ANRIK LTD v AS LEISURE PROPERTIES LTD

Technology and Construction Court

Edwards-Stuart J

8 January 2010

THE FULL TEXT OF THE JUDGMENT OF EDWARDS-STUART J

1. There are three applications before the court. The first is Anrik Limited's application for summary judgment under Part 24 against the defendant in that action, AS Leisure Properties ("AS Leisure"), for £516,793 and interest.

2. The next application is AS Leisure's application for a stay of the enforcement of that judgment until judgment on the preliminary issue as to whether the claimant and the defendant entered into two contracts by two letters dated 17th November 2006 in respect of Uxbridge Road and Providence Place contracts.

3. The third application is in a separate action brought by AS Leisure in which they seek orders that there be a trial of the preliminary issue of the following, whether the two letters dated 17th November 2006 relating to the claimant's projects at Uxbridge Road and Providence Place give rise to contracts between the claimant and the defendant and for certain other relief in relation to costs, and that Anrik's application for summary judgment be heard at the same time as the application for the trial of the preliminary issue. Those matters have all been ordered to be heard today by an order made by Ramsey J on 16th December 2009.

4. Turning to the facts, Anrik is a building contractor. AS Leisure is a developer. The actions concern two projects which have already been mentioned, one known as Uxbridge Road and the other known as Providence Place. It is acknowledged and agreed between the parties that Anrik had been invited to tender and had indeed tendered for both these projects in 2006, following which there was a certain amount of negotiation and discussion which eventually culminated in a telephone conversation or conversations on 17th November 2006 followed by two letters of that date.

5. The letters set out the terms of what had been discussed and included, in particular, a project price for each of the two contracts. Taking as an example the letter in relation to Uxbridge Road, it began:

"Further to our recent telephone conversation I am writing to confirm that AS Leisure Properties Limited would like you to undertake this project for us at a fixed cost of £1.4 million. Because the project is new build, please note that all invoices should be made out to AS Leisure. The project is being carried out on a fixed costs basis to construct the building as shown on the architect's plans. We understand that you have priced this project on the basis of using a timber frame construction and as such you will need to provide a priced bill of quantities to reflect this work so that valuations can be carried out accordingly. The following provisos will also apply..."

and a number of matters were set out dealing with items such as provisional sums, prime cost sums and so forth.

6. Under the heading "Programme" the letter said:

"Works will commence in the early part of 2007 (exact start date to be agreed closer to that date once discussions with Coral have been concluded) and will take 52 weeks to complete."

7. I should interpose that Coral was a tenant at Uxbridge Road and certain preliminary works had to take place with the agreement of Coral before the main works could begin. There was then a reference to carrying out certain pre-contract steps in relation to health and safety and access management. In relation to specific pre-contract works, the letter provided that:

"In addition, there is a considerable amount of work to be carried out in the existing grounding floor tenants' premises" (that being Coral). "At this stage, we anticipate that most of this work will be carried out by Anrik Limited. There may be items in the bill of quantities, however, which are carried out by the tenants' own contractor. Under such circumstances all costs associated with such will be deducted from the bill of quantities accordingly."

8. There was then a reference to "subcontract design" and that pointed out that Anrik would need to liaise with AS Leisure's architects and acoustic consultants to ensure that the proposed design was capable of meeting all acoustic, thermal and fire-resistant requirements of the Building Regulations.

9. Then finally the letter concluded:

"This letter is to be read as an addendum to the IFC 98 contract document and subsequent amendments. That contract will be signed by AS Leisure Properties Limited and Richard Fitzgerald and Anrik Limited jointly and severally. Please countersign this letter below as confirmation of your agreement to the above."

10. That letter was duly countersigned by Richard Fitzgerald on behalf of Anrik. It is to be noted that it was also signed jointly and severally, this perhaps being a recognition that Anrik was a small company and was effectively controlled by Mr Fitzgerald.

11. Turning back to the story, in fact what happened was that apart from the preparatory works, neither of the two projects actually went ahead and Anrik was never given possession of either of the sites. Sometime later in March 2009 Anrik terminated the contracts and put forward a claim for losses of the order of about £2.7 million. In June 2009 Anrik's solicitors wrote to AS Leisure setting out Anrik's claim. AS Leisure then instructed their solicitors Lucas McMullan Jacobs, and their followed a period of correspondence between solicitors both on the merits of the claim and the process of resolving the dispute.

12. In due course AS Leisure served a draft response, but most importantly the parties entered into an ad hoc agreement to adjudicate dated 2nd October 2009 nominating the adjudicator as a Mr. Ennis. The adjudication agreement provided in addition to the appointment of Mr. Ennis that, so far as applicable, the Scheme for Construction Contracts (England and Wales) Regulations 1998 ("the Scheme") would apply to the adjudication, that the adjudicator had jurisdiction to consider both disputes under both contracts in the same adjudication, and that he had jurisdiction to decide on the matters in dispute even if some of the terms of the contract had only been agreed orally.

13. The referral was duly served on 14th October 2009. There were no significant challenges to Mr. Ennis' jurisdiction, and on 24th November he published his decision. He decided in principle, first, that AS Leisure should pay Anrik the sum of £516,793, being £4,093.20 plus interest, together with any VAT and that AS Leisure should pay his fees which he determined in the amount of £15,000 plus VAT, and those fees were in due course paid by AS Leisure.

14. So far as the main sum awarded is concerned, AS Leisure has refused to pay. It has instead offered to pay the money into court if the enforcement application is unsuccessful and the enforcement is stayed. However, AS Leisure accepts that there is no ground upon which the application for summary judgment can be resisted on its merits. Its position is simply that there should be a stay of execution because of Anrik's, it says, inability to repay the sum.

15. The referral notice raised the following matters. It referred to the letters of 17th November 2006 and then went on to say at paragraph 2.3:

"On the basis of the aforesaid letters, Anrik incurred expenses in preparing to make a start on the Uxbridge Road project towards which AS Leisure contributed the sum of £13,450.

2.4 - On the basis of the aforesaid letters, Anrik incurred expenses in preparing to make a start on the Providence Place project towards which AS Leisure contributed the sum of £5,000.

2.5 - It is now apparent that neither project will proceed and Anrik have terminated their employment under the contracts referred to above.

2.6 - In this referral notice Anrik are claiming the total value of work properly executed and their direct loss and expense arising as a result of the project delay and such determination on both of the above the properties. Anrik are claiming damages for breach of contract in the alternative.

2.7 - Anrik assert that had they been allowed to fulfil their contractual obligations they would have made a gross profit of 30% on both projects. That loss of profit and a similar loss of profit on other projects they would have been able to secure but for the delay to the Uxbridge Road and Providence Place projects prior to termination form part of the claim by Anrik against AS Leisure."

16. As I have already indicated, in the event no starting dates were ever given. The projects did not go ahead beyond the pre-contract preparation and the preliminary works. Anrik's position throughout is that the two letters of 17th November 2006 constitute binding contracts. AS Leisure by contrast deny that and say that they were not binding and that, in effect, in the case of both projects any agreement was subject to contract.

17. The issues before me are as follows: AS Leisure contends that the adjudicator's decision was obviously wrong insofar as he held the two letters of 2nd November 2006 constituted binding contracts. Mr. Mark Raeside QC, who appears for AS Leisure, submits that the adjudicator wholly failed to address particular points that were put to him during the course of the adjudication, in particular the history and detail of the prior dealings between the parties for the five or so years before these two projects came into existence.

18. I have been taken through documents relating to those previous contracts with a view to demonstrating, first, the importance of some of the matters on which agreement, so AS Leisure says, had not been reached in the letters of 17th November 2006, and also to indicate the general course of dealing and the importance that AS Leisure placed on having signed contracts.

19. To the extent that it is necessary to do so, I find that it is arguable that the adjudicator was wrong and that accordingly it is appropriate to entertain AS Leisure's application for a stay. However, I stress that that is only a finding that it is arguable. It would be inappropriate on this application to express any view beyond that as to the merits of AS Leisure's case in relation to the two letters.

20. So the principal issues on the application to stay are these. First, whether it has been shown that it is probable that Anrik would be unable to repay the award of sum £500,000 odd if the adjudicator's decision were subsequently to be set aside. Second, whether Anrik's financial position has materially changed during the relevant period. The real issue here concerns the extent of that period. AS Leisure say that it starts with the letters of 17th November 2006. Anrik says that it starts with the date of the agreement to adjudicate in October 2009. I will in fact deal with these two issues in reverse order, but before I do that I will turn to the law.

21. For present purposes in the context of these applications, it is not necessary to look at any decision apart from the decision of Coulson J (as he now is) in the case of Wimbledon Construction Company 2000 v. Derek Vago [2005] BLR 374. At paragraph 13 of his judgment when considering the relevant authorities, Coulson J said this:

"It has been said on a number of occasions by the Court of Appeal that the decision of an adjudicator is intended to be enforced summarily. The contract provisions in this case, which I have just read and which are by no means untypical, make that point clear. The presumption is that the successful party, the likely claimant in any enforcement proceedings, should not be kept out of its money."

22. In this case, as I have already indicated, the adjudication agreement was subject to the statutory scheme. So these comments of Coulson J apply with equal force to this case. Then at paragraph 26 of his judgment he went on helpfully to consider the applicable principles. He said this:

"In a number of the authorities which I have cited above the point has been made that each case must turn on its own facts. While I respectfully agree with that, it does seem to me that there are a number of clear principles which should always govern the exercise of the court's discretion when it is considering a stay of execution in adjudication enforcement proceedings. Those principles can be set out 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)."

Pausing there, I shall turn to that case in a moment.

"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 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)."

23. I should point out at once that here we are not concerned with sub-paragraph (ii) of f) because it is not suggested by AS Leisure that Anrik's financial predicament has been caused by any failure to honour the award. AS Leisure's position is quite clear and that is that Anrik has been in a wobbly financial position for several years and at least since 2006.

24. So the real issue here is that identified by Coulson J at paragraph 26 f) (i), whether or not Anrik's financial position is the same or similar to its financial position at the time that the relevant contract was made. In that context it is helpful to look at the case of Herschell to which Coulson J referred. That is a decision of HHJ Humphrey LLoyd QC in Herschell Engineering Limited v. Breen Property Limited, unreported but dated 28th July 2000. At paragraphs 18 and 19 of his judgment in that case HHJ Humphrey LLoyd QC said this:

"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, as it were, is 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 had not changed one iota between June 1999 and July 2000, except that the company itself has now become entitled to money due 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 unable to pay money to that company under an adjudicator's decision, the question may properly be 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)."

25. I should just mention also the terms of Order 47, the relevant part of that is rule 1(a) which remains part of the CPR by operation of Part 50 and 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."

Then Coulson J went on to observe in paragraph 15 of his judgment:

"There can be no doubt that the probable inability on the part of the claimant to repay the judgment sum is a special circumstance within the meaning of Order 47 (1) (a)."

26. The submissions made by the parties in this case can be summarised as follows. Mr. Raeside submits that the relevant time here is November 2006, and that of course (on Anrik's case) was when the contract was made upon which it subsequently brought its adjudication proceedings. That was also the time when the transactions under consideration took effect. He says further that the parties are now bound by the adjudicator's decision that the letters of 17th November 2006 constituted binding contracts.

27. Mr. Jonathan Lewis who appears for Anrik submits that the relevant contract is the agreement which contained the machinery giving rise to the current debt, that is to say the adjudicator's award. He says that that is how Coulson J's judgment should be read. In my judgment, Mr. Lewis' submission is plainly correct. The question is whether there has been a significant change in the financial circumstances of Anrik since the time that the obligation was entered into that has given rise to the debt. In this case, that is clearly the adjudication agreement that was made in October 2009. That is made perfectly clear from the letter sent by AS Leisure's solicitors dated 27th July 2009. In that letter they wrote this:

"Our client's position remains unaltered. There was no binding contract for either Uxbridge Road or Providence Place on or about 17th November 2006 or at all. As your client must well know, the letters dated 17th November 2006 were simply a further stage in the tendering process for Uxbridge Road and Providence Place over which your client's non-compliant tender for those two projects was converted from a variable to a fixed price on the basis of the timber frame design proposal provided by your client ..." and so on.

Then the letter continued in the following paragraph:

“On the above basis, there is plainly no agreement in writing that can provide for adjudication either by reference to a letter dated 17th November 2006 or the specimen JCT contract attached to the draft referral notice. Furthermore and in any event, our client denies the relief your client sought. If your client wishes this dispute to be referred to adjudication, it will be necessary for our clients to enter into an ad hoc adjudication in which both our clients can reserve their positions as they see fit. A draft written ad hoc adjudication agreement is attached for your client's consideration which we can discuss further for any necessary amendments."

28. Whilst it is entirely correct that the adjudicator has since held that the letters of 17th November 2006 constituted binding contracts, that was not the position in mid-2009 and, given AS Leisure's position at that time, any adjudication brought by Anrik on the basis of the letters of 17th November 2006 would have faced enormous procedural difficulties. It was clearly in the commercial interests of both parties to find some method of dispute resolution that would be straightforward and not open to jurisdictional challenge. That is exactly what the parties did, and, if I may say so, sensibly did, by entering into the adjudication agreement of October 2009.

29. It is plain that that is the agreement which gave rise to this award, and hence to the debt represented by the adjudicator's award which is the subject of the present application. There is no evidence whatever of any change of Anrik's financial position between October 2009 and now or indeed October 2009 and, say, October 2010, a date by which it is possible that this dispute might be finally resolved. On this ground alone, therefore, the requirement for exceptional circumstances required by Order 47 is not, in my judgment, made out. So AS Leisure's application for a stay must fail. However, in case I am wrong about that I will deal briefly with the financial position.

30. It is clear that since 2006/2007 Anrik's financial position has been weak, although it appears from the evidence before the court that it is still trading today. Turnover for 2008/2009 appears to have been of the order of £120,000 to £130,000 as against £450,000 to £500,000 in 2004, 2005 and 2007. There was a peak turnover of £940,000 in 2006, but that appears to have been exceptional.

31. There has been an issue about a figure of £80,000 that was wrongly shown as "stock" in the 2007 accounts. It is clear that it should not have been there. The amount appears to relate to invoices that were rendered for work carried out in early 2008. Even so, if that item had been taken out of the 2007 accounts, I find that the company would just about have broken even for that year. Any dividend that might have been taken by Mr Fitzgerald (Anrik's sole or principal Director) would then have to have been treated as a loan by him to the company. I do not in fact know how much money he took out of the company in that year, but according to the accounts there was a profit of over £60,000 and it is fair to assume that some or all of that may have been taken by him as a drawing.

32. There is no clear evidence of the trading position in 2008 and 2009, apart from the fact that the company is still going. I have mentioned a turnover of the order of £120,000 to £130,000, well below its turnover in previous years. It is quite clear that Anrik's main client historically has been AS Leisure and whilst the loss of that custom has clearly affected its trading position, there is no evidence that it is insolvent or even on the verge of insolvency.

33. A detailed investigation was carried out by accountants instructed by AS Leisure, Grant Thornton, who produced a report very shortly after the publication of the adjudicator's award. The report appears to be dated 2nd December 2009 and the adjudicator's decision was published a little over a week before, on 24th November 2009. I do not propose to go into the report in any great deal, although I have been carefully taken through a number of sections of it. I propose to deal briefly with its conclusions in paragraphs 5.1 and 5.2. At paragraph 5.1 the report concludes:

"From the information provided and available from public sources it is clear that Anrik's financial position is unstable and at risk. The company has always had very few assets and there are considerable doubts with regard to certain company balances."

He concludes in that paragraph:

"There is a serious doubt that Anrik would be in a position to repay the interim award if the adjudication decision was paid over by AS Leisure and subsequently reversed."

In the following paragraph 5.2 he says:

"There is a serious risk, in my opinion, that any amount paid to Anrik relating to the interim award would not be available for repayment."

34. In the light of those comments I am reminded of the words that I quoted earlier from the judgment of HHJ Humphrey LLoyd QC where he described the company in that case as being an unknown entity in financial terms, and that he could not see how the situation would change one iota simply because that company had now become entitled to money due under a contract which the defendant did not wish to pay. As he pointed out, "that told him nothing about the ability of the claimant to repay the money or its inability to do so." There was an echo of those comments in the evidence in this case.

35. It is accepted that the test that I must apply is whether or not Anrik would probably be unable to repay the award if it is subsequently set aside. That the test is one of probability is clear (see paragraphs 26 (d) and (f) of the Wimbledon case). In my judgment, a serious risk or a serious doubt about the company's inability to repay is not of itself sufficient unless it is shown that that risk or doubt amounts to a probability. On the material available before the court, which is admittedly fairly sparse, there is no credible evidence from which I can properly conclude that it is probable that Anrik will be unable to repay the award if the judgment is enforced. I accept that there is a risk that it may not do so, but that risk is inherent in the nature of the adjudication process and is a risk that any party takes when entering into a construction contract or any other form of agreement which contains adjudication provisions of the type with which we are concerned here. So, for these reasons also, I would not have granted a stay.

36. In relation to the final application which concerns the preliminary issues, it emerged during the course of argument that that application might not be one which could be appropriately pursued today although, if I have understood it correctly, Mr. Raeside entirely reserves his position about resurrecting that application at an appropriate stage in the proceedings as they go forward. Therefore, unless I am invited to do so otherwise, I shall at present make no order in relation to that application.