ON APPEAL FROM THE HIGH COURT OF JUSTICE,
CHANCERY DIVISION
HIS HONOUR JUDGE HODGE QC
3113 of 2014
Strand, London, WC2A 2LL |
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B e f o r e :
LADY JUSTICE GLOSTER
and
SIR COLIN RIMER
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WILSON AND SHARP INVESTMENTS LTD |
Appellant |
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- and - |
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HARBOUR VIEW DEVELOPMENTS LTD |
Respondent |
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Mr Clifford Darton (instructed by Watkins Ryder Solicitors Ltd) for the Respondent
Hearing dates : Thursday 16 July 2015.
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Crown Copyright ©
Lady Justice Gloster :
Introduction
Issues arising on the appeal
i) Issue 1: whether the proposed petition debt is disputed on substantial grounds.
The appellant contends that the sums set out in the interim payment certificates were no longer payable after the respondent entered Creditor's Voluntary Liquidation ("CVL") on 25 July 2014; this argument is based upon clauses in the contracts that state:
"As from the date the Contractor becomes insolvent … the Employer need not pay any sum that has already become due."
The appellant contends that the judge wrongly rejected its construction of the contract and failed to apply the correct test of whether the debt was disputed in good faith and on substantial grounds.
ii) Issue 2: whether, in accordance with what is said to be the established practice of the Technology and Construction Court ("TCC") not to enforce interim payment obligations in favour of insolvent contractors, the respondent should not be permitted to enforce an interim payment obligation by way of a winding up petition, given that it is insolvent and in CVL.
The appellant contends that the judge, in permitting the respondent to present a petition, acted inconsistently with the established practice of the TCC which, it is said, recognises the provisional nature of interim payment obligations and that enforcement should not be ordered where there is no prospect of recovering payment if those payment obligations are subsequently varied.
iii) Issue 3: whether the appellant has serious and genuine cross claims which exceed the sums alleged to be outstanding under the interim payment certificates.
The appellant contends that the respondent's works were overvalued in the interim payment certificates and further that it has substantial claims for damages based upon the respondent's repudiatory breach of contract and defective and late works. It contends that the judge was wrong to reject such arguments and to refuse to exercise his discretion in favour of the appellant.
Factual background
"…disregard or overrule any certificate, opinion, decision or instruction given by any predecessor in that post, save to the extent that the predecessor if still in post would then have had the power under this Contract to do so."
i) the contractor (i.e. the respondent) to make an application for payment not less than 7 days before the due date (clause 4.10.1);ii) the architect/contract administrator to issue an interim certificate stating the sum due not later than 5 days after the due date (clause 4.7.2);
iii) a final date for payment of an interim payment 14 days after the due date (clause 4.11.1);
iv) the sum to be paid to be as stated in the interim certificate, save and to the extent that the employer (i.e. the appellant) issued a Pay Less Notice (as defined) not later than 5 days before the final date for payment (clause 4.11.5).
i) Union House Contract:
Issue Date | Interim Certificate | Gross Valuation | Amount Due |
01/08/2013 | 14 | £1,878,622.22 | £339,712.41 |
05/09/2013 | 15 | £2,197,163.12 | £318,540.90 |
ii) Hurn House Contract
Issue Date | Interim Certificate | Gross Valuation | Amount Due |
01/08/2013 | 7 | £2,819,324.56 | £530,962.76 |
05/09/2013 | 8 | £3,270,635.43 | £451,310.87 |
It is the appellant's case that the above interim certificates substantially overvalued the respondent's works. This is disputed by the respondent.
"I do not admit the debt because the debt relates to monies owing by [the appellant] in connection with two building contracts between [the respondent] and [the appellant] and not myself."
In their evidence on the application, Mr Sharp and Mr Wilson explained that, on the basis of the advice which they had received, they were confident that the grounds which they had raised as a defence to the statutory demands would succeed, and therefore there was no need to raise any other ground.
"2 Completion of the Works
(a) [The respondent] agrees to remobilise and re-commence the Works on the Commencement Date.
…
3 Payment
(a) The parties acknowledge that the balance of the Payment interim certificates in the sum of £1,202,506.55 excluding VAT is due for payment. In consideration of this agreement [the respondent] agree[s] to waive any claim for interest and damages for late payment accrued as at the date of this agreement.
(b) [the appellant] will pay [the respondent] the sums due for payment exclusive of VAT under the Payment interim certificates in instalments on the respective due dates for payment. The parties acknowledge that the due dates otherwise determined by the Contracts and/or the Act [the HGCRA] are agreed as follows:
(i) On condition that the Contract Administrator has issued further payment certificates (where required) the following sums are due for payment on the following due dates:
(a) £200,000 on the Commencement Date[3];
(b) … [and subsequent payments of £97,000 each week thereafter up to practical completion]
(ii) …
(c) In the event the payment at paragraph 3(b)(i)(a) is not made this agreement has no effect."
"Notice of Intention to terminate contracts
I am instructed on behalf of [the respondent] to give notice of intention to terminate for non-payment of interim certificates in respect of the above sites effective from the date of this letter. Full details of those certificates are of course known to yourself and your client. Formal termination notice, in the absence of payment will be given on 4 February, clause 8. 9. 3.
[The letter went on to complain that the respondent was entitled to possession of the sites and had wrongly been denied access]."
"Your client has not been refused access. There are security arrangements in place but access is not been denied.
A letter will be coming out to you later this morning to confirm this email that your client's repudiation of contract is accepted; the repudiation primarily relates to your client's complete failure to comply with its statutory obligations with regard to the CDM regulations and the hoarding licence (the current CAs recent emails on these subjects refer). Your client has refused to respond to the current EA's attempts to engage with your client with regard to both the serious issues and the EA and our client to reach the conclusion (quite legitimately) your client has no intention whatsoever to engage or comply with its obligations. The contracts relating to 4 and 6 Christchurch Road are therefore determined.
I am also instructed that significant damage has been caused to the property in your client's taken no steps whatsoever to protect the building from further damage."
i) by paragraph 1, the appellant agreed to pay the respondent £100,000 by 10 February 2014;ii) in consideration of such payment, the respondent agreed not to present a winding up petition or any proceedings of any kind against the appellant for a period of 60 days from 6 February 2014; and
iii) in consideration of a payment by Mr Sharp and Mr Wilson of £1 each to the respondent, it was agreed that the statutory demand proceedings were to be discontinued by way of Tomlin Order with no order as to costs and that "the statutory demands and [the Guarantee] which are the subject of the above proceedings are revoked and of no legal effect … PROVIDING that [the appellant] makes payment in accordance with paragraph 1 above."
i) the previous Contracts Administrator, Mr Green, had overvalued the Works by £452,524.20 in respect of Union House;ii) £230,000 of this alleged overvaluation related to the construction of student accommodation on the top floor of Union House for which planning consent had yet to be obtained;
iii) the previous Contracts Administrator had overvalued the works at Hurn House by £717,238.75.
The letter concluded by stating that the interim certificates had overvalued the Works by £1,169,762.96 (i.e. in excess of the amounts outstanding under the certificates) and that there were other claims for damages. Attached to this letter were 8 pages of schedules setting out the basis of Mr Dacey's valuation which showed that £268,782.59 had been deducted for works for which planning permission had yet to be obtained.
i) On 16 May 2014, the appellant obtained a planning appeal decision that affected the valuation of the respondent's works.ii) On 21 May 2014, the respondent obtained a moratorium to enable it to put forward to its creditors proposals for a company voluntary arrangement ("CVA"). The proposals showed that the respondent was insolvent in an estimated amount of £137,749, even if it recovered in full the sums alleged to be due from the appellant. That moratorium stayed in place until 30 June 2014, when the proposals for a CVA were rejected by the respondent's creditors[4].
iii) On 30 June 2014, Mr Dacey issued updated valuations of the respondent's works to take account of the planning appeal decision and other matters. His conclusion was that the respondent had been overpaid by £240,550.36 across both of the contracts and that, accordingly, no sums were due to the respondent.
iv) On 2 July 2014, after rejection by its creditors of the directors' proposals for a "CVA", the respondent gave notice under section 98 of the Insolvency Act 1986 ("the 1986 Act") that a meeting of creditors was to be held on 11 July 2014 for the purposes of appointing a liquidator for the purpose of winding up the respondent's affairs and distributing its assets.
The legal background to the contracts
i) First, parties to a construction contract were entitled to payment by instalments: section 109. Every construction contract was to provide a mechanism for determining what payments become due, and when, and a final date for payment in relation to any sum, which became due: section 110. By section 111 (as originally enacted), a party could not withhold payment beyond the final date for payment, unless it had served a valid withholding notice.ii) Second, a party to a construction contract was given a statutory right to refer any dispute to adjudication at any time: section 108. That is a speedy form of dispute resolution, where the standard time for a decision is apparently 28 days. The adjudicator's decision is binding until the dispute is finally determined by legal proceedings, arbitration or by agreement.
"The second question raised by the appeal is whether the judge was right to give summary judgment to Dahl-Jensen for the amount which the adjudicator had decided Bouygues should pay. In the ordinary case I have little doubt that an adjudicator's determination under section 108 of the 1996 Act, or under contractual provisions incorporated by that section, ought to be enforced by summary judgment. The purpose of the Act is to provide a basis upon which payment of an amount found by the adjudicator to be due from one party to the other (albeit that the determination is capable of being re-opened) can be enforced summarily….".
See also The Technology and Construction Court Guide, 2nd ed. (30/4/2014) Section 9. It was also common ground that the courts have allowed the enforcement of payment obligations under construction contracts to be the subject of statutory demands and winding up petitions: see e.g. In Re a Company (No 1299 of 2001) [2001] CILL 1745.
"29……But this is not an ordinary case. At the date of the application for summary judgment - indeed at the date of the reference to adjudication - Dahl-Jensen was in liquidation.
30. In those circumstances rule 4.90 of the Insolvency Rules 1986 has effect. The rule is in these terms, so far as material:
"(1) This rule applies where, before the company goes into liquidation there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company proving or claiming to prove for a debt in the liquidation.
(2) An account shall be taken of what is due from each party to the other in respect of the mutual dealings and the sums due from one party shall be set off against the sums due from the other.
(3) ...
(4) Only the balance (if any) of the account is provable in the liquidation. Alternatively (as the case may be) the amount shall be paid to the liquidator as part of the assets."
31. That rule is made under section 411 of the Insolvency Act 1986. Subsection (2) of that section - and Schedule 8, paragraph 12 - provide that the Lord Chancellor may make provision by rules or regulations as to the debts that may be proved in the winding up. There is no doubt that the rule has statutory force. It applies wherever there have been mutual dealings, giving rise to mutual obligations and mutual credits, between a company which subsequently goes into liquidation and another party.
32. The effect of the rule was explained by Lord Hoffman[n] in his speech in the House of Lords in Stein v Blake [1996] 1 AC 243……. [which Chadwick LJ went on to cite]
33. The importance of the rule is illustrated by the circumstances in the present case. If Bouygues is obliged to pay to Dahl-Jensen the amount awarded by the adjudicator, those monies, when received by the liquidator of Dahl-Jensen, will form part of the fund applicable for distribution amongst Dahl-Jensen's creditors. If Bouygues itself has a claim under the construction contract, as it currently asserts, and is required to prove for that claim in the liquidation of Dahl-Jensen, it will receive only a dividend pro rata to the amount of its claim. It will be deprived of the benefit of treating Dahl-Jensen's claim under the adjudicator's determination as security for its own cross-claim.
34. Lord Hoffman[n] pointed out, at page 252 in Stein v Blake that the bankruptcy set-off requires an account to be taken of liabilities which at the time of the bankruptcy may be due but not yet payable, or which may be unascertained in amount or subject to contingency. Nevertheless, the insolvency code requires that the account shall be deemed to have been taken, and the sums due from one party shall be set off against the other, as at the date of insolvency order. Lord Hoffman pointed out also that it was an incident of the rule that claims and cross-claims merge and are extinguished; so that, as between the insolvent and the other party, there is only a single claim - represented by the balance of the account between them. In those circumstances it is difficult to see how a summary judgment can be of any advantage to either party where, as the 1996 Act and paragraph 31 of the Model Adjudication Procedure make clear, the account can be reopened at some stage; and has to be reopened in the insolvency of Dahl-Jensen.
35. Part 24, rule 2 of the Civil Procedure Rules enables the court to give summary judgment on the whole of a claim, or on a particular issue, if it considers that the defendant has no real prospect of successfully defending the claim and there is no other reason why the case or issue should be disposed of at a trial. In circumstances such as the present, where there are latent claims and cross-claims between parties, one of which is in liquidation, it seems to me that there is a compelling reason to refuse summary judgment on a claim arising out of an adjudication which is, necessarily, provisional. All claims and cross-claims should be resolved in the liquidation, in which full account can be taken and a balance struck. That is what rule 4.90 of the Insolvency Rules 1986 requires.
36. It seems to me that those matters ought to have been considered on the application for summary judgment. But the point was not taken before the judge and his attention was not, it seems, drawn to the provisions of the Insolvency Rules 1986. Nor was the point taken in the notice of appeal. Nor was it embraced by counsel for the appellant with any enthusiasm when it was drawn to his attention by this Court. In those circumstances - and in the circumstances that the effect of the summary judgment is substantially negated by the stay of execution which this court will impose - I do not think it right to set aside an order made by the judge in the exercise of his discretion. I too would dismiss this appeal."
"111Requirement to pay notified sum
(1)Subject as follows, where a payment is provided for by a construction contract, the payer must pay the notified sum (to the extent not already paid) on or before the final date for payment.
(2)For the purposes of this section, the "notified sum" in relation to any payment provided for by a construction contract means—
(a)in a case where a notice complying with section 110A(2) has been given pursuant to and in accordance with a requirement of the contract, the amount specified in that notice;
(b)in a case where a notice complying with section 110A(3) has been given pursuant to and in accordance with a requirement of the contract, the amount specified in that notice;
(c)in a case where a notice complying with section 110A(3) has been given pursuant to and in accordance with section 110B(2), the amount specified in that notice.
(3)The payer or a specified person may in accordance with this section give to the payee a notice of the payer's intention to pay less than the notified sum.
(4)A notice under subsection (3) must specify—
(a)the sum that the payer considers to be due on the date the notice is served, and
(b)the basis on which that sum is calculated.
It is immaterial for the purposes of this subsection that the sum referred to in paragraph (a) or (b) may be zero.
(5)A notice under subsection (3)—
(a)must be given not later than the prescribed period before the final date for payment, and
(b)in a case referred to in subsection (2)(b) or (c), may not be given before the notice by reference to which the notified sum is determined.
(6)Where a notice is given under subsection (3), subsection (1) applies only in respect of the sum specified pursuant to subsection (4)(a).
(7)In subsection (5), "prescribed period" means—
(a)such period as the parties may agree, or
(b)in the absence of such agreement, the period provided by the Scheme for Construction Contracts.
(8)Subsection (9) applies where in respect of a payment—
(a)a notice complying with section 110A(2) has been given pursuant to and in accordance with a requirement of the contract (and no notice under subsection (3) is given), or
(b)a notice under subsection (3) is given in accordance with this section,
but on the matter being referred to adjudication the adjudicator decides that more than the sum specified in the notice should be paid.
(9)In a case where this subsection applies, the decision of the adjudicator referred to in subsection (8) shall be construed as requiring payment of the additional amount not later than—
(a)seven days from the date of the decision, or
(b)the date which apart from the notice would have been the final date for payment,
whichever is the later.
(10)Subsection (1) does not apply in relation to a payment provided for by a construction contract where—
(a)the contract provides that, if the payee becomes insolvent the payer need not pay any sum due in respect of the payment, and
(b)the payee has become insolvent after the prescribed period referred to in subsection (5)(a).
(11)Subsections (2) to (5) of section 113 apply for the purposes of subsection (10) of this section as they apply for the purposes of that section."
The relevant provisions of the contracts
"Contractor's right of suspension
4.13
1 Without affecting the Contractor's other rights and remedies, if the Employer fails to pay the Contractor the sum payable in accordance with clause 4.11 (together with any VAT properly chargeable in respect of such payment) by the final date for payment and the failure continues for 7 days after the Contractor has given notice to the Employer …. of his intention to suspend the performance of his obligations under this Contract and the ground or grounds on which it is intended to suspend performance, the Contractor may suspend performance of any or all of those obligations until payment is made in full.
…
General
Meaning of insolvency
8.1 For the purposes of these Conditions:
1. a Party which is a company becomes insolvent:
.1 when it enters administration within the meaning of Schedule B1 to the Insolvency Act 1986;
.2 on the appointment of an administrative receiver or of a receiver or manager of its property under Chapter I of Part III of that Act, or the appointment of a receiver under Chapter II of that Part;
.3 on the passing of a resolution for voluntary winding-up without a declaration of solvency under section 89 of that Act; or
.4 on the making of a winding-up order under Part IV or V of that Act.
…….
4. a Party also becomes Insolvent if:
.1 he enters into an arrangement, compromise or composition in satisfaction of his debts (excluding a scheme of arrangement as a solvent company for the purposes of amalgamation or reconstruction);…..
…
Other rights, reinstatement
8.3.1 The provisions of clauses 8.4 to 8.7 are without prejudice to any other rights and remedies of the Employer. The provisions of clauses 8.9 and 8.10 and (in the case of termination under either of those clauses) the provisions of clause 8.12 without prejudice to any other rights and remedies of the Contractor.
…
Insolvency of Contractor
8.5
.1 If the Contractor is Insolvent, the Employer may at any time by notice to the Contractor terminate the Contractor's employment under this Contract.
.2 The Contractor shall immediately notify the Employer if he makes any proposal, gives notice of any meeting or becomes the subject of any proceedings or appointment relating to any of the matters referred to in clause 8.1.
.3 As from the date the Contractor becomes insolvent, whether or not the Employer has given notice of termination:
.1 clauses 8.7.3 and 8.7.5 and (if relevant) clause 8.8 shall apply as if such notice had been given;
.2 the Contractor's obligations under Article 1 and these Conditions to carry out and complete the Works shall be suspended; and
.3 the Employer may take reasonable measures to ensure that the site, the Works and site materials are adequately protected and that such Site Materials are retained on site; the Contractor shall allow and shall not hinder or delay the taking of those measures.
…
8.7 If the Contractor's employment is terminated under clause 8.4, 8.5 or 8.6:
.1…
.2…
.3 no further sum shall become due to the Contractor under this Contract other than any amount that may become due to him under clause 8.7.5[7] or 8.8.2 and the Employer need not pay any sum that has already become due either:
.1 insofar as the Employer has given a Pay Less Notice under clause 4.11.5; or
.2 if the Contractor, after the last date upon which such notice could have been given by the Employer in respect of that sum, has become insolvent within the meaning of clauses 8.1.1 to 8.1.3.
……."
"If the Contractor's employment is terminated under any of clauses 8.9 to 8.11, under clauses 6.11.2.2[8] or under paragraph C.4.4 of schedule 1[9]:
.1 no further sums shall become due to the Contractor otherwise than in accordance with this clause 8.12".
The first issue - discussion and determination
"4. There was no dispute before the Judge, nor has there been in this court, on the applicable legal principle. It can be shortly stated. If the company can demonstrate that the alleged debt on which the petition is founded is genuinely disputed on substantial grounds, the court will strike out the petition. There are rare exceptions to this principle, none of which is relevant to this case.
5. This principle is essentially a statement of general practice. A petitioner must establish its standing to present a winding-up petition. Those with standing are defined for present purposes by section 124 of the Insolvency Act 1986 and include any creditor or creditors. Where the company disputes any liability to a person petitioning as a creditor, it is taking issue with the petitioner's standing to present the petition. It would in theory be open to the court dealing with the winding-up petition to try that issue itself, as in effect a preliminary issue. For at least three sound reasons, that is not the practice of the court. First, it is not the function of the Companies Court to try disputed debt claims. Its function, so far as winding-up petitions are concerned, is to decide whether the case is suitable for the class remedy of a winding-up order and, if so, to administer, principally through the Official Receiver or liquidator, the winding up. The determination of debt claims is a proper function of the county courts or, in appropriate cases, an action in the High Court. Secondly, the threat of winding-up proceedings could otherwise be used as improper pressure on a company to pay a disputed debt. Thirdly, the inevitable delay in determining the issue is unacceptably damaging to the company, whose freedom to carry on business may be severely curtailed by the existence of a pending winding-up petition. It is for this reason that the earlier practice of staying a winding-up petition while the issue of liability was determined in separate proceedings was abandoned in favour of striking it out."
"42. Mr Darton submits that that conclusion is wrong. He says that when one looks at condition 8-7-3 in its context, it is looking to the position only where a contract is still on foot. He submits that s.111 (10) of the 1996 (as substituted) and the contractual provisions in the JCT standard conditions, were introduced to address the issues raised by the speech of Lord Hoffman in the case of Melville Dundas Ltd v George Wimpy UK Ltd [2007] UKHL 18, reported at paragraphs 11 through to 13. Mr Darton submits that that was a case where a contract was terminated by the contractor's insolvency. Those observations, he says, have no application to a case where the contract has, prior to the insolvency, already been terminated. There are issues in the present case as to who lawfully terminated these two building contracts; but it is common ground that terminated those building contracts had been by a date earlier this year. Mr Darton submits that the provisions of condition 8-5 and 8-7 are predicated on the basis that the contract is still on foot at the date of the contractor's insolvency.
43. I accept that submission. It seems to me that where the contract has already been terminated before a relevant insolvency event, condition 8-7-3 is not engaged. I acknowledge the force of Miss Lee's point that condition 1-4-1 the conditions provides that, unless the context otherwise requires, the headings in the conditions are included for convenience only, and are not to reflect interpretation of the contract. Nevertheless, it seems to me quite clear that, looking at conditions 8-5 and 8-7 in context, they are not engaged where the contract has already been terminated in advance of the onset of the contractor's insolvency. Thus I do not consider that even if the respondent company enters into creditors' voluntary liquidation tomorrow or thereafter, that of itself will render it incompetent to present a winding up petition against the applicant."
i) Clauses 8.5 and 8.7 were, he said, clearly predicated on the basis that the contracts were determined by the respondent's insolvency as shown by the fact that clauses 8.5.3.2 and 8.5.3.3 stated that (i) such insolvency would determine the respondent's obligations to complete the Works; and (ii) allow the appellant to secure the site. That determination might take effect by the appellant giving notice under clause 8.5.1 or automatically under clause 8.5.3, but in both cases the provisions were concerned with the determination of the contracts as a consequence of the respondent's insolvency.ii) Clause 8.5 did not in itself determine the appellant's obligation to pay its existing liabilities as that provision was set out at clauses 8.7.3. Under the heading: "Consequences of termination under clauses 8.4 to 8.6" clause 8.7.3 was preceded by clause 8.7 which stated: "If the Contractor's employment is terminated under clauses 8.4, 8.5 or 8.6." It was therefore clear that the appellant's liabilities were only extinguished under clause 8.7.3 if the contracts were determined by the respondent's insolvency and not otherwise.
iii) That construction of clauses 8.5 and 8.7 not only accorded with the ordinary and natural meaning of the words used in these clauses but it was also consistent with the other provisions of the contracts which:
a) excluded CVAs from the extinguishing provisions of clause 8.7.3.2;b) provided that the respondent's termination of the contracts under clause 8.9 only terminated the appellant's liability for "further sums".iv) That interpretation did not offend subsection 111(10) of the HGCRA and did not give rise to the "injustice" that was considered in Melville Dundas.
v) The need to preserve a contractor's "cash flow" which underpinned section 111 of the HGCRA was preserved, because, in such circumstances, the contractor's insolvency was likely to have been caused (as here) by the employer's failure to make interim payments (in accordance with subsection 111(1)) and to have led to the contractor terminating the contract. To find otherwise would be to encourage employers to withhold payment on interim certificates in the hope that this would lead to a contractor's insolvency and its release from liability, contrary to the whole purpose of section 111 of the HGCRA.
i) the employer has not served any notice of termination; orii) the employer has already served a notice of termination under clauses 8.4, 8.5 or 8.6.
In other words, given that clause 8.7.3 necessarily applies after termination in circumstances where the contractor's employment has already been terminated under clause 8.4 or 8.6, and can apply irrespective of whether the contract has already been terminated on the grounds of the contractor's insolvency under clause 8.5, I see no logical basis for the implication of a term that clauses 8.5.3 and 8.7.3 are not operative in circumstances where the contract has already been terminated by the employer on the grounds of repudiatory breach on the part of the contractor.
"8 Apart from the requirements of sections 109(1) and 110(1) , the Act does not purport to interfere with the freedom of the parties to make their own terms about interim payments. Section 109(2) says: "The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due."
9 The references to "circumstances" shows that Parliament did not require that stage payments should become inexorably due at fixed intervals but that liability to pay them could be subject to contingency. … I can think of no reason why Parliament should have left the parties free to agree the circumstances on which instalment payments should fall due but then insisted that nothing should be capable of discharging that liability. Mr Howie suggested that it was in the interests of certainty. But certainty does not require unalterability if the grounds of alteration are sufficiently certain. There can be no uncertainty about whether administrative receivers have been appointed and the contract therefore provides an "adequate mechanism" for determining whether a payment is due.
…
"11. … Instalments payments are in their nature provisional liabilities. As has been frequently said, they are to provide the cash flow for the contractor or subcontractor to enable him to perform his duties under the contract. But when the contractor's employment has been determined in consequence of the appointment of a receiver, two consequences follow. First, the contractor no longer has any duties to perform. Secondly, the liability to make an interim payment is no longer provisional. While the employer retains the money, he can set it off against his cross-claim for non-completion against the contractor. In practice, where the contractor has become insolvent, the employer will have a cross-claim for damages which exceeds the contractor's claim for unpaid work. On the other hand, once the employer has paid the money, it is gone. It is swept up by the bank's floating charge and the employer will have to prove in the liquidation for his cross-claim. Upon insolvency, liability to make an interim payment therefore becomes a matter which relates not to cash flow but to the substantive rights of the employer on the one hand and the contractor's secured or unsecured creditors on the other.
…
13. A provision such as clause 27.6.5.1, which gives the employer a limited right to retain funds by way of security for his cross-claims, seems to me a reasonable compromise between discouraging employers from retaining interim payments against the possibility that a contractor who is performing the contract might become insolvent at some future date (which may well be self-fulfilling) and allowing the interim payment system to be used for a purpose for which it was never intended, namely to improve the position of an insolvent contractor's secured or unsecured creditors against the employer. Mr Howie said that to allow the employer any security in the form of an unpaid instalment payment would be to allow him to profit from his own wrong. But the security arises, not from the terms of the contract but from the law of bankruptcy set-off. As Chadwick LJ pointed out in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 522, any creditor who owes a debt to an insolvent company, no matter how long overdue, may set off that debt in full against his own claim in the liquidation. It is in any case artificial to speak of the employer profiting from his own wrong when the contractor has no further interest in the matter and the issue is one of priority between the employer and the contractor's other creditors."
The second issue - discussion and determination
The third issue - discussion and determination
"If [the client]'s has overpaid on the interim certificate the matter can be put right in subsequent certificates. Otherwise he can raise the matter by way of adjudication with necessary arbitration or legal proceedings".
Similarly, the fact that an employer accepts that interim payments have become due, because of a failure to serve a Pay Less Notice, is not prejudiced by such acceptance when it seeks to raise a serious and genuine cross claim: see per Newey J in R & S Fire and Security Services Ltd v Fire Defence plc supra, in which he held that the fact that interim payments had fallen due under the HGCRA, by reason of a failure to issue a Pay Less Notice, did not preclude the employer from challenging the valuation at a later date or raising a cross-claim in response to a winding up petition.
i) the appellant's unchallenged evidence that from August 2013 (the same month as the first two interim certificates) the respondent and the Contract Administrator, GA, had been refusing to disclose project documentation to the appellant that would have enabled it to carry out an independent review of the valuations;ii) the prejudice which this caused the appellant in preparing its cross-claims and its new contract administrator, Mr Peter Dacey, in preparing independent valuations;
iii) the appellant's evidence that it did not know about the need to send Pay Less Notices and that its then contract administrator/architect (GA) had failed to advise it of the need for such notices;
iv) the fact that the appellant had claims for repudiatory breach of contract and defects against the respondent which could not be finally determined until completion of the project, which had still not occurred;
v) the fact that the appellant's cross-claims had been put forward in correspondence as early as January 2014 and substantiated in correspondence from April 2014; and that such cross-claims were supported by independent valuations carried out by the quantity surveyor, and new contract administrator, Mr Dacey that supported WS' cross-claim;
vi) the fact that the rejection by the judge of Mr Dacey's evidence was based simply upon assertions made by a director of the respondent, Mr Clapcott, with no detailed consideration of the points made, their impact upon Mr Dacey's valuations or the appellant's responses to Mr Clapcott's points;
vii) the fact that the appellant's reasons for not issuing any proceedings against the respondent at an earlier stage included: the lack of disclosure of relevant information by the respondent; the fact that the project was incomplete; a desire to focus on completion of the project; the CVA moratorium from 21 May 2014 to 30 June 2014; and the insolvency of the respondent; and were not therefore consistent with a lack of confidence or belief on the appellant's part in its claims.
Sir Colin Rimer:
Lord Justice McCombe:
Note 1 "The Joint Contracts Tribunal Ltd." [Back] Note 2 Intermediate Building Contracts with Contractors Design (2011) Edition. [Back] Note 3 This was seven days after the date of the November Agreement subject to satisfaction of certain conditions by the respondent. [Back] Note 4 The creditors who voted against the CVA did not include the appellant because of the fact that the nominee for the purposes of the CVA adopted the respondent's position that the appellant owed the sums stated in the interim certificates. [Back] Note 5 With which both Peter Gibson and Buxton LJ J agreed. [Back] Note 6 With whom Lords Hope and Walker, agreed, but with Lord Mance and Lord Neuburger dissenting. [Back] Note 7 On an account following the completion of the Works. [Back] Note 8 Non availability of terrorism cover [Back] Note 9 Material loss and damage to existing structures. [Back]