England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		4th October 2013

The Honourable Mr Justice Coulson:

1. This is an adjudication enforcement hearing. Issues arise under two separate heads: the effectiveness or otherwise of the contract provisions, which are relied on by the Defendant to reduce any judgment sum; and issues arising out of the Defendant's application for a stay of execution. The contractual points are straightforward, but the points raised on the stay are novel. The judgment had to be reserved because there was no time left at the end of the hearing for an extempore judgment. I am very grateful to both counsel for their clear and economical submissions.
2. Pursuant to a sub-contract made in about June 2011, the Defendant ("Graham") instructed the Claimant ("Pioneer") to carry out the cladding and curtain walling sub-contract works at a site in South Shields. The sub-contract incorporated Graham's standard terms and conditions. Clause 21 set out the dispute resolution provisions which provided:

"(i) Should any dispute arise under this Sub-Contract, the same may referred to an Adjudicator (to be agreed between the parties) or in default of agreement, in the manner hereinafter set out...

(ii) The Adjudication should be carried out in accordance with the Housing Grants, Construction and Regeneration Act 1996 and the Model Adjudication Procedure ('MAP') published by the Construction Industry Council subject to the amendments set out in schedule 5 hereto.

(iii) Notwithstanding clause 29 of MAP the Adjudicator's fees are to be borne by the Party which refers the dispute to adjudication…

(v) In the event that the decision of the Adjudicator is the making of a monetary award ("Adjudicator's Award") in favour of the Sub-Contractor, the following provision shall apply:-

(a) Graham shall place on deposit the amount of the Adjudicator's award with Northern Bank Limited in the joint names of the solicitors acting for Graham and solicitors acting for the Sub-Contractor within seven days from the date of receipt by Graham of the Adjudicator's decision."

3. Pursuant to those provisions, Pioneer referred two disputes under the sub-contract to two separate adjudications. The decision in relation to the cladding sub-contract was that Pioneer was entitled to £222,394.20 plus interest. The decision pursuant to the curtain walling element of the sub-contract was that Pioneer had been overpaid by £29,388.67. Thus, there is a net sum due to Pioneer pursuant to the adjudicator's awards of £193,005.53.
4. On the face of it, clause 21(v) would suggest that Pioneer are not entitled to be paid that sum and instead the money is to be paid into the escrow account with Northern Bank. However, Pioneer argue that the provision is contrary to the Housing Grants (Construction and Regeneration) Act 1996 and contrary to the principles behind the entire adjudication process, which is 'to pay now, argue later'; "where the need for the 'right' answer has been subordinated by the need to have an answer quickly" (see Carillion v Devonport Royal Dockyard [2006] BLR 15.
5. I am in no doubt that clause 21(v) is in breach of both the policy behind the 1996 Act and the Act itself. It is not in accordance with the Scheme for Construction Contracts introduced by the Act. Because it would deprive a claiming party of the money they had been awarded by the adjudicator, the clause is designed to discourage a party from exercising its right to take disputes to adjudication. In line with the decisions in Yuanda (UK) Limited v WW Gear Construction Limited [2010] PLR 435 and Sprunt Limited v London Borough of Camden [2012] BLR 83, such a clause is unlawful and cannot be enforced.
6. The conventional view is that if one part of the contract offends against the 1996 Act and/or the Scheme, the adjudication provisions in the contract fail in their totality, and are to be replaced by the Scheme. If that view is adopted, then the provision at clause 21(iii), which would make Pioneer liable for the entirety of the adjudicator's fees, must also fall.
7. Even if that is wrong, and clause 21(iii) can survive, I consider that that clause too is contrary to the 1996 Act and the Scheme. Although it is not as extreme as the provision in Yuanda, which made the referring party liable for the whole of the costs of the adjudication, it is still a provision which could discourage a claiming party from commencing adjudication and is therefore unlawful. For either of those reasons therefore, I do not consider that Graham can rely on that provision either.
8. The practical effect of that is that each party is liable for half of the adjudicator's fees. Because Graham had paid some of those fees on behalf of Pioneer, the parties are agreed that the sum of £4,340.04 must be deducted from the £193,005.53 due to Pioneer, making a net sum due of £188,665.49. Graham cannot deduct any larger sum on the basis that Pioneer were liable for all of the adjudicator's fees.
9. In those circumstances, I turn to the stay of execution. Both counsel referred to my decision in Wimbledon Construction Company 2000 Limited v Derek Vago [2005] BLR 374. In that case I summarised the relevant principles relating to the grant of such a stay as follows:

"a) Adjudication (whether pursuant to the 1996 Act or the consequential amendments to the standard forms of building and engineering contracts) is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.

b) In consequence, adjudicators' decisions are intended to be enforced summarily and the claimant (being the successful party in the adjudication) should not generally be kept out of its money.

c) In an application to stay the execution of summary judgment arising out of an Adjudicator's decision, the Court must exercise its discretion under Order 47 with considerations a) and b) firmly in mind (see AWG).

d) The probable inability of the claimant to repay the judgment sum (awarded by the Adjudicator and enforced by way of summary judgment) at the end of the substantive trial, or arbitration hearing, may constitute special circumstances within the meaning of Order 47 rule 1(1)(a) rendering it appropriate to grant a stay (see Herschell).

e) If the claimant is in insolvent liquidation, or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted (see Bouygues and Rainford House).

f) Even if the evidence of the claimant's present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:

(i) the claimant's financial position is the same or similar to its financial position at the time that the relevant contract was made (see Herschell); or

(ii) The claimant's financial position is due, either wholly, or in significant part, to the defendant's failure to pay those sums which were awarded by the adjudicator (see Absolute Rentals)."

10. On behalf of Pioneer, Mr Webb was anxious to emphasise that the whole purpose of the 1996 Act was to ensure prompt payment and that the court needed to keep that principle firmly in mind when considering applications for a stay of execution. I agree with that but would say that the summary set out in Wimbledon v Vago, particularly the points at a), b) and c), already allows for that important consideration.
11. In this case, the issues that arise are threefold:

(i) Is it probable that Pioneer would be unable to repay the £188,665.49 if that was the outcome of the ongoing arbitration?

(ii) Is Pioneer's financial position the same or similar to the financial position of which Graham was aware at the time that the contract was made?

(iii) Is Pioneer's financial position due either wholly or in significant part to Graham's failure to pay the sums awarded by the Adjudicator?

12. As to the first issue, I am in no doubt that, if this money was paid over to Pioneer, they would not be in a position to repay it if the arbitration subsequently went against them. There is a considerable volume of evidence contained in these files that make that proposition good, but I note in particular:

(a) The original accounts for the year ending November 2012 show losses of £212,950.

(b) Even the amended accounts show net assets of just £1,382. I deal with the fact that there are two different figures in further detail below.

(c) There are five County Court Judgments outstanding against Pioneer which have been entered since the 16^th May 2013, totalling £61,440. Indeed all but £6,601 of that sum relates to County Court Judgments entered in the last five weeks. The biggest single Judgment of all, namely £38,859, has not been specifically addressed by Mr Lloyd, the relevant director of Pioneer, anywhere in his evidence.

(d) Generally in relation to these debts, Mr Lloyd has said in his first statement that Pioneer 'simply does not have the money to settle the judgments at this stage'. In my view, that is a clear and unqualified admission that Pioneer are technically insolvent.

13. Accordingly, for these reasons, I consider that Graham have made out their case that Pioneer are insolvent and/or they would be unable to repay the £188,665.49 if I gave judgment for Pioneer in that sum and did not grant a stay. The next issue is whether Pioneer's bleak financial position is the same as when the sub-contract was made.
14. It is this aspect of the dispute which is unusual. Mr Webb submitted that both the accounts for the year ending November 2011, and the amended accounts for the year ending November 2012, show a very small sum in credit and that, effectively, throughout the relevant trading periods, whatever Pioneer has earned, it has paid out again. Thus, he said, Graham cannot now complain that Pioneer's financial position is unstable because they knew that it was unstable when they contracted with them in June 2011.
15. Ms Laney, on behalf of Graham, disputed this, submitting that on an analysis of the financial information that Pioneer provided to Graham before Graham entered into the sub-contract, Pioneer misled Graham into thinking that they were a much more substantial and successful entity than they actually were, and that the sub-contract was therefore entered into on a false premise. She submitted that, in consequence, Pioneer cannot rely on their bleak financial position then to avoid the stay of execution now, because it was the opposite of what they were saying to Graham at the time. I should pay tribute to Ms Laney for the detailed way in which this aspect of the dispute was presented and say that, for the reasons set out below, I accept those submissions.
16. First, I note that the accounts themselves are un-illuminating. That is because they are not full accounts, but abbreviated balance sheet accounts. Significantly, there is nothing to demonstrate turnover. Thus, although Mr Webb argued that Pioneer were a busy company, carrying out large high-profile sub-contracts, and therefore generating significant turnover, there was nothing (other than the statements of Mr Lloyd, the relevant director) which really made that good. That was one of the reasons why the credibility of Mr Lloyd's evidence was so important to this application.
17. Secondly, there can be no doubt that Graham made detailed inquiries about Pioneer's financial position before they contracted with them. Graham's employer on the South Shields project nominated two cladding/curtain walling sub-contractors: Pioneer and Baris. Graham had never sub-contracted with either of them and, even though they were the employer's preferred sub-contractor, Graham took extensive steps to ensure that Pioneer were financially sound.
18. Thus, on 14 April 2011, Mr Lloyd provided Graham with what was called a Project Portfolio. This suggested, not only that Pioneer were currently working on a number of schemes worth £2.9 million odd, but that they also had another £4 million's worth of projects that they were likely to perform in the near future. I find that this information suggested that Pioneer were financially healthy. Moreover, although the email referred to the fact that a predecessor company had gone into voluntary liquidation because of the non-payment of monies, it was said that this had not affected Pioneer, who had moved forward with the same staff and the same suppliers, with good relations with their clients.
19. The extensive attachments to the email only confirmed the glitzy projects with which Pioneer claimed to be associated. Although those had been principally carried out by the other company, the information did not make that clear.
20. Somewhat unusually, Baris, the other potential sub-contractor, contacted Graham to point out that Pioneer had gone into administration the previous year and warning that their supply chain partners, such as NBK (the main suppliers for the tiling and cladding on the South Shields project) 'have expressed their deepest concerns regarding this project, should Pioneer be involved.' Whilst the general view at Graham was that it was extremely unprofessional for Baris to criticise their competitor in this way, Graham felt that they had no option but to investigate the claims. However, on 10 May 2011 the architects on the project expressed their concern that Baris had acted in this manner, which they thought was both 'incorrect and unprofessional'. The architects said they did not have the same concerns in respect of Pioneer. I find this too was a major factor in Graham's decision to contract with Pioneer.
21. The credit report that Graham obtained was rather more worrying because it described the company as 'not rated: not trading'. Although the company had been incorporated in November 2008 it did not appear that it had traded at all; there were certainly no accounts available in May/June 2010. In those circumstances, Graham had to obtain further information from Pioneer direct.
22. Pioneer filled out a Pre-Qualification Questionnaire ("PQQ") on 19 May 2011. That described its annual turnover for the previous year at £400,000. Since the accounts make no mention of turnover, it is simply unclear where that figure could have come from. Mr Lloyd did not give evidence about it. The PQQ also listed a number of projects on which it was said Pioneer were currently working.
23. There was a meeting on 19 May 2011 between Mr Hall of Graham and Mr Lloyd of Pioneer. Mr Hall kept contemporaneous notes of that discussion. Amongst other things, Mr Hall noted Mr Lloyd as saying that Pioneer had £1.2 million cash in the bank which was finance for the purchase of materials. Mr Lloyd now denies saying that.
24. Plainly that is not a dispute that I can resolve without hearing oral evidence. However, on the basis of the material before me, there is strong support for the proposition that Mr Lloyd did indeed say that Pioneer had £1.2 million cash in the bank. Not only is there a contemporaneous record of him saying just that, and not only is there no other sensible explanation for the note, but Mr Hall's notes generally correspond with much of what Mr Lloyd undoubtedly did say, and are also consistent with the PQQ. For the limited purposes of this stay application, I accept that it is more likely than not that Mr Lloyd did say that, and that it was a misleading and incorrect statement. Pioneer plainly did not have such cash in the bank.
25. There was also an exchange about a bond which, at that stage, Graham required. It appears that initially, Mr Lloyd was operating on the basis that the bond might cost £30,000 to £40,000, but later, there was a suggestion that it would tie up £150,000 of Pioneer's cash for almost a year. Although Mr Lloyd's email of 25 May said that they were not prepared to agree to that, there was no suggestion that they did not have such reserves. On the contrary, the email exchanges in relation to the bond suggested that the sticking point was not the financial effect, but the delays that would be inherent in setting up such an arrangement.
26. In all the circumstances, I believe Graham were right to conclude, as they did at the time, that they had 'robustly vetted' Pioneer. In the absence of any proper accounts or independent financial information, they had done the best that they could. In view of the fact that the architects had expressed their concerns about Baris and had positively endorsed Pioneer, it was unsurprising that, in the end, Graham entered into a nominated sub-contract with Pioneer.
27. 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 (paragraph 11(ii) above) in Graham's favour.
28. The alternative ground put forward by Pioneer for avoiding the stay of execution is the suggestion that Pioneer are only in their current financial position because of Graham's failure to pay. Although Mr Webb sought to persuade me that this was merely a matter of mathematics (on the basis that, if the £188,665.49 awarded by the adjudicator had been paid, the County Court Judgments would in turn also have been paid) I do not think that, in all the circumstances of this case, it is as simple as that. First, the outcome of this issue depends to a large extent on the credibility of Mr Lloyd's witness statements, because there is no independent evidence to support much of what he says. Secondly, there is also the related question of Pioneer's performances on other sub-contracts, because Ms Laney argued that the South Shields project was far from being the only job where Pioneer were in serious trouble.
29. As to Mr Lloyd's credibility, the first problem is the fact that he signed off two very different sets of accounts for the year ending November 2012. I do not regard the explanations given in his statements as sufficient or satisfactory. It is wholly unclear how he came to sign off the first when the figures were, as Mr Webb now accepts, so obviously wrong; neither is there any explanation as to why the second version of the accounts bears the same sign-off date of 31 August. It also seems that the accounts were only changed once Graham had pointed out the problems with the original accounts and relied on the losses of £212,950.
30. Mr Lloyd claimed that the mistakes had come about as a result of problems with figures brought forward. Again, on an analysis of the accounts, that cannot right. What appears to have happened is that there was a complete failure to identify any stock at all in the year ending November 2012 (which may be linked to the fact that Pioneer were having trouble on a number of sub-contracts at that time, a matter that I revisit below) and that, in respect of the other entries, the figures that were put into the accounts were the differences between the 2011 and the 2012 accounts, as opposed to the gross figures for 2012. I accept that the latter was a mistake likely to have been generated by the software, although that does not explain why Mr Lloyd signed them off in the first place.
31. As to Pioneer's performance on other contracts, I regard the position as nothing short of calamitous. In his second statement, Mr Lloyd referred to the fact that Pioneer were continuing to trade and, in particular, identified four projects which he said Pioneer had 'picked up' after November 2012. The evidence now demonstrates that this paragraph was almost entirely untrue. Contrary to Mr Lloyd's statement, Pioneer did not obtain work at Camberwell for Durkans: Mr Hill's statement showed that Pioneer was not awarded any work on the Camberwell project by Durkans. Mr Lloyd also said that Pioneer had picked up work from MAF Developments at Eccelsall Road in Sheffield after November 2012, but Mr Hill's statement revealed that i) Pioneer were engaged before then, in May 2012; and ii) that their contract was terminated by MAF on 14 September because of Pioneer's non-performance. The email from MAF explains that there was constant delay by Pioneer and repeated non-delivery of materials to site. They also said that Pioneer's workmen failed to arrive due to non-payment of wages and could not work when they got to the site because there were no materials. MAF had had to order and pay for materials themselves but in the end they terminated the sub-contract on 14 September 2012.
32. Although Mr Webb said on instructions that Mr Lloyd had genuinely thought that the MAF work had come after November 2012, not before, it seems to me that that completely missed the point. Paragraph 32 of Mr Lloyd's statement was entirely misleading because, amongst other things, it failed to point out that MAF had terminated Pioneer's sub-contract because of problems which had gone on for months. That error is particularly significant here because, on the South Shields sub-contract, Graham had had precisely the same problems with Pioneer of delay and non-delivery of materials, and had, in November 2012, themselves taken over responsibility for ordering materials because of Pioneer's default. I can only assume that the failure on the part of Mr Lloyd to refer to history repeating itself with MAF was a deliberate omission.
33. The final project referred to in paragraph 32 of Mr Lloyd's statement was the Foxhill Medical Centre for Mansell's. He said that was further work that Pioneer obtained after November 2012. Mr Hill's statement showed that Mansell's had told Graham that Pioneer had not been engaged on this project at all. Mr Webb said on instructions that Pioneer disagreed with that. It seems to me extraordinary that even a simple statement by Mr Lloyd that Pioneer had obtained work at a particular site can be the subject of such controversy. Mansell's must know who they contracted with.
34. There is one further project which I should mention. Way back at the time of the Project Portfolio in April 2011 (paragraph 18 above), Mr Lloyd referred to work being carried out by Pioneer for Pelikaan worth £1.7 million. However, the latest statement from Mr Hill also includes an email from Pelikaan which refers to Pioneer's disastrous performance on that project as well. Pelikaan alleged that from November 2011, Pioneer were not meeting their obligations and that, in the end, Pelikaan had to place orders for materials because Pioneer were failing to do so. In November 2012, Pelikaan terminated Pioneer's employment.
35. In my view, all of this evidence demonstrates a clear and unambiguous pattern. Pioneer never had sufficient cash reserves to run their business properly. They were always robbing Peter to pay Paul. For Pelikaan, for MAF, and for Graham, they entered into large sub-contracts and were then unable to pay for materials, with the consequence that the contractors had to buy the materials on their behalf, and in the end, their sub-contracts were terminated.
36. It is plain, both as a matter of chronology and as a matter of commonsense, that Pioneer's failure to perform for Pelikaan and for MAF had nothing whatsoever to do with Graham's failure to pay. For example, the Pelikaan failures in November 2011 were unconnected to any default in payment by Graham because those defaults did not occur, even on Pioneer's case, till late 2012. The same appears to be the case in relation to MAF too. Moreover, the problems with Pioneer's general performance echoed the warning that Baris had originally given about Pioneer's cashflow difficulties as long ago as May 2011 (see paragraph 20 above).
37. Accordingly, I reject the suggestion that Pioneer's financial difficulties were caused or substantially contributed to by Graham. On the contrary, I consider that those financial problems were inherent in Pioneer's business model and that Pioneer's cashflow difficulties stem back to a time before they even sub-contracted with Graham. I therefore decide the third issue at paragraph 11 above in Graham's favour.
38. For those reasons, I consider that this unusual case is one of those rare occasions when, notwithstanding the relatively high hurdles noted in Wimbledon v Vago, the defendant has made out a good case for a stay of execution. I therefore exercise my discretion against Pioneer and, although I give judgment in the sum of £188,665.49 in their favour, I stay the execution of that judgment pending the outcome of the ongoing arbitration.
39. This judgment has, by agreement with the parties, been handed down in open court in their absence. It does not address costs or any other consequential matters.