UK: How Will The Technology And Construction Court Deal With An Enforcement Application By An Insolvent Company?

Last Updated: 12 July 2011
Article by Rebecca Evans

In the case of Straw Realisations (No 1) Ltd (formerly known as Haymills (contractors) Ltd (in administration)) -v- Shaftsbury House (Developments) Ltd, the administrators of Straw Realisations issued enforcement proceedings in relation to two adjudicator's decisions. The Technology and Construction Court (TCC) was asked to consider the relationship between the Housing Grants Construction and Regeneration Act 1996 (Construction Act) which requires compliance with adjudicator's decisions and the Insolvency Rules 1986 which provides for a balancing of accounts between two parties in the event of an administration.

The TCC further considered whether or not to grant a stay of enforcement as Straw Realisations is insolvent.

Background

Straw Realisations was a contractor and Shaftsbury House (Developments) is a property developer. They entered into a JCT Standard Form of Building Contract with Quantities 2005 (amended) for the construction of a mixed use development at a property in Islington, London. The contract provided stated that if a party became insolvent then any provision of the contract requiring payment would cease to apply. It also contained a provision that an adjudicator's decision would be final and binding, unless a party gave notice to the other within three months of the decision of their intention to refer it for final determination.

The first adjudication

The dispute concerned classification of waste. The contractor alleged it had incurred additional costs of £740,000. The first adjudicator awarded £182,000 plus interest. The developer paid the sum and also served notice of dissatisfaction in accordance with the contract. Proceedings were issued. A defence and counterclaim were filed by the contractor and, amongst other things; they claimed an extension of time, loss and expense of £801,000 and repayment of liquidated damages of £550,000.

The second adjudication

The contractor referred a dispute concerning repayment of liquidated damages of £50,000 to adjudication. The contractor was successful and on 31 July 2009 it was awarded £31,000. The developer failed to pay.

The third adjudication

On 27 July 2009 the contractor referred a dispute concerning the balance of liquidated damages of £500,000 to adjudication. On 13 August 2009 the contractor went into administration and became insolvent.

The developer alleged that the third adjudicator did not have jurisdiction to continue and that any award, if made, would be enforceable. The third adjudicator concluded he did have jurisdiction as the administration order was subsequent to the referral. He found in favour of the contractor and awarded £475,000. Again, the developer failed to pay. The developer gave notice of dissatisfaction.

The proceedings

The developer resisted the enforcement proceedings on the following basis:

1. the third adjudicator did not have jurisdiction once the administration order was made;

2. if he did, the decision was in breach of natural justice due to the way he had dealt with programming issues;

3. in any event, the administration order suspended any right to payment under the contract and substituted it with a claim to the net balance. The insolvency prevailed over the obligation to comply with an adjudicator's decision.

4. Neither the second or third decisions had become final and binding as the developer had given notice of dissatisfaction (in relation to the second adjudicator it was alleged that the issue of proceedings in the first adjudication fulfilled the contracts requirements for a notice of dissatisfaction).

Decision

Mr Justice Edwards-Stuart considered these issues and concluded that the second adjudicator's decision was final and binding under the contract as there was no notice of dissatisfaction. The fact that there were proceedings issued concerning matters covered by the second adjudication prior to the date of the referral did not affect the contractual requirement to give a notice.

However, the third adjudicator's decision was not final and binding. Whilst there was no merit in the jurisdiction point, as the administration and any claim to a net balance under Insolvency Rules arose after the date of the referral, the developer had served notice of dissatisfaction in accordance with the contract.

In reaching this decision the TCC further held that the contractual provisions not requiring further payment on insolvency did not prevail over the statutory obligation to comply with an adjudicator's decision. The TCC further held that the rules of insolvency set off had not yet been triggered as the administrator had not yet given a notice of distribution. Any claim to a net balance had not yet arisen. Mr Justice Edwards-Stuart gave some guidance as to what the position would be had the notice of distribution been served.

Given the financial position of the contractor, the TCC granted a stay of enforcement proceedings in relation to the second adjudicator's decision. Whilst this only applied to the second adjudicator, it was noted that it would also apply to the third adjudicator's decision if it had been final and binding.

Mr Justice Edwards-Stuart provided a useful set of guidance:

1. A contract clause cannot prevail over the statutory obligation to comply with an adjudicator's decision.

2. If a party is in administration and notice of distribution has been given, the adjudicator's will not be enforced.

3. If a party is in administration but the notice of distribution has not been given then:

a. where the adjudicator's decision is not final and binding it will not be enforced by summary judgment; and

b. where it is final and binding it may be enforced by summary judgment although this may be subject to the imposition of a stay.

4. If a party is insolvent, or its financial circumstances are equivalent, such that a paying party would be unlikely to recover the sums paid pursuant to an adjudicator's decision, the court may grant summary judgment but stay the enforcement of that judgment.

Comment

It is not surprising that the TCC has stated that the statutory obligations to comply with adjudicators decisions prevail over contractual terms. It is, however, surprising that the TCC found that a clause requiring a notice of dissatisfaction must be strictly complied with and this amendment to the Scheme for Construction Contracts was upheld. Parties who have such clauses in their contracts must be careful to ensure that the time periods and notice requirements for giving a notice of dissatisfaction are strictly complied with.

The case also highlights the difficulties which administrators are facing in the current climate. For those who are familiar with this area of law, this element of the decision was no doubt expected. The TCC will be reluctant to grant a summary judgment and will refuse a stay on execution where the prospect of the paying party recovering the sums paid (if and when the underlying dispute is determined in litigation or arbitration) would be slim at best.

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