When delay becomes an own goal

In part, the Housing Grants (Construction and Regeneration) Act 2006 as amended (the HGA) was enacted to ease cashflow for contractors and sub-contractors. The recent Court of Appeal (CA) decision in Wilson & Sharp Investments Ltd v Harbour View Developments Ltd [2015] highlights the need to avoid delay when enforcing a right to payment or risk losing that right.

In summary, the CA, considering the standard form Joint Contracts Tribunal (JCT) provisions dealing with insolvency, held that Wilson & Sharp Investments Ltd (the Employer) was not obliged to pay the sums in interim certificates where Harbour View Developments Ltd (the Contractor) had become insolvent after the final date for payment, even though the contracts had, by then, been terminated.

The issue before the Court

The Employer sought an injunction against the Contractor seeking to restrain it from presenting a winding up petition in relation to an alleged debt of £902,506 arising from interim payment certificates.

The facts

The facts were complex - the key points are summarised below.

• In 2012 and 2013, the Employer and the Contractor entered into two contracts for the development of student accommodation (the Contracts). The Contracts were subject to the JCT Intermediate Building Contract with Contractor's design, 2011.
• In August and September 2013, the Contractor issued four interim certificates, of which only one was paid by the Employer. As to the other three, the Employer failed to issue any pay less notices and the sums applied for therefore became due for payment.
• In September 2013, the Contractor suspended services and issued statutory demands in respect of the interim certificates against the directors of the Employer. Despite disputing the demands, no attempt was made on behalf of the Employer to raise any cross-claim alleging over valuation at this stage.
• After further negotiations failed, in January 2014, both parties sought to terminate the Contracts, and, soon after (despite the fact that no pay less notices had been served at the time), the Contract Administrator issued a new valuation which stated that the unpaid interim certificates had overvalued the works. This led to notice by the Contractor that it intended to issue a winding up petition against the Employer.
• Prior to the hearing of the winding up petition, in May 2014, the Contractor was placed in voluntary liquidation, ie it became insolvent.
• The Employer then commenced proceedings to obtain an injunction against the Contractor to prevent it from issuing a winding up petition.

At first instance, the Technology and Construction Court (TCC) dismissed the Employer's application, holding that:

1. the terms of the Contract which provided that upon the Contractor's insolvency, the Employer was not obliged to pay sums otherwise due did not apply; and
2. the alleged cross claims were nothing more than "a put up job" ie neither substantial, nor genuine.

The Employer appealed. The three issues before the CA were as follows:

1. did the Employer have contractual grounds not to pay the interim certificates ie were the sums in dispute no longer payable after the Contractor had entered into a creditor's voluntary liquidation (ie it had become insolvent)?;
2. were the Employer's cross-claims genuine and sufficient so as to enable the winding up petition to be set aside?; and
3. on the assumption that the Employer had no contractual entitlement to refuse payment, whether or not it was the established procedure of the TCC not to enforce interim payment obligations in favour of insolvent contractors?

The Employer was successful in its appeal.

As to the first issue, the CA held that, although it was common ground that the interim payments had become due, on proper construction of the Contracts, the Employer was not obligated to pay them because the Contractor had become insolvent. This was the case even though the Contractor had become insolvent after the Contracts had been terminated, and the Employer had not served pay less notices.

The Court then turned to whether it was the established practice of the TCC not to enforce interim payment obligations in favour of insolvent contractors. Although the CA recognised that "in appropriate circumstances", including insolvency, the provisional nature of the obligation to make interim payments would lead to the court refusing summary judgment in favour of the contractor, there was no "absolute rule" and each case would depend on the facts.

Finally, the CA disagreed with the first instance Judge and found that there were indeed genuine and serious cross claims that were sufficient so as to justify an injunction restraining presentation of a winding up petition against the Employer.

Key points

This decision reflects the pragmatic approach being taken by the TCC generally in relation to the payment and notice provisions in the HGA - a clear example of this was the decision in Galliford Try Building Ltd v Estura Ltd [2015], the subject of our alert "If you think that the Housing Grants Act makes payment (or not) clear, keep reading for the latest case..."

On one view, the most interesting factual points before the CA in this case were that:

1. no pay less notices had been issued by the Employer who stated (among other things) that its directors "were not aware of the need to issue Pay Less Notices"; and
2. having failed to serve pay less notices, even then, it was not until several months after the interim certificates in question had been issued that the Employer actually challenged those valuations.

Even so, the Employer was successful in halting the attempts of the Contractor to secure payment of the amounts certified in those interim certificates due to the Contractor's insolvency.

The message in this context relating to interim payments is simple: insolvency (or potential insolvency) of the contractor changes the ball game. So, what can you do to protect your position?

Practical steps

As an employer

1. Ensure that measures are in place to assess interim applications swiftly and to issue pay less notices in good time.
2. If the details of cross-claims are not available at the time when a pay less notice needs to be issued, then provide those details as soon as they are to hand. Any delay may lead to arguments as to whether or not the cross-claim is genuine, as was the case here.

As a contractor

Where no pay less notice has been served, and the Employer has not made an interim payment by the final date for payment, give careful thought to the possibility of commencing an adjudication without delay. Although this may not always be the right step, here, it was likely to have left the Contractor in a better position than taking steps to commence winding up proceedings.

As the CA pointed out, the TCC "has moulded a rapid procedure for enforcing an adjudication decision that has not been honoured and which enables a contractor to obtain speedy payment". In the absence of a pay less notice, if referred to adjudication, this should have resulted in an "open and shut" decision in favour of the Contractor, which could then have been swiftly enforced in the TCC (ie before the Contractor's insolvency allowed the Employer a way out).

So, be wary and avoid any delay in enforcing your rights; it rarely pays.