Straw Realisations (No 1) Ltd V Shaftsbury House (Developments) Ltd

STRAW REALISATIONS (NO 1) LTD V SHAFTSBURY HOUSE (DEVELOPMENTS) LTD

Technology and Construction Court

Edwards-Stuart J

20 October 2010

THE FULL TEXT OF THE JUDGMENT OF EDWARDS-STUART J

Introduction

1. This is a judgment on an application to enforce, by way of summary judgment, two adjudication decisions made in favour of the Claimant. They are:

(1) The Decision of Mr Wilkey dated 31 July 2009, in the sum of £31,964.30; and

(2) The Decision of Mr Smalley dated 13 October 2009, in the sum of £491,902.86.

2. The disputes that were referred to adjudication arise out of a building contract between the Claimant and the Defendant by which the Defendant engaged the Claimant to construct a new mixed residential and retail development in Islington, London. The contract price was about £8,500,000. Practical Completion was achieved on 9 April 2009.

3. However, on 13 August 2009 an Administration Order was made by the court putting the Claimant into administration. Before this happened Mr Wilkey had made his decision in the first adjudication which required payment to the Claimant of the sum found due by 10 August 2009, and Mr Smalley had been appointed adjudicator in the second adjudication on a further referral by the Claimant. Thus when the Claimant went into administration the adjudication before Mr Smalley was still on foot.

4. Clause 8 of the contract provided for the insolvency of the contractor. Put briefly, it provided that if the contractor became insolvent (which included being put into administration), any provisions of the contract which required any further payment or any release of retention would cease to apply. The central issue raised by the application is to resolve what was described by Mr Marc Rowlands, who appeared for the Claimant, as the "tension between (on the one hand) an extant adjudication decision (Mr Wilkey's) and an ongoing adjudication (Mr Smalley's); and (on the other) the operation of a contractual provision that no further payments are due under the Contract". Related to, and possibly determinative of, this question is whether or not either decision became final and binding because the Defendant did not give an effective notice under clause 9 of the contract within 3 months of the decision, in the absence of which the contract provides that an adjudicator's decision is final and binding.

5. Matters are further complicated by the fact that the Administrators purported to assign the contract to another company. It is now accepted that this assignment was unlawful in that it was in breach of a term of the contract that prohibited assignment of the contract by the contractor, and so this application is made by the Administrators of the Claimant. At the outset of the hearing I asked for and was given an undertaking through Mr Rowlands that the Administrators would accept liability for any adverse order of costs in the event that the application was unsuccessful.

6. The principal argument for the Defendant, who was represented by Mr Peter Fraser QC and Miss Serena Cheng, was that the effect of the administration was to suspend automatically any entitlement to further payment under the contract and to substitute a right to payment only of any net balance due to the contractor (or to the employer) after all claims and cross claims had been taken into account. In effect, the Defendant's case is that the general provisions applicable to situations of liquidation or bankruptcy prevail over the statutory policy in relation to the enforcement of adjudicator's decisions.

7. The application also raises issues as to whether Mr Smalley had jurisdiction to continue the referral before him in the light of the Administration Order and, if he did, whether his decision was reached in breach of the rules of natural justice so that it should not be enforced. Even if the Defendant is unsuccessful on all these points, Mr Fraser submits that if the Claimant is entitled to summary judgment, the court should order a stay of execution.

8. With this brief introduction I now turn to the relevant provisions of the contract.

The contract

9. The Claimant, who was formerly known as Haymills (Contractors) Limited, was a building contractor. The Defendant is a property developer.

10. On about 6 February 2007 the Defendant entered into a construction contract with the Claimant under which the Claimant was to carry out works to construct "a new mixed residential and retail development comprising seven levels from basement to fifth floor at 29 Highbury Corner and at 37-49 Holloway Road, Islington, London". The contract was based on the JCT Standard Form of Building Contract with Quantities 2005, but incorporated various bespoke amendments. The Contract Sum was £8,568,242 and the contract provided for sectional completion in two sections. The Date for Possession of Section 1 was 26 February 2007 and Date for Completion was 25 May 2008. For Section 2, the Date for Possession was the same, but the Date for Completion was 15 August 2008. There was provision for liquidated damages for delay at the rate of £15,000 per week in relation to Section 1, and £20,500 per week in respect of Section 2.

11. The contract provided for adjudication, to which the Scheme for Construction Contracts was to apply, as amended by the contract. Paragraph 23 of the Scheme, as amended, provided that:

"(1) in his decision, the adjudicator may, if he thinks fit, order any of the parties to comply peremptorily with his decision or any part of it.

(2)(a) the decision of the adjudicator shall be final as well as binding unless within three months of the giving of the adjudicator's decision any party to the dispute serves on the other party or parties notice in writing of its intention to refer the dispute or difference for final determination by legal proceedings.

(2)(b) unless the parties to the dispute otherwise agree in writing, any legal proceedings of which written notice has been given in accordance with paragraph 23(2)(a) may not proceed until after Practical Completion or alleged Practical Completion of the Works or determination or alleged determination of the Contractor's employment under this Contract or abandonment of the Works under the Contract in each case."

12. Clauses 8.5 and 8.7 of the contract provided for the Insolvency of Contractor. For the purposes of the contract a party was deemed to be insolvent if, amongst other things, "he has appointed to him an administrator or administrative receiver" (clause 8.1.4). Clause 8.5 was in the following terms:

".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 inform the Employer in writing 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 such notice of termination:

.1 the provisions of clauses 8.7.4, 8.7.5 and 8.8 shall apply as if such notice had been given and the other provisions of this Contract which require any further payment or any release of Retention shall cease to apply;

.2 the Contractor's obligations under clauses 2.1 and 2.2 to carry out and complete the Works and the design of the Contractor's Designed Portion 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 these measures."

13. Clause 8.7, which was headed "Consequences of termination under clauses 8.4 to 8.6" provided, so far as is material, as follows:

"If the Contractor's employment is terminated under clause 8.4, 8.5 or 8.6:

.1 the Employer may employ and pay other persons to carry out and complete the Works . . .

. . .

.4 within a reasonable time after the completion of the Works and the making good of defects (or of Instructions otherwise, as referred to in clause 2.38), an account of the following shall be set out in a certificate issued by the Architect/Contract Administrator or a statement prepared by the Employer:

.1 the amount of expenses properly incurred by the Employer, including those incurred pursuant to clause 8.7.1 and, where applicable, clause 8.5.3.3, and of any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise;

.2 the amount of payments made to the Contractor; and

.3 the total amount which would have been payable for the Works in accordance with this Contract;

.5 If the sum of the amounts stated under clauses 8.7.4.1 and 8.7.4.2 exceeds the amount stated under clause 8.7.4.3, the difference shall be a debt payable by the Contractor to the Employer or, if that sum is less, by the Employer to the Contractor."

The facts

14. The Claimant commenced the Works on about 26 February 2007. By September 2008 a dispute had arisen between the parties concerning the classification of material to be disposed of by the Claimant off site. It was contended by the Claimant that certain materials had been re-classified from "inactive" to "active", with the result that the cost of disposing this material were substantially increased. The Claimant asserted that it was entitled to an additional payment in respect of this variation in the sum of about £470,000, of which only about £250,000 was paid by the Defendant.

15. The Claimant therefore served a Notice of Adjudication on 4 September 2008 and a Mr Judkins was appointed adjudicator by the RIBA. On 17 October 2008 Mr Judkins issued his Decision in which he held that the Claimant was entitled to be paid a sum in excess of £182,000 plus interest and that the Defendant should pay his fees. Those sums were thereafter paid by the Defendant. On 10 November 2008 the Defendant served a notice pursuant to paragraph 23(2)(a) of the Scheme giving notice of its intention to refer the dispute or difference is the subject of the Decision for final determination by legal proceedings. On 15 January 2009 the Defendant issued proceedings to challenge the decision (Claim No HT-09-18) in accordance with its earlier notice.

16. On 9 July 2009, following the issue of the certificate of Practical Completion for the whole of the Works on 9 April 2009, the Claimant served a Defence and Counterclaim in that action. By the Counterclaim the Claimant claimed various declarations and payments, including declarations that it was entitled to an extension of time in relation to Section 2 of the Works and to loss and expense in the sum of about £801,000, and a claim for repayment of the Liquidated Damages deducted by the Defendant in the sum of £551,696. In short, by this Counterclaim the Claimant was claiming all the relief under the contract to which it asserted that it was entitled.

17. Meanwhile, on 3 July 2009, the Claimant referred a further dispute to adjudication, and this was the adjudication in which Mr Wilkey was appointed adjudicator. The scope of this dispute was limited to a claim for the wrongful deduction of liquidated damages in a sum of about £50,000, but the Notice of Adjudication expressly referred to the fact that the Claimant asserted an entitlement to an extension of time for the full period up to the date of completion and that this was the subject of a different dispute.

18. That dispute was the subject of a further Notice of Adjudication dated 27 July 2009, and that was the dispute that was referred to Mr Smalley. In this referral the Claimant sought to recover the balance of the liquidated damages deducted by the Defendant in the sum of about £500,000.

19. As the figures set out in the opening paragraph of this judgment demonstrate, the Claimant was substantially successful in the first adjudication and almost wholly successful in the second adjudication.

20. Mr Wilkey issued his decision on 31 July 2009, by which he ordered the Defendant to pay the Claimant the sum of £31,964 within 7 days of the publication of the Decision and in any event no later than close of business on 10 August 2009. In addition, he ordered the Defendant to pay £6,923 to him in respect of his fees and expenses within the same time.

21. The Defendant did not pay either of these sums and, on 13 August 2009, by an order of the court, the Claimant was put into Administration.

22. During August 2009 there was an exchange of correspondence between Mr Smalley and the parties about the effect of the making of the Administration Order on the adjudication during which Mr Smalley raised the issue of the appropriateness of continuing the adjudication. On 20 August 2009 Kingfisher Associates, a firm of construction dispute and contract advisers acting on behalf of the Defendant, wrote to Mr Smalley stating that any decision which he might make in favour of the Claimant would not be enforceable and that the further pursuit of the adjudication was a waste of time. Mr Smalley replied the following day, 21 August 2009, expressing the initial view that the arguments presented on behalf of the Defendant did not affect his jurisdiction in the adjudication. On the same day PricewaterhouseCoopers, one of whose partners, Mr Oldfield, had been appointed as Administrator, wrote to Vinci Construction UK Limited ("Vinci"), to whom the contract had been purportedly assigned by the Claimant, seeking confirmation that, amongst other things, Vinci would be responsible for the payment of all costs, expenses and disbursements incurred by the Administrator in respect of the adjudication. This letter was countersigned by Vinci and sent thereafter, I assume, to the adjudicator and to the parties. At around the same time Eversheds were instructed on behalf of the Claimant, and on 2 September 2009 they wrote to PricewaterhouseCoopers giving their view that the adjudicator had jurisdiction to continue with the adjudication and that should he decide to stand down in spite of the fact that he had jurisdiction, then it would be likely that he would be considered to have failed to deliver a decision - in which case, they said, he would not be entitled to his fees. In the meantime, by a letter dated 25 August 2009, Kingfisher Associates reiterated their position that the adjudicator had no jurisdiction and, whilst agreeing to attend a meeting before the adjudicator on 8 September, reserved the Defendant's position in relation to the adjudicator's jurisdiction and said that the Defendant's continued participation in the adjudication would be on that basis and that it would not necessarily be bound by any decision made.

23. On 3 September 2009 Mr Smalley, having received a copy of the letter from Eversheds, wrote to the parties and informed them that he had decided that he had jurisdiction to continue with the adjudication and that accordingly he proposed to do so without further delay. In that letter he said that the question of whether or not the Claimant would be able to enforce any decision would be a matter for the court.

24. In the event, the adjudication went ahead and, on 13 October 2009, Mr Smalley issued a very detailed and comprehensive Decision, running to some 60 pages, plus appendices, in which he directed the Defendant to pay back to the Claimant all the sums withheld by way of liquidated damages apart from a sum of about £25,000. He directed that the Defendant should be liable for 75% of his fees and the Claimant for 25%, but since the Claimant had already paid his fees in full he directed the Defendant to reimburse the Claimant for its 75% share of the fees. These sums were ordered to be paid by 19 October 2009, but neither sum has been paid. Whilst at first sight it may seem surprising that the Claimant, having been almost wholly successful in the adjudication, should be ordered to pay some of the adjudicator's fees, the reason why Mr Smalley made that order was because he found the presentation of the Claimant's case to have been "convoluted" and that a large number of events had been relied on as causing delays that ultimately had no effect on the critical path to completion.

25. On 5 November 2009 PricewaterhouseCoopers wrote to the Defendant demanding payment of the sums awarded by Mr Smalley. On 24 November 2009 the Defendant replied as follows:

"We acknowledge receipt of your Demand letter dated 5 November 2009 which was only received at this office on Saturday 21st November 2009.

Mr Wynne-Jones is currently away from office but will return at the end of this week.

However, in his absence we will send you a full and proper reasoned paper rejecting your claim.

It may not come as a complete surprise to you when I confirm that our leading Counsel has advised that your demands are unenforceable."

26. This letter is relied on by the Defendant as complying with the requirements of paragraph 23(2)(a) of the Scheme, as amended, and thus preventing the decision of Mr Smalley becoming final and binding on the Defendant.

The decision of Mr Smalley

27. Mr Fraser submitted that the decision of Mr Smalley was unenforceable for two reasons. First, the Administration Order deprived Mr Smalley of jurisdiction over the dispute referred to him since the only dispute between the parties following the administration became one over the "net balance" due after the exercise required under clause 8.7 of the contract. Second, Mr Smalley's decision was reached as a result of clear breaches of natural justice.

28. In my view, there is nothing in the jurisdiction point. Mr Smalley was appointed before the Administration Order was made and so the dispute referred to him did not include, and could not have included, any dispute that arose as a result of the making of the Administration Order. In Westwood Structural Services Limited v Blyth Wood Park [2000] EWHC 3138 (TCC), Coulson J had to consider a clause which provided that on the determination of the employment of the contract the employer was not bound to make any further payment to the contractor that may be due under the contract until after completion of the works. There were two adjudications in that case, the first of which was started before the employer determined the contract. In relation to that adjudication the judge remarked, at paragraph 7, that the "adjudicator properly decided that since the determination had occurred after the commencement of the adjudication, he did not have the jurisdiction to address it". In my judgment, the same applies here. Mr Smalley had no jurisdiction to consider the consequences of the Administration Order because it occurred after the commencement of the adjudication.