than accepting it as a ground not to pay. However, the floodgates did not open quite as far as I anticipated.

MCMS Ltd Matt Molloy

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