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The Facts

During 2011 John Graham Construction Limited (鈥淕raham鈥�) was appointed main contractor for a new swimming pool and leisure facility in South Shields. The employer local authority nominated two preferred cladding subcontractors, one of which was Pioneer Cladding Limited (鈥淧ioneer鈥�).  Graham invited both sub-contractors to complete a Pre-Qualification Questionnaire (鈥淧QQ鈥�).

Pioneer returned a PQQ claiming an annual turnover of 拢400k and also provided Graham with a project portfolio which indicated that it was currently working on a number of schemes worth 拢2.9 million and was likely to be involved in another 拢4 million鈥檚 worth of projects in the near future.  At a meeting on 19 May 2011 one of Pioneer鈥檚 directors indicated that Pioneer had substantial cash reserves.

Accordingly during June 2011 Graham engaged Pioneer to install the cladding and curtain walling. Clause 21 of the subcontract concerned dispute resolution and provided as follows:

鈥�(iii)     鈥� the Adjudicator鈥檚 fees are to be borne by the Party which refers the dispute to adjudication鈥�

(v)        In the event that the decision of the Adjudicator is the making of a monetary award (鈥淎djudicator鈥檚 Award鈥�) in favour of the Sub-Contractor, the following provision shall apply:-

(a) Graham shall place on deposit the amount of the Adjudicator鈥檚 award with Northern Bank Limited in the joint names of the solicitors acting for Graham and solicitors acting for the Sub-Contractor within seven days from the date of receipt by Graham of the Adjudicator鈥檚 decision.鈥�

Pioneer subsequently referred two disputes to adjudication.  The effect of the resulting adjudication awards was that a net sum of 拢193,005.53 was due to Pioneer.  Graham did not pay and during 2013 Pioneer issued enforcement proceedings.

Pioneer argued that clauses 21(iii) and 21(v) of the subcontract were contrary to the Housing Grants (Construction and Regeneration) Act 1996 (鈥�the Act鈥�) and could not be relied upon to prevent payment.

In reply, Graham sought a stay of execution on the grounds that Pioneer was technically insolvent and would be unable repay monies at a later date.

The Issues

The key issues were as follows:

1.              Was clause 21(v) contrary to the act?

2.              Was clause 21(iii) contrary to the act?

3.              Was Graham entitled to a stay of execution?

The Decision

The judge had little hesitation in holding that clause 21(v) was in breach of the policy underpinning the act. The judge considered that clause 21(iii) was equally likely to discourage a party from commencing adjudication and as such was unlawful, being contrary to the act and the scheme.

Regarding the third issue, the judge found that where Pioneer was technically insolvent it was probable that it would not be able to repay Graham if it lost a subsequent arbitration. This satisfied the first requirement established by Wimbledon Construction Company 2000 Ltd vs Derek Vago but the judge noted, in line with Wimbledon vs Vago, that a stay should not be granted if Pioneer鈥檚 financial position was the same as it had been at the time the contract was entered into, or, if Pioneer鈥檚 financial position was due or largely due to Graham鈥檚 failure to pay the sums awarded by the adjudicator.

The rationale behind the first proviso is that the paying party cannot avoid the repercussions of an adjudicator鈥檚 award if at the time the contract was made, it knew of and accepted the risk of doing business with a financially unstable company.  In this instance the judge found on the facts that Graham had entered into the sub-contract on a 鈥渇alse premise鈥� where the information provided by Pioneer in the PQQ, the project portfolio and at the meeting on 19 May 2011 was misleading and incorrect. Therefore, Pioneer could not defeat Graham鈥檚 application for a stay on the basis that Graham knew what they were getting into when they sub-contracted with Pioneer.  On the contrary, having been misled, Graham had no proper idea as to Pioneer鈥檚 financial position.

The judge also concluded that the second proviso did not apply where on the facts, Pioneer鈥檚 financial problems had nothing to do with Graham鈥檚 failure to pay, but were inherent in the manner in which Pioneer ran its business. The judge observed that Pioneer鈥檚 practice of 鈥渞obbing Peter to pay Paul鈥� reflected cash flow difficulties stemming back to a time well before the date of the sub-contract with Graham.

Commentary

The judge鈥檚 conclusions regarding clauses 21(iii) and 21(v) of the sub-contract are unsurprising. The courts have previously demonstrated their intolerance of clauses that in practical terms impose a fetter on a party鈥檚 right to adjudicate. See for example Yuanda (UK) Limited vs WW Gear Construction Limited and Sprunt Limited vs London Borough of Camden.

Likewise, where the facts strongly indicated that Pioneer had been financially unstable for some time so that Graham鈥檚 non-payment would have made little difference, Pioneer could not rely upon the second proviso in Wimbledon v Vago.

However, the judge鈥檚 consideration of the first proviso in Wimbledon vs Vago was novel. Thus the paying party may obtain a stay if it can be shown that notwithstanding reasonable enquires, it was misled as to the true state of the other party鈥檚 financial position when entering into a contract.

Claire King
Fenwick Elliott LLP