Adjudication
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KEYWORDS: |
Adjudication, Housing Grants, Construction and Regeneration Act 1996, JCT Minor Works 1998, RSC Order 47, section 726(1) Companies Act 1985, counterclaim, stay of execution, insolvency, financial position, HH Judge Peter Coulson QC. |
The judgment of HH JUdge Coulson on 20 May 2005 in Wimbledon Construction Company 2000 Limited v Derek Vago [2005] EWHC 1086 (TCC) deals mainly with the defence to enforcement proceedings of the uncertain financial position of the party seeking to be paid. Of greatest interest is the summary of the relevant authorities and the statement of the applicable principles. Of side interest is the claim for an agreed sum which was not part of the adjudication and the use of a counterclaim to defend against the agreed sum.
On 16 August 2003 Vago engaged WCC to carry out extension and refurbishment works at his house at 51 Drax Avenue London SW20. The contract sum was £209,941. On 17 January 2005 WCC commenced an adjudication pursuant to the terms of that contract. On 21 February 2005, the Adjudicator published his decision, the net effect of which was to award WCC the sum of £122,923.34 inclusive of VAT.
The sum awarded was not paid and on 26 April 2005, WCC commenced enforcement proceedings. At about the same time Vago commenced arbitration proceedings against WCC in which many of the Adjudicator's findings in favour of WCC were challenged. In the enforcement proceedings Vago had consented to judgment being entered and offered to pay the sum of £122,923.34 into court. The offer was refused. Vago then sought an order that the enforcement be stayed, pending the outcome of the arbitration proceedings, on the grounds of WCC's uncertain financial position.
In addition, WCC sought summary judgment for £6,507.97, being the agreed value of post-contract works carried out at the property. Vago did not dispute the figure but maintained that he had a set-off and counterclaim in respect of alleged defects in the heating and ventilation works which it was stated operated as a complete defence to this element of the claim.
Judge Coulson QC dealt first with the claim for £6,057.97 and then addressed the issue which arose out of Vago's application to stay execution.
WCC made a claim in the adjudication for £9,669.84 plus VAT for works carried out at the property after the contract had reached practical completion. Vago valued those works at £5,538.70 plus VAT, which made a total of £6,507.97. Vago argued that the Adjudicator had no jurisdiction to consider such a claim, a submission which the Adjudicator accepted. WCC sought summary judgment in respect of the sum of £6,507.97 on the basis that it was Vago's own figure for the post contract works.
Vago maintained that summary judgment for £6,507.97 should not be granted due to the existence of his counterclaim against WCC for defects in the heating and ventilation works. The only documents which related to the alleged cross-claim was a fitter's report apparently dated 28 February 2005 and another document entitled "Budget Costs" and apparently dated 2 March 2005.
WCC argued that the cross-claim should be disregarded completely because the dates of the documents were not clear. WCC stated that the fact that the budget costs document referred to a schedule of outstanding works dated 24 January 2005 indicated that the entire cross-claim was a matter which could and should have been raised in adjudication. Judge Coulson did not accept that submission. All the documents were dated or referred to dates which were after the commencement of the adjudication and both the fitter's report and the budget costs document post-dated the Adjudicator's decision.
WCC complained that the nature of the counterclaim was extremely vague. WCC stated that there was no apparent correlation between the fitter's report and the budget costs document. There was also no attempt to identify how and why the items in either document could be said to constitute a breach of contract on the part of WCC. Furthermore, the budget costs document amounted to £4,372.21, a lot less than the amount identified by WCC.
Vago conceded rightly in the view of Judge Coulson, that the counterclaim could not be valued at more than £4,372.21 because that was the amount in the budget costs documents. Vago contended however that the two documents were sufficient to defeat the claim for summary judgment, at least up to that amount.
Judge Coulson considered that the uncertainty within Vago's own evidence as to the value of the proposed cross-claim typified the fact that almost no analysis had been provided for the proposed claim. He accepted WWC's submissions that it was unclear how or why the items in either the fitter's report, or the budget costs document, were breaches of contract on the part of WWC. It was also unclear what WWC should or should not have done under the terms of the contract. The judge was bound to conclude that Vago had no real prospect of successfully defending the claim for an agreed sum by referenced to the proposed set-off and counterclaim. It was simply too equivocal and uncertain. Judge Coulson therefore gave summary judgment for £6,507.97 for post-contract works.
Judge Coulson did not consider that it was appropriate to stay execution of the summary judgment because of the existence of the counterclaim. He stated that the reasons why he concluded that there should be summary judgment inevitably meant that he should also refuse a stay. He considered that there was no counterclaim with a real prospect of success.
Alternatively Vago submitted that there should be a stay of execution because of the financial position of WCC. This led to the critical issue between the parties: the interaction between the adjudication process and RSC Order 47.
In the instant case the contract between the parties incorporated the JCT Minor Works Form 1998 Edition, including amendments one to four. Section D of the contract set out detailed provisions in respect of adjudication, including at D7 particular provisions relating to the effect of any Adjudicator's decision.
"D 7.1 The decision of the Adjudicator shall be binding on the parties until the dispute or difference is finally determine by arbitration or by legal proceedings or by an agreement in writing between the parties made after the decision of the Adjudicator has been given.
D 7.2 The parties shall without prejudice to their other rights under this agreement comply with the decision of the Adjudicator and the employer and the contractor shall ensure that the decision of the Adjudicator is given effect.
D 7.3 If either party does not comply with the decision of the Adjudicator the other party shall be entitled to take legal proceedings to secure such compliance pending any final determination of the referred dispute or difference pursuant to clause D 7.1."
Judge Coulson observed that the Court of Appeal had stated on many occasions that the decision of an Adjudicator was intended to be enforced summarily. The contract provisions made that point clear. Judge Coulson held that the presumption was that the successful party, the likely claimant in any enforcement proceedings, should not be kept out of its money.
In the case where the unsuccessful party, the likely defendant in any enforcement proceedings, is concerned at the claimant's financial position it will seek a stay of execution by relying on RSC Order 47, which remains part of the CPR by operation of Part 50. The relevant part was Rule 1 (a) which provides as follows:
"(1) Where a judgment is given or an order made for the payment by any person of money and the court is satisfied on an application made at the time of the judgment, or order, or at any time thereafter by the judgment debtor or other party liable to execution. -
(a) that there are special circumstances which render it inexpedient to enforce the judgment or order …
… the court may by order stay the execution of the judgment or order … either absolutely or for such period and subject to such conditions as the court thinks fit."
Judge Coulson held that the probable inability on the part of the claimant to repay the judgment sum was a special circumstance within the meaning of RSC Order 47(1)(a). He then considered the six authorities in which this rule has been considered on an application to stay the execution of a summary judgment obtained to enforce an Adjudicator's decision.
In Bouygues UK Limited v Dahl-Jensen UK Limited [2000] BLR 522 the Court of Appeal upheld the decision of Dyson J to grant Dahl-Jensen summary judgment to enforce an Adjudicator's decision, even though it was accepted that that decision contained an error. However, because Dahl-Jensen were in insolvent liquidation the Court of Appeal imposed a stay of execution. At paragraph 35 of his judgment Lord Justice Chadwick said:
"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 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 4.09 of the Insolvency Rules 1986 requires."
In that case, the Court of Appeal did not interfere with the judge's finding that summary judgment should be entered, but a stay of execution was ordered.
In Absolute Rentals v Glencor Enterprises Limited (16 January 2000) His Honour Judge David Wilcox was asked to stay execution because of questions over the claimant's financial viability. He said:
"To do so would frustrate the Scheme [under the 1996 Act]. Whilst the Claimant has admitted an irregularity in making its company returns, it asserts, in an accountant's statement, put in at the hearing, that the proper notification of directors has been made and has now been filed at Companies House. I am not in a position to judge the financial standing of either company. It is not desirable that I should on such limited evidence before me, neither is it desirable to do so on such an application. It is entirely possible that if there is any impecuniosity in the claimants it could derive from the defendant's default. I do not know what the time table for the arbitration is or what the resolution will be by the arbitrator or agreement. The purpose of the Scheme is to provide a speedy mechanism for settling disputes in construction contracts on a provisional interim basis by requiring decisions of Adjudicators to be enforced pending final determination of disputes by arbitration, litigation or agreement whether those decisions are wrong in point of law or fact if within the terms of the reference. It is a robust and summary procedure and there may be casualties, although the determinations are provisional and not final."
Judge Coulson considered that the fullest consideration of the points which any court should take into account when being asked to exercise its discretion to stay execution of a summary judgment (obtained to enforce an adjudicator's decision) was to be found in the judgment of His Honour Judge Humphrey Lloyd QC in Herschell Engineering Limited v Breen Property Limited (28 July 2000).
First, Judge Lloyd had emphasised the importance of the time at which the sum would have to be repaid. At paragraph 16 he said:
"I am invited to draw the inference that the company would not be able to repay the money if the ultimate tribunal found in favour of the defendant. That in turn raises the question: at what stage would that decision be made? It is not a question of whether it would not be able to repay the money at the time when the moment of repayment might arise. The test is therefore comparable to that under section 726 (1) of the Companies Act 1985 on an application for security for costs. It is therefore incumbent on an applicant to establish when that date is."
Second, Judge Lloyd also stressed the importance of looking at whether or not there had been any fundamental change in the claimant's financial position since the contract was made. In paragraphs 18 and 19 he said:
"In addition I cannot draw an inference that a company which was considered by the defendant to be worth the business granted to it within a few years of its formation last year has somehow changed its nature in the course of the last year to become a company which is, as it were, teetering on the verge of insolvency, either now or in the future, or will thus be unable to repay the money. On the evidence before me there has been no apparent change in the company. It still is an unknown entity in financial terms. That was the company with which the defendant contracted; that was the company which the defendant entrusted with the work. In my view that situation has not changed one iota between June 1999 and July 2000 except the company itself has now become entitled to money under the contract and the defendant does not wish to pay that money. That tells us nothing about the ability of the claimant to repay the money or its inability to do so.
In my view on an application for a stay where a party has entered into a contract with a company whose financial status is or may be uncertain and finds itself liable to pay money to that company under an adjudicator's decision, the question may be properly posed: is this not an inevitable consequence of the commercial activities of the applicant that it finds itself in the position it is in? It has, as it were, contracted for the result. That is not normally a ground for avoiding the consequences of a debt created by the contractual mechanism (which is how, in the absence of express terms, adjudication operates: see section 114 of the Act). 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)."
In Rainford House Limited v Cadogan Limited (13.2.01) His Honour Judge Richard Seymour QC, found that the defendant had raised "a strong prima facie case" that the claimant was insolvent. Indeed, the judge went on to find that "that evidence [of insolvency] has not been contradicted or explained." He therefore ordered a stay of execution.
In Total M and E Services v ABB Building Technologies [2002], His Honour Judge David Wilcox refused a stay in respect of all but a small part of the summary judgment sum. He said at paragraph 54:
"Since January 2000 there has been no real change in the claimant's financial status. The defendant is adjudged to have had the substantial benefit of the claimant's labour measured in financial terms. The defendants are and were, it is said, a substantial multi-million pound company who clearly have the ability to pay. The evidence before me as to the risk of future non-payment is not based on compelling and uncontradicted evidence. I am satisfied that there are no special circumstances which render it inexpedient to enforce the judgment."
In AWG Construction Services v Rockingham Motor Speedway [2004] EWHC 888 His Honour Judge John Toulmin CMG Q.C. reviewed some of the authorities and concluded at paragraph 186:
"In general a court must balance (a) the intention of the legislation that adjudication should be enforced summarily; (b) the right of the successful party not to be prejudiced by being kept out of its money and (c) in cases where there is a serious risk that the party will not be able to recover the money, that the defendant is not being seriously prejudiced in a way not contemplated by the Act which is silent as to the position where a defendant runs more than a nominal risk of being unable to recover money after trial or arbitration award.
A further specific consideration which is relevant in considering whether the justice of the case demands a stay is the diligence with which the applicant has pursued the substantive remedy, whether by litigation or arbitration."
Vago submitted that the test under section 726(1) of the Companies Act 1985 relating to security for costs was also the test to be applied under Order 47. Section 726 (1) required a defendant seeking security to show "by credible testimony that there is reason to believe that the company will be unable to pay the defendant's costs if successful in its defence." Judge Coulson agreed with WCC's submission that the reference to the section 726 test in both Herschell and Rainford House was to the issue of timing, namely when the inability to repay should be measured.
Judge Coulson held that the well-known guidelines as to the exercise of the court's discretion under section 726(1) (set out, for instance, by Lord Denning in Sir Lindsay Parkinson & Co v Triplan [1973] QB 609) were of general application to the exercise of the judges discretion under Order 47. One of the matters which Lord Denning required the court to consider was whether the claimant's want to means had been brought about by any conduct on the part of the defendant. That was a matter expressly referred to by Judge Wilcox in Absolute Rentals.
Judge Coulson observed that the authorities showed that each case turned on its own facts. Whilst agreeing with that, Judge Coulson considered that there were a number of principles which should always govern the exercise of the court's discretion when considering a stay of execution in adjudication enforcement proceedings. The principles were set out as follows:
With those principles in mind Judge Coulson then turned to the evidence in the instant case concerning the Claimant's financial position.
The contract was made in August 2003. The Claimant's accounts for the financial year ending 31 May 2003 showed a modest profit of £8,397 on a turnover of £320,000 odd. The Claimant's accounts for the financial year ending the 31 May 2004 showed an increased turnover to £592,548 but a loss on ordinary activities, before taxation, of £68,868 and a retained loss, carried forward, of £71,632. These figures were calculated taking into account a credit figure of £65,000, which other evidence had explained was the stated value of this claim when the accounts were prepared. The Adjudicator of course awarded the Claimant nearly twice that figure. In addition there was a figure in the accounts of £135,050, said to be a short term loan from a director. The judge agreed that there was a surprising lack of evidence surrounding the detail of this loan. It was not clear from the accounts who made the loan, or on what terms it was made, although other evidence indicated that it was made by Mr Doig, the principal director of the Claimant company.
In addition the lack of evidence relating to the director's loan, Vago had a number of other concerns about WCC's financial position. Vago had obtained a financial status report from Experian, dated 24 February 2005, and based on the accounts up to 31 May 2004, which described WCC as "a maximum risk company" and gave a warning that all credit transactions should be supported by a director's guarantee. Vago also relied upon a letter dated 4 May 2005 from an independent firm of accountants, Dover Childs Tyler, who, again on the basis of the accounts up to 31 May 2004 concluded that:
"The balance sheet of the company shows a negative balance of £71,630 which indicates that the company's liabilities exceed its assets by that sum and therefore the company is technically insolvent. In view of this I would be extremely concerned about the company's ability to repay the sum of £122,000 and indeed the whole viability of the company based on the information provided."
On 9th May Vago's solicitors wrote to the WCC's solicitors referring the accounts up to 31 May 2004 and their concerns over Mr Doig's loan which they said could be withdrawn at any time. The letter went on:
"If he were to provide our client with an unequivocal written undertaking that he will not call the loan in whole or in party until after the arbitrator's award has been satisfied then this would go some way to dealing with the concerns our client has."
There did not appear to have been a reply to that letter, other than a notification on the 10th May that the Claimant's solicitors were taking the Claimant's instructions on the points raised.
In reply to the evidence relied on behalf of Vago, WCC served a statement from Eileen Barry with a number of exhibits. The most significant new information provided by Miss Barry was the set of accounts showing the position up to 11 May 2005. The accounts demonstrated an operating profit of £3,791, compared to the operating loss the previous year. This also served to reduce the retained loss to £67,958. In addition, there was an allowance for the adjudication claim in the sum of £104,000 described as "the director's best estimate of the amount" WCC would receive for the work carried out on behalf of Vago. The accounts also showed additional loans from directors (£72,501) and related parties (£51,000).
In addition, WCC's accountant, David Stafford, provided a letter dated 11 May which endeavoured to answer many of the concerns raised by Vago's solicitors. As to the instant particular contract Mr Stafford said:
"At the 31st May 2004 Wimbledon Construction has spent £130,000 on extras at Drax Avenue going to adjudication. Stock and work in progress are valued at the lower of cost and net realisable value and any value deducted from cost of sales. Had there been no dispute over extras at Drax Avenue turnover would have been £150,000 more (including £20,000 mark-up) and profit £85,000 more."
A little later he dealt with the accounts generally and said:
"Whilst the 2004 accounts show a negative balance of £71,360 this is solely due to the non payment of work carried out at Drax Avenue that is in dispute. This work had to be funded by the director and is the sole reason for the £135,050 advance during the year. If the additional profit has been made, as in note 2(a) above, the company would have had net assets of circa £15,000."
He then went on in the letter to deal with the new accounts and the profit of £3,674. He concluded by saying:
"We do not consider that this company is insolvent."
There was evidence adduced by both sides relating to the financial position of two other companies run by Mr Doig, West Wimbledon Developments Limited, and West Wimbledon Developments 2003 Limited. There was no credible evidence to support the suggestion that, as inferred by Mr Vago, Mr Doig moved, or may have moved, sums from one to another in order to avoid his liabilities. Similarly, the fact that WCC was apparently relying on the instant proceedings on the payment to West Wimbledon Developments Limited of £624,196.22 in respect of the sale of a property in Cambridge Road in London was also considered meaningless by Judge Coulson given that there was no evidence of West Wimbledon Development Limited's overall financial position and what difference the payment would make to it. Whilst the statement of Miss Barry for WCC suggested £82,000 of this sum would be paid to the Claimant in respect of "invoiced building work done on behalf of the development company on this property" no other documents were provided to support this suggestion.
Judge Coulson held that the position of the two other companies was irrelevant to the question he was asked to decide in respect of the Claimant's financial position.
The final piece of evidence said to be relevant to WCC's position was that during the currency of the contract, Vago made a payment of £40,000 which had not been certified to assist the Claimant's cash flow difficulties. Miss Barry's statement rejected the suggestion that these monies were payments in advance provided that specific parts of the property were completed by certain dates.
Judge Coulson found it impossible to resolve the factual dispute on the evidence provided to him. Even if it was right that the money was paid early to ease cash flow difficulties on the part of WCC, Judge Coulson attached very little weight to such evidence when considering whether or not WCC would probably be unable to repay the judgment sum within nine to twelve months.
Judge Coulson held that Vago had not demonstrated a probable inability on the part of WCC to repay the judgment sum, if that was the outcome of the arbitration process, in nine to twelve months' time. He found that after a poor year up to the 31 May 2004 WCC had made a modest profit up to 11 May 2005 just as it did in the year up to 31 May 2003. It was not therefore even technically insolvent now, and, given that WCC was now making a modest profit once again, Judge Coulson could not conclude that it would probably be unable, at the appropriate time, to repay the judgment sum if it had to.
Judge Coulson considered that the letter of 11 May 2005 from WCC's accountant, David Stafford, was the clearest possible statement that WCC was not insolvent and that accordingly Vago could not show that it would probably be unable to repay the judgment sum.
Judge Coulson did not accept that the nature and extent of the loans from the directors and others was a legitimate source of concern for Vago. However, the mere fact that the directors (and others) were making loans to this company did not demonstrate that it would probably be unable to repay the judgment sum in nine to twelve months' time. On the contrary, Judge Coulson considered that such loans demonstrated a high degree of practical faith in the future of the company on the part of the directors, and that faith might be regarded as the best possible evidence that any sums, if they had to be, would be repaid.
Judge Coulson considered that WWC's financial position, was very similar to its financial position at the time when the contract was made. In August 2003 WCC was a small company making a modest turnover of £320,000. It remained a small company and on the basis of the accounts up to 11 May 2005 it was again making a modest profit on a modest turnover of about half a million pounds. It has always been, and remained, dependent to some extent on loans. There had therefore been no significant change in WCC, and no change in the way in which it was financed, between August 2003 and the date of judgment. Accordingly, borrowing the words of His Honour Judge Lloyd in Herschell, Vago had contracted for this result. The financial vulnerability of WCC was, in general terms, no greater and no less than it was in 2003.
Judge Coulson held that it would be wrong in principle for him to exercise my discretion in favour of Vago by granting the stay.
Judge Coulson observed that a stay would usually be refused, on the exercise of the courts discretion, if the Claimant's financial position was the direct result of the Defendant's failure to pay the sums which were then found to be due by the adjudicator. This was not the situation in the instant case, because the new accounts up the 22 May 2005 showed a modest profit when due allowance was made for the sums awarded by the adjudicator. Judge Coulson found that that was a similar position to the one which existed at the time that the contract between the parties was made.
He found however that during the currency of this contract, as shown by the accounts for the year ending 31 May 2004, upon which Vago relied, WWC suffered particular financial difficulties. WCC's accountant, Mr Stafford, in his letter attributed those specific difficulties directly to the Vago's refusal to pay the sums later found by the adjudicator to be due. Judge Coulson found that on all the evidence those particular financial difficulties were due, at the least in significant part, to the failure on the part of Vago to pay the sums which the adjudicator found were due. Judge Coulson found that that failure necessitated the recent director's loans, certainly at a much higher level than would otherwise have been the case.
WCC's turnover was about half a million pounds in both the year up to 31 May 2004 and the year up to 11 May 2005. The instant contract was originally worth £209,941 and the adjudicator found its gross value, including extras, to be in excess of £300,000. In other words, the contract accounted for over half the Claimant's turnover in any one year or more than a quarter over two years. It was therefore unsurprising that the Vago's failure to pay the sums eventually awarded by the adjudicator had a deleterious short term effect on the WWC's financial position.
Judge Coulson concluded that the particular financial problems relied upon by Vago in the year up to 31 May 2004 were largely Vago's own fault. This was a second additional reason why Judge Coulson exercised his discretion against granting the stay in any event.
Judge Coulson granted summary judgment against Vago in the total sum of £129,431.31 inclusive of VAT. Interest was payable on that sum and Judge Coulson anticipated that the parties would be able to agree the appropriate figure. He declined to stay execution of the judgment.