Adjudication Matters – March 2018

6th March 2018

‘SPV with no P’ gets ‘Broad Justice’

Summary

In Equitix ESI CHP (Wrexham) Ltd v Bester Generacion UK Ltd  the court considered a number of questions which arose out of an adjudication in relation to a biomass energy project.  The Employer was awarded £9.8 million by an adjudicator on termination of the Project.  The court held the adjudicator’s decision was enforceable.  However, the Contractor was only required to pay £4.5 million to the Employer and a further £1 million into court.

Background

The Employer, a Special Purchase Vehicle created solely for this project, employed the Contractor on a biomass energy project. The early milestones were all met. These related to the preparation of bonds and a business plan, placing an order for a steam turbine, completion of drawings, and completion of a site compound.  The Employer paid the Contractor £8 million in respect of these milestones though the Project was in delay.

The Employer commenced an adjudication and obtained a decision that the Contractor was not entitled to an extension of time. The Contractor had consented to the adjudication, though had ‘reserved its position’ regarding jurisdiction on the basis that the Contractor considered that the adjudication was an ambush.

Following this adjudication, the Employer then terminated the Contract and notified the Contractor that it had elected not to continue with the Project. The Employer issued an interim account under a post-termination contractual clause and sought £11.6 million from the Contractor for its net losses.

In a second adjudication brought by the Employer over the validity of the termination and the basis of the interim account, the Contractor said nothing in respect of jurisdiction and expressly agreed to the adjudicator’s terms and conditions of appointment. The adjudicator ordered that the Contractor pay £9.8 million to the Employer plus interest.

Payment from the Contractor was not forthcoming and the Employer brought the enforcement proceedings before Coulson J in the Technology and Construction Court. In order to seek to resist enforcement, the Contractor argued that:

• the adjudicator in the second adjudication did not have jurisdiction to hear the matter as the Contract fell under s105(2) of the Housing Grants, Construction and Regeneration Act 1996 (“the Construction Act 1996“) and thus was outside the meaning of ‘construction operations’. The Contractor argued that as the Project related to power generation, it fell within the operations which are excluded from the statutory right to adjudicate under the Construction Act 1996
•  it had reserved its position and was able to raise the jurisdictional challenge;
• there should be a stay of execution.

The decision

Excluded operations

Coulson J noted that the milestone payments all related to preparatory works. The work that had been carried out did not include any excluded operations.  Rather than look at the works to be performed under the Contract as a whole, he decided the correct approach was to look at what the dispute itself related to.  No ‘excluded operations’ had been carried out at the time of termination.  There was therefore no jurisdictional issue.

Reservation of rights

Coulson J concluded that the Contractor’s ‘general reservation of rights’ in the first adjudication did not assist the Contractor for the following reasons:

• Read as a whole, the reservation raised in the first adjudication was not a general reservation; it took a specific point related to timetabling in relation to the Contractor’s concerns about an ambush
  • The two adjudications were not linked and a reservation of rights in the first adjudication could not feed through into the second adjudication
  •  The Contractor’s agreement to the adjudicator’s terms and conditions in the second adjudication amounted to an acceptance of the adjudicator’s jurisdiction.

Stay of execution

Coulson J held that the Contractor had no defence to the second adjudicator’s decision. The court did, however, exercise its discretion to grant a partial stay.  In doing so, it considered the following:

• the principles for a stay (as set out in Wimbledon Construction Co 2000 Ltd v Vago [2005] EWHC 1086 (TCC) (http://www.bailii.org/ew/cases/EWHC/TCC/2005/1086.html)). In particular:
  • Adjudication is intended to be a quick and inexpensive method of arriving at a temporary result in a construction dispute and adjudicator’s decisions are to be enforced summarily and the claimant should not generally be kept out of its money; and
  • The probable inability of the claimant to repay the judgment sum at the end of a substantive trial may constitute special circumstances which merit a stay in enforcement.
• whether it was ‘fair’ to enforce the adjudicator’s decision in full (as considered in Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC) (http://www.bailii.org/ew/cases/EWHC/TCC/2015/412.html));
• LB RP (Crown Road) Ltd v Squibb Group Ltd [2016] EWHC 2669 (TCC), where the issue was whether the claimant had given proper answers to questions raised about its financial circumstances.

Coulson J was sympathetic to the Contractor in that the Employer had ‘stonewalled’ the Contractor in respect of its financial situation and the Employer had failed to file its accounts with Companies House.

In considering Galliford Try v Estura, Coulson J noted that if the full sum was paid by the Contractor the Employer would have little motivation to provide a final calculation of its net losses having the effect that the final account would likely take longer to finalise.

Coulson J also considered the Employer to be an ‘SPV with no P’.  He considered the SPV’s purpose had come to an end.  It was not continuing with the Project and it was probable that the SPV would soon be wound up.  This created a real risk that the Contractor might overpay and never be repaid.

To ‘do broad justice’ to the parties Coulson J considered that summary judgment should be given for the sum of £9.8 million plus interest, the Contractor was required to pay £4.5 million with a further £1 million to be paid into court, and that a general stay should be ordered in respect of the remaining sums.

Practical implications of the case

The case highlights:

• the importance of making a general reservation regarding jurisdiction early at the point at which the adjudicator’s appointment is accepted;
• that any reservation of rights should be clear and unequivocal;
• that where a specific reservation is made, it can fall away when the matter giving rise to the reservation is resolved;
• that reservations cannot carry over from a previous adjudication and in cases of multiple adjudications, the reservation of rights should be repeated in each adjudication; and
• that a court may draw negative inferences where a lack of information is provided in relation to a party’s assets which could result in a stay to the enforcement of an adjudicator’s decision.