Straw/Haymills v Shaftsbury House (Developments) [2010] EWHC 2597 (TCC)

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summary

(a) Where the claiming party to an adjudication enters administration before an adjudicator delivers his decision, this will not of itself mean the adjudicator lacks jurisdiction to make his decision. (b) Where a contract contains a provision to the effect that an adjudicator’s decision will become final and binding unless a notice is given within a specified period of time, the notice provision will not be satisfied by the mere fact that litigation concerning the contractual position is already afoot. (c) Where the decision of an adjudicator has not become final and binding then the principles applicable to the balancing of accounts on insolvency will trump the statutory obligation to comply with the decision and the decision will not be enforced by way of summary judgment. (d) Where the decision of an adjudicator has become final and binding then the statutory obligation to comply with the decisions of an adjudicator will trump the principles applicable to the balancing of accounts on insolvency and the decision will be enforced by way of summary judgment, although the Court may exercise its discretion to grant a stay of execution.

Technology and Construction Court, Mr Justice Edwards-Stuart

Background

The claimant (“Straw”) was a building contractor employed by the defendant property developer (“SHDL”) to build a mixed residential/retail redevelopment pursuant to a contract based on the JCT Standard Form with Quantities 2005, but incorporating various bespoke amendments. One of the bespoke amendments provided that the decision of the adjudicator would be final and binding unless within three months of the giving of his decision one of the parties gave notice of intention to refer the dispute for final determination by legal proceedings. Clause 8 of the contract stated that if Straw went into administration, the provisions of the contract which required any further payment would cease to apply; SHDL had the option to terminate Straw’s employment and to employ and pay other persons to complete the Works, following which a balancing exercise would determine whether Straw owed SHDL money because of loss occasioned by the contractual termination or otherwise, or vice versa. Any sum due was payable as a debt by one party to the other.

After Straw had been on site for about eighteen months, the parties fell into dispute concerning the pricing of materials. Straw alleged that it was entitled to £220k more than SHDL had paid it, and referred the matter to adjudication (the “first adjudication”). The adjudicator awarded Straw £182k plus interest and ordered that SHDL pay his fees. SHDL paid these amounts, served notice that it intended to refer the dispute for final determination within the three-month period set out in the contract, and issued proceedings to challenge the decision two months later. Straw’s counterclaims in those legal proceedings claimed all the relief under the contract to which Straw asserted it was entitled, including repayment in full of liquidated damages. Meanwhile, Straw commenced a further adjudication (the “second adjudication”), claiming £50k in alleged wrongful deductions of liquidated damages (“LDs”). The adjudicator awarded Straw £30k and ordered SHDL to pay his fees. Straw refused to pay up. Further issues concerning LDs were referred to a third adjudication (the “third adjudication”).

During the course of the third adjudication Straw went into administration. The administration not attributable primarily to SHDL: Straw had assets of c£50k and liabilities of c.£35 million. The parties exchanged correspondence with the third adjudicator regarding the effect of the administration, and SHDL submitted that any award in favour of Straw would not be enforceable. The third adjudicator proceeded with the adjudication, and awarded Straw £491k. SHDL refused to pay out against the third adjudicator’s decision and within three months of the decision sent a letter that said that in due course it would send full and proper reasons for rejecting the claim and that leading Counsel had advised that the demands were unenforceable. Straw sought to enforce the decisions in the second and third adjudications by way of summary judgment.

Issues

The Court addressed the following issues:

  • Did the third adjudicator have jurisdiction to proceed with the adjudication after Straw had gone into administration? SHDL argued that following the Administration Order the only dispute between the parties could be over the balancing exercise under clause 8.
  • Had the third adjudicator been in breach of the rules of natural justice?
  • Were the decisions in the second and third adjudications final and binding?
  • Did the making of the Administration Order relieve SHDL of the obligation to comply with the decisions in the second and third adjudications?
  • If Straw was entitled to summary judgment in respect of either of the two adjudicators’ awards, should the Court order a stay of execution?

Decision

The Court held:

  • The adjudicator in the third adjudication had jurisdiction to proceed notwithstanding the making of the Administration Order. The third adjudicator could not have taken into account any dispute that arose as a result of the administration, because the administration had occurred after the commencement of the adjudication.
  • SHDL had alleged that Straw had told the third adjudicator that there was no electronic master programme available when in fact there was and that the adjudicator had then produced his own programme, without giving SHDL the proper opportunity to deal with it. The Court rejected this submission on the facts.
  • The “final and binding” notice provisions were not satisfied by the mere fact that litigation concerning the contractual position was already afoot (i.e. by the counterclaims in the proceedings relating to the first adjudication) at the time of the decisions in the second and third adjudications. There was still a requirement to serve a notice of intention to refer the dispute for final determination by legal proceedings. However, the court went on to find that the “final and binding” notice provisions did not have to be strictly followed when one of the parties was in administration. This was because, under the relevant insolvency legislation, a party did not have an unqualified right to commence legal proceedings against a company in administration. The Court therefore held that the “final and binding” notice provisions had to be interpreted to mean that, following the administration of the party in whose favour the decision had been made, the dissatisfied party was only obliged to give notice within three months of its intention to challenge the award “by some appropriate means”.
  • Even on this interpretation of the provisions, however, SHDL had not given an effective notice in respect of the second adjudication decision, which was therefore final and binding. As to the third adjudication, the letter that said that SHDL would send full and proper reasons for rejecting the claim constituted a valid notice. The decision in that adjudication had not therefore become final and binding.
  • A clause in a contract that purports to override the obligation to comply with an adjudicator's decision is ineffective: see Ferson v Levolux and William Verry Ltd v London Borough of Camden.
  • If, at the date of the hearing of the application to enforce an adjudicator's decision, the successful party is in liquidation, then the adjudicator's decision will not be enforced by way of summary judgment: see Bouygues v Dahl Jensen and Melville Dundas Ltd v George Wimpey Ltd. The same result follows if a party is the subject of the appointment of administrative receivers: see Melville Dundas.
  • Similarly, if a party is in administration and a notice of distribution has been given, an adjudicator's decision will not be enforced by way of summary judgment. The provisions of Insolvency Rules that required that in calculating any distribution an account had to be taken of what was due between the parties would apply.
  • If, as in the present case, a party is in administration, but no notice of distribution has been given, an adjudicator's decision which has not become final and binding will not be enforced by way of summary judgment. This followed from the decision in Melville Dundas and was consistent with the reasoning in the Scots decision in Integrated Building Services v PIHL UK Ltd [2010] CSOH 80: once there has been an event, such as an administration order, that affects the assets of one of the parties or the ability of a party to bring proceedings to challenge a decision of an adjudicator, the order of priorities between the need to enforce the decisions of adjudicators and the need to enforce the rules of insolvency shifts in favour of the latter.
  • However, if the adjudicator's decision had become final and binding, so that it was no longer capable of being reconsidered by the court, then the approach in Melville Dundas ceased to be appropriate because of the emphasis placed by the majority of the House of Lords on the provisional nature of the interim payment that was the subject of the dispute in that case. Thus, an adjudicator’s decision that had become final and binding could be enforced by way of summary judgment notwithstanding the fact that the claiming party was in administration.
  • If a party is insolvent in a real sense, or its financial circumstances are such that if an adjudicator's decision is complied with the paying party is unlikely to recover its money, or at least a substantial part of it, the court may grant summary judgment but stay the enforcement of that judgment. The factors affecting the discretion of the court when considering whether or not to grant a stay where it appears that the successful party would be unable to repay an award are set out in Wimbledon Construction Ltd v Derek Vago, Mead General Building Ltd v Dartmoor Properties Ltd and Pilon Ltd v Breyer. Broadly speaking, where a party is in insolvent liquidation or there is no dispute on the evidence that it is insolvent (or unlikely to be able to repay the sum awarded by the adjudicator), a stay of execution will usually be granted unless either that party's financial situation was the same or similar to its financial situation at the time when the contract was made or its insolvency is due to the other party's failure to pay the sums awarded by the adjudicator.
  • Accordingly Straw was entitled to summary judgement in the second adjudication but not the third adjudication, as it had not become final.
  • A stay of enforcement would be ordered given the financial straits of Straw and the fact that neither of the exceptions to granting a stay applied in this case.

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes

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