Adjudication Matters: November 2023

When will the court issue a stay of execution of an adjudication decision based on the Defendant’s inability to pay?

J&B Hopkins v A&V Building Solutions [1] is a dispute which has been ferociously litigated and featured in both our March 2023 and July 2023 Adjudication Matters bulletins. To recap, Hopkins was engaged as a mechanical and electrical contractor on a project at the University of Sussex. They sub-contracted A&V for part of the work. A&V were successful in the first adjudication being awarded £138,010.86. JB&H refused to honour this award responding with a pre-emptive Part 8 claim for a declaration that the application for payment from A&V was invalid. In a second Final Valuation Adjudication the award was reversed, and the Adjudicator decided that A&V pay J&BH the sum of £82,956.88.

There have been multiple adjudications and court proceedings between the parties.

In this most recent judgment the court held that whilst there was little doubt that A&V had little or no money, when considering whether to order a stay of execution of an adjudicator’s decision the court must have regard to the financial situation of those standing behind the company.

Having heard from the owner of A&V and allowed additional evidence to be submitted on this point, the court was satisfied that A&V had no money: finding that the “Corporate Cupboard, for all practical purposes is bare“. The court found that the Owner of A&V had exhausted all obvious sources of finance bar perhaps some small loans from friends and family to assist in allowing A&V to get to trial on their claim.

It was against this backdrop that the court then considered the following:

To determine A&V’s application for a stay of execution in action 444 of 2022

The courts are used to dealing with applications by the defendant to resist summary enforcement of adjudication decisions due to the claimant’s poor financial position, citing concerns that when the matter is finally decided in court, they risk a hollow victory should the claimant be unable to repay the adjudication award.

It is more unusual for a party to rely upon its own inability to pay to seek a stay of enforcement.

1. Here the court decided that enforcement of the adjudicator’s decision should be stayed due to A&V’s inability to pay the monies to JB&H if so directed. The factors considered by the court in reaching this decision were:  The behaviour of the claimant including refusing to pay the first adjudicator’s decision, raising unmeritorious arguments in adjudication and in court. These actions were held to have contributed to A&V’s financial woes;
2. A&V had at least an arguable case that the second adjudicator’s decision was wrong; and
3. Enforcing the judgment would have no benefit to J&BH, A&V would probably be wound up and crucially this would stifle A&V’s claim against J&BH.

Consider J&BH’s application of a stay of the claim by A&V

The court considered that it would be inconsistent to allow a stay of execution of the judgment against A&V, only to then stay A&V’s claim. Again J&BH’s general behaviour during the dispute and its decision to not honour the first adjudicator’s decision weighed heavily upon the reasoning of the court.

J&BH’s request for security for costs

Finally, the court found that making an order for security for costs, given A&V’s financial state and that of the owner, would have the effect of stifling A&V’s claim against J&BH.

Takeaway Points

It is important to note that the court will look closely at the financial state of those who stand behind a defendant company pleading poverty. A desperate financial state is not enough on its own to resist enforcement of an adjudication decision. Two points can be drawn out from this case. Firstly, the defendant was in the position where it had a clear arguable cross claim against the party seeking enforcement. the court was reticent to take any measures which may have stifled this cross claim and result in denying A&V access to justice. Further, the judgment makes it clear that J&BH’s own conduct was a significant factor against J&BH.

It will come as little surprise that the parties were soon back in court [2] with J&BH seeking permission to appeal the judgment on various grounds. Permission was refused. At paragraph 18 of that judgment there is strong judicial comment that J&BH, having been criticised by the Court of Appeal for flouting the principles of adjudication, were now seeking to use those same principles to stifle A&V’s claim.

These cases shall proceed to trial in May 2024 before the same judge. It appears almost certain that there will be more to discuss should the matter get that far.

What will be regarded as “construction operations” under the Act?

In Crystal Electronics Limited v Digital Mobile Spectrum Limited [3] the TCC held an adjudicator’s decisions to be unenforceable as the contract in question was not a “construction contract” because a substantial proportion of the works performed by the contractor did not constitute “construction operations” under the Act.

Background

Digital Mobile Spectrum Limited (DMSL) contracted Crystal Electronics Limited (Crystal) to provide installers to deliver corrective support to households to resolve inference issues with digital TV reception affected by high speed mobile broadband services. DMSL terminated the contract by notice.

The dispute

Following termination, Crystal submitted two invoices for payment for works undertaken pursuant to the contract, which DMSL disputed. Crystal brought a “smash and grab” adjudication against DMSL claiming non-payment of the first invoice. DMSL challenged the adjudicator’s jurisdiction on the grounds that the contract was not a “construction contract” as defined by the Act. DMSL submitted that none of the works were construction operations or alternatively that only some works were construction operations in which case the contract was a hybrid contract. Crystal submitted if any parts of the works were construction operations, the adjudicator’s jurisdiction was limited to awarding payment of the notified sum; any issue of severance or apportionment would be a matter for the court on application for enforcement. The adjudicator accepted Crystal’s submissions and awarded Crystal the full amount. Crystal commenced a second adjudication in respect of the second invoice, the same adjudicator was appointed who then awarded payment of the second invoice. DMSL did not pay the sums awarded by the adjudicator and Crystal made an application for summary judgment. DMSL resisted the application.

The Act

Parties to a “construction contract” have a statutory right under the Act to refer a dispute arising under that contract to adjudication. A construction contract includes the carrying out of, arranging for the carrying out of, or providing labour to carry out “construction operations” [4]. Alteration, repair, maintenance, extension, demolition and dismantling works forming part of the land (whether permanent or not) will ordinarily constitute “construction operations” [5].

Discussion

At the hearing, Crystal claimed that their works involved working on rooftops and working at height and that this work fell within the definition of “construction operations” under s.105 of the Act or alternatively that their work was a form of surveying work and engineering advice in relation to construction operations that fell within the scope of s.104(2) of the Act. The Judge noted that the repair, maintenance etc. of “any works forming, or to form, part of the land” fall within the scope of construction operations. The Judge also considered that “works” could include electronic communications apparatus but would only do so if the apparatus forms part of the land. The Judge concluded that television aerials did not form part of the land and therefore concluded that the fitting of television aerials would not constitute construction operations.

Decision and takeaway points

The TCC concluded that neither of the adjudication decisions were enforceable because a substantial proportion of the works to which the adjudication decisions related comprised operations that were not construction operations.

Key learning points from this case are:

• To avoid any dispute regarding the statutory right to adjudicate the parties could consider including an express right to adjudicate in the contract itself;
• Before referring a dispute to adjudication a party should consider whether there is scope for dispute as to whether the Act applies. If so, rather than risking incurring abortive adjudication costs, prior to commencing adjudication the party could apply to the court to obtain a declaration under Part 8 of the Civil Procedure Rules as to whether or not there is a right to adjudicate.

In what circumstances can a freezing order be obtained?

In John E. Griggs & Sons Ltd v High Firs Penthouse Ltd [6] the TCC refused a contractor’s application for a post-judgment freezing order against a developer. The TCC considered that the contractor had ample time to obtain a less draconian and more focused relief.

Background

John E. Griggs (Griggs) entered into a construction contract with High Firs Penthouse Ltd (High Firs) in respect of a development at High Firs in Hertfordshire. Griggs commenced adjudication proceedings after High Firs failed to pay Griggs’ August 2022 application for interim payment. When High Firs failed to make payment of the adjudicator’s award, Griggs brought proceedings to enforce the adjudicator’s decision. By consent order made on 6 June 2023, High Firs was ordered to pay the judgment sum and costs totalling £140,275.87 within 14 days. High Firs failed to make any payment.

On 20 June 2023 High Firs gave Griggs notice of its claim for alleged snagging and defective works in the sum of £443,805.08. In the notice High Firs indicated its intention to sell penthouse 3. Griggs considered that there was a real risk that the sale of penthouse 3 would dissipate the remaining value of High Firs’ interest in the development.

Griggs applied to the High Court for a freezing order over the assets of High Firs up to the value of £175,000 to aid the execution of the High Court judgment in its favour. Griggs sought an order that High Firs should not “grant a leasehold interest by way of sale or disposal” in respect of the development at High Firs.

The considerations for the grant of a freezing order

The TCC considered that the principles for the grant of a freezing order are “uncontroversial”. The applicant must demonstrate a good arguable case that the respondent owns or has some interest in assets and that there is a real risk that any judgment will not be satisfied because of an unjustified dissipation of such assets and that it is just and convenient on all circumstances to grant relief.

Injunctive relief is a discretionary remedy. One ground in which the court can decline to give relief is where the applicant has delayed in making the application.

Decision

The TCC found that whilst Griggs had an unanswerable claim with a judgment in its favour this could only be a “powerful factor” in favour of the grant of a freezing order but cannot be decisive. The real issue for the court to consider is whether “there is a real risk of unjustified dissipation of assets and whether it is in all the circumstances just and convenient to grant the relief sought“.

The TCC considered that whilst freezing orders were originally recognised as an interim remedy granted pre-judgment to prevent injustice of a defendant dissipating assets to avoid the risk of satisfying future judgment, freezing orders are granted post judgment where necessary to prevent the removal or dissipation of assets prior to “the process of execution can realise the value of the asset for the benefit of the judgment creditor“.

The TCC concluded that in the present case there was no evidence to establish that the sale of a leasehold interest in penthouse 3 would amount to an unjustified dissipation of High Firs’ assets. The TCC noted that High Firs was incorporated for the sole purpose of developing and then selling properties at the High Firs development. The TCC considered that a more realistic application by Griggs might have been to freeze the net proceeds of the sale, however there was no real evidence as to High Firs’ intended use of any funds generated from the sale. Therefore, the TCC concluded that the application must fail due to lack of proof of a real risk that the judgment would remain unsatisfied by an unjustified dissipation of High Firs assets.

The TCC therefore dismissed the application for a freezing order concluding that it was neither just nor convenient to grant a freezing order in circumstances where Griggs had ample time to obtain less draconian and more focused relief (for example a charging order over High Firs’ leasehold interest in the development).

Takeaway points

When applying for the grant of a freezing order the applicant must first be able to demonstrate that there is a real risk of an unjustified dissipation of assets and secondly that in all the circumstances it is just and convenient for the court to grant the relief sought.

How we can help

If you have any queries in respect of this bulletin or would like to know more about adjudication please contact Carly Thorpe, Andrew Dixon or Julia Bates.

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[1] J&B Hopkins Limited v A&V Building Solution Limited [2023] EWHC 1483 (TCC)

[2] J&B Hopkins Limited v A&V Building Solution Limited [2023] EWHC 2475 (TCC)

[3] Crystal Electronics Limited v Digital Mobile Spectrum Limited [2023] EWHC 2656 (TCC)

[4] S.104(1) Housing Grants, Construction and Regeneration Act 1996

[5] S.105(1) Housing Grants, Construction and Regeneration Act 1996

[6] John E. Griggs & Sons Ltd v High Firs Penthouse Ltd [2023] EWHC 2231 (TCC)