Mr Justice Akenhead :
Introduction
1. The London Borough of Camden (“
2. This case follows on from an earlier decision of this Court on a claim in which Makers sought to enforce against Camden an earlier adjudicator’s decision, [2008] EWHC 1836 (TCC); I gave judgment in favour of Makers.
The History
3. Makers was a building contractor employed by Camden under a contract in writing dated 21 June 2006 (“the Contract”) to carry out extensive refurbishment works at Whittington Estate, Highgate, New Town, London N19 (“the Site”). The Contract sum was £4,337,511.17 or such other sums as might be due under the Contract from time to time. There was an adjudication clause, Clause 9, pursuant to which each party would pay its own costs of the adjudication.
4. Although dated in June 2006, the contract was made in September 2005 and Makers commenced the Works on 17 October 2005. Issues arose between the parties over variations and delays.
5. By notice dated 3 July 2007 (“the Default Notice”),
6. In January 2008, Makers referred to adjudication the dispute as to whether there had been a valid contractual determination or a repudiation by
(a) Makers was failing to proceed regularly and diligently with the Works at the time of service of the Default Notice.
(b) Makers did not continue the default for 14 days from receipt of the Default Notice.
(c)
(d) Makers had not repudiated the Contract.
It was this decision which Makers successfully sought to enforce in July 2008, in so far as it required
7.
8.
9. An Acknowledgment of Service was filed by Makers on 10 December 2008 (that is, within the time permitted by the rules – see CPR Part 10.3(1)(b)). According to Dr Critchlow of Makers’ solicitors, Fenwick Elliott, his recollection is that Mr Roberts (the solicitor with conduct of the case for Camden at the time) had previously on 5 December 2008) agreed an extension of time for service of the Defence until the 12th January 2009; however, it is accepted that the alleged extension was not confirmed in writing and cannot be evidenced; Makers does not rely upon it for the purposes of its present application.
10. The Defence was due nominally on 26 December 2008 in accordance with the rules (28 days after service of the Particulars of Claim – see CPR Part 15.4(1)(b)); in practice, no extension to that period had been agreed.
11. Judgment in default was duly entered against Makers by the Court on 8 January 2009. On 12 January 2009 a Defence and Counterclaim was purportedly served by Makers and was filed with the Court on the same day. Makers by its Counterclaim claims some £4m of which only a relatively small part relates to the consequences of the repudiation; the bulk relates to the allegedly unpaid and uncertified sums for work done.
12. Thereafter, the parties discussed through solicitors the possible setting aside of the judgment with
The Financial Position of Makers
13. The latest company accounts filed by Makers are for the year ending 31 December 2007. In the Directors’ report, the following appears:
“On 20 August 2007, Keller group plc, the company’s ultimate parent, announced its decision to withdraw from the Makers UK Limited business. As the directors do not believe the company will continue to trade once existing contracts have been completed, they have not prepared the financial statements on a going concern basis…”
14. The following illustrates the trading and asset position as indicated on the company accounts put before the Court:
Year ending | [Loss]/Profit on ordinary activities before taxation* | [Loss] Profit for the financial year* | Total assets less current liabilities** | Net Assets/liabilities** |
31/12/07 | [£10,428,000] | [£8,541,000] | [£8,661,000] | [£10,268,000] |
31/12/06 | [£3,789,000] | [£2,957,000] | [£1,769,000] | [£1,831,000] |
31/12/05 | [£2,141,000] | [£1,356,000] | £2,081,000 | £1,081,000 |
31/12/04 | £413,000 | £437,000 | £1,709,000 | £1,474,000 |
31/12/03 | [£6,969,000] | [£6,598,000] | [£1,728,000] | [£4,728,000] |
31/12/01 | £2,289,000 | £1,588,000 | £1,898,000 | £1,898,000 |
* From Profit and Loss account
** From Balance Sheet
15. Thus, on these figures and based on the largely unchallenged evidence of Mr Cornmell, an expert accountant who prepared a report dated 12 March 2009 on behalf of Camden which was put before me, it seems clear that:
(a) based on the latest filed accounts, Makers is insolvent in that, without the support of its parent, Keller, which was effectively rescinded or removed in August 2007, its business is loss making and it has a substantial negative value. If anything up to £8m was paid over to it, it would be unable to repay it.
(b) based on the accounts (year ending 31 December 2004) available at the time that the Contract was entered into (September 2005), Makers was in profit from its trading activities and worth in capital terms a significant amount.
16. The accounts for the year ending 31 December 2008 have not been provided or filed yet.
17. The only reason advanced by Makers as to why it is not insolvent is contained in the statement of Mr Whitehouse, a financial consultant to Makers, who says that there are no winding up petitions, statutory demands or resolution liabilities against Makers. That however does not mean that Makers is not insolvent. All that suggests is that the primary creditor of Makers is Keller which has no interest in liquidating Makers.
The Issues
18.
(a) Makers does not institute any further adjudications covering issues addressed in these proceedings, and
(b) Makers gives
19. The issues have been properly defined in the skeleton submissions of Mr Matthias QC, albeit I have slightly amended his second issue:
a) What is the nature and scope of the jurisdiction to impose conditions upon setting aside a regular default judgment? (“The Jurisdiction Issue”).
b) Is Makers insolvent and based on the evidence currently before the Court will it probably be unable to repay any sum awarded to it by an adjudicator upon a future adjudication in respect of its quantum claim against Camden and/or is there reason to believe that it will be unable to pay Camden’s costs of defending the intended Counterclaim in this litigation if ordered to do so (“The Insolvency Issue”).
c) Granted that that at this stage the Court is bound to conclude that Makers has a real prospect of successfully defending the claim, is there some other good reason why judgment in default should be set aside (“The Other Good Reason Issue”).
d) Should the Court exercise its discretion to set aside the regular default judgment, upon conditions that:
i) Makers does not institute any further adjudications covering issues addressed in these proceedings, and
ii) Makers gives
(“The Conditions Issue”)
The Jurisdiction Issue
20. CPR Part 13.3 provides that, apart from when a judgment is obtained irregularly, in “any other case the court may set aside or vary a judgment entered under Part 12 if (a) the defendant has a real prospect of successfully defending the claim”. Thus there is no doubt that the setting aside of the default judgment is a matter of discretion rather than of obligation. In the exercise of that discretion, the Court is empowered to attach conditions to any order it is minded to make. CPR Part 13.3 in fact states in terms that “Rule 3.1(3) provides that the court may attach conditions when it makes an order”. It is not uncommon that terms may be imposed in circumstances where, for instance, although the defendant has a real prospect of successfully defending the claim, elements of that defence are what used under the old Rules of the Supreme Court practice to be called “shadowy”.
21. CPR Part 3.1(3) provides that when “the court makes an order, it may – (a) make it subject to conditions, including a condition to pay a sum of money into court; …” Part 3.1(2) identifies a list of the court’s general powers of case management, concluding at sub-paragraph (m) that: “Except where these Rules provide otherwise, the court may – take any other step or make any other order for the purpose of managing the case and furthering the overriding objective.”
22. The overriding objective in CPR Part 1 is in essence to deal with cases justly. Part 1.1(2) identifies a number of aims in relation to the furtherance of the overriding objective, of which three are specifically relied upon by
23. The Court can have regard to a wide range of individual circumstances in deciding whether to exercise its discretion to set aside and if so on what terms if any. Thus, the Court can have regard to the delay or promptness with which the application to set aside is issued and the reasons why the Defence was not served in time. However, it is not the Court’s function to punish the defaulting defendant. The Court must do justice between the parties. For instance Chadwick L.J. in Hussein v
“But it must be kept in mind that discretionary powers are not to be used to punish a party for incompetence – they must be exercised in order to further the overriding objective. In the present case, as the judge recognised, the essential question was whether the risk of injustice to the Governors (in denying them the opportunity to advance at trial a defence which – as the judge himself said – had a good prospect of success) outweighed the risk of injustice to the claimant and other defendants if the Governors were allowed (at this late stage) to participate in the proceedings.”
24. So far as the Jurisdictional Issue is concerned, the Court undoubtedly has jurisdiction to impose conditions as part of the setting aside of the default judgment in question. That jurisdiction is tempered by at least two factors:
(a) The court is not to impose conditions to punish the defendant;
(b) In considering whether to impose conditions, the court must have regard to the imperative to act justly as between the parties.
The Insolvency Issue
25. As indicated above, the currently available evidence overall clearly indicates that Makers is insolvent in the sense that it can not currently pay its debts as they fall due. It is taking no new work, Keller has removed any financial support or obligation to provide such support, its balance sheet position is dire and there is no obvious prospect of it ever, off its own bat, being able to pay back any sum which might be awarded due to it under a future adjudication decision. Furthermore, the latest accounts would normally satisfy a court that Makers would be unable to pay
The Other Good Reason Issue
26. This issue arises because the Court should set aside a judgment obtained in default if the defendant has a real prospect of successfully defending the claim or if there is any other good reason to do so. Subject to the question of whether conditions should be imposed, the only ground advanced by Makers is that
27. This ground was not advanced with any great force at the hearing. In essence it amounted to an argument that, by the stance taken in correspondence both before and after the judgment was obtained
28. Consequently, the Court should exercise its discretion to set aside the judgment because, although there is no “other good reason” to do so, there is, it is accepted by
The Conditions Issue
29. It is this issue which is primarily what has been argued before the Court. I start from the standpoint that, in one sense, the judgment obtained has arisen because Makers or their advisers simply made a mistake in overlooking the need to serve a defence in time or obtain a short extension of time for its service. The Defence was clearly in the process of being finalised at the time that the judgment was procured and there was, in the light of the first adjudicator’s decision at least, an arguable defence. If the Defence had been served in time, there does not exist any jurisdiction in the court in effect to enjoin Makers from pursuing any right to adjudicate. There does of course exist a jurisdiction for the Court to order security for costs.
30. In Herschel Engineering Ltd v Breen Property Ltd [2000] EWHC 178 (TCC), Mr Justice Dyson, as he then was, addressed the issue of whether a party could pursue adjudication if there were concurrent court proceedings on the same topic or dispute. Having reviewed the terms of the Housing Grants, Construction and Regeneration Act 1996 and previous authorities relating to arbitrations, he said:
“18. In my view, the principles deriving from the authorities to which I have referred have no application to adjudications. Section 108(2)(a) of the 1996 Act expressly states that a party may refer a dispute to an adjudicator “at any time”. It is true that the words “at any time” do not appear in paragraph 1(1) of the Scheme. But it is plain from section 108(5) that it was intended that the relevant provisions of the Scheme should be consistent with the requirements of section 108(1) to (4) of the Act. I do not consider that the omission of the words “at any time” from paragraph 1(1) of the Scheme is of any significance. Nor did Mr Davies suggest that it was. Parliament had litigation and arbitration proceedings very much in mind when drafting the Act. As I said in Macob Civil Engineering Ltd v Morrison Construction Ltd [1999] BLR 93, 97:
“The intention of Parliament in enacting the Act was plain. It was to introduce a speedy mechanism for settling disputes in construction contracts on a provisional interim basis, and requiring the decisions of adjudicators to be enforced pending the final determination of disputes by arbitration, litigation or agreement.”
31. That reasoning is correct. A party to a construction contract has a statutory right to adjudicate upon any dispute at any time. There is of course a finite point at which adjudication on a given dispute is no longer possible, that is when the Court or arbitrator has finally resolved the dispute one way or the other. The fact that court or arbitration proceedings have been instituted does not however prevent or bar a party’s statutory or contractual right to adjudicate; that produces a decision which, although binding temporarily, is not final. If Parliament had intended that a party could not institute adjudication on a dispute if there were court proceedings addressing the same dispute already or later issued, it would have said so; such a state of affairs would or could produce an unfortunate race to issue the first set of proceedings.
32. A concomitant of the right to adjudicate at any time is that this gives a party a commercial advantage and lever. Thus it is open and permissible to a party such as Makers in this case to threaten adjudication against the other party. It is a commercial lever for two reasons, the first being that the other party knows that it faces the risk of a decision against it which, if made fairly and within jurisdiction by the adjudicator, will be enforced by the Court. Secondly, the other party knows that in most cases it will incur costs of defending the adjudication proceedings which will be irrecoverable as the adjudicator is only rarely given a discretion to award such costs. Parliament must be taken to have known that such a commercial advantage and lever was being given. Parliament was certainly aware that the passing of the 1996 Act would alter the balance as between employers and contractors so far as cash flow was concerned.
33. The issue thus arises as to whether the Court on setting aside a judgment should or even can impose a condition which prevents a party from pursuing a statutory right to adjudicate. One can state with certainty that it will, at the very least, be a very rare case in which it would be appropriate to impose such a condition.
34. The Court however clearly has a jurisdiction, which derives from statute, under the CPR to impose conditions on a setting aside of a judgment in default (see Paragraphs 20-24 above). In considering whether to impose conditions and in the management of cases, the Court must have regard to the overriding objective. CPR Part 1.1 states as follows:
“(1) These Rules are a new procedural code with the overriding objective of enabling the court to deal with cases justly.
(2) Dealing with cases justly includes, so far as is practicable-
(a) ensuring that the parties are on an equal footing;
(b) saving expense;
(c) dealing with the case in ways which are proportionate-
(i) to the amount of money involved;
(ii) to the importance of the case;
(iii) to the complexity of the case;
(iv) to the financial position of each party;
(d) ensuring that it is dealt with expeditiously and fairly; and
(e) allotting to it an appropriate share of the court’s resources, while taking into account resources to other cases.”
35. The list in CPR 1.1(2) is not exclusive. Dealing with cases justly and fairly must also include applying or permitting the application of the law of the land. Thus, if statute or a contract gives a party the right to adjudicate upon a dispute even though the Court is seised of the same dispute in concurrent proceedings, justice demands that, save at most in exceptional circumstances, the Rules should be operated so as not to prevent that party from pursuing such an adjudication. Adjudication usually involves a 28 day timetable from institution to decision which can usually be accommodated in the Court’s timetable for the court proceedings. I do not rule out the possibility that, where an adjudication is threatened such that the just disposal of a court case is threatened, steps might be considered to limit the impact of the adjudication on the court proceedings.
36. Reliance upon CPR 1.1(2) (a), the “equal footing” basis, involves primarily the equal footing in the court proceedings themselves. The “equal footing” may have to account for the fact that there is an adjudication decision in existence or to come into existence which may alter the commercial balance as between the parties. Ensuring the parties are on an “equal footing” does not require or even enable the Court to interfere with statutory or contractual rights except possibly in exceptional circumstances.
37. As for CPR 1.1(2) (a), the “saving [of] expense” must relate primarily at least to the saving of expense in connection with the court proceedings in question. It would not usually relate to the need to prevent or limit the costs to be incurred by a party pursuing its legal right to adjudicate. Although the Rule refers to the saving of “expense” which might properly be considered as a wider expression than legal and witness costs of and occasioned by the proceedings, the expense in question should relate to the proceedings with which the Court is concerned. It would not relate, usually, to the expense of the institution of adjudication proceedings which a party was legally entitled to pursue. Parliament or the contractual parties in question are taken to have legislated or contracted for what is to happen in relation to the cost and expense of adjudication.
38. As for CPR 1.1(2)(c), proportionate dealing, this relates to the dealing by the Court with the case in question and, generally, not to interfering with the legal rights of the parties.
39. The need to deal with cases expeditiously and fairly, adumbrated in CPR 1.1(2)(d), does not assist
40. CPR 1.1(2)(e) is not of any relevance here as what will be done in any adjudication will not materially impact adversely on the application of court resources.
41. Camden’s argument essentially is that, given that the Court has the opportunity to consider the setting aside of the default judgment and has wide case management powers in line with the overriding objective, it should take into account the likelihood that any future adjudication award against Camden will not be enforceable or any summary enforcement judgment against Camden will be stayed by reason of the poor financial position of Makers. Therefore, it contends, the Court should impose the condition about not adjudicating on Makers to save expense in a broad sense, to save time and resource which would better be deployed in preparing for the Court claim and to maintain an equal footing by not giving Makers an unfair advantage of being able to pursue an adjudication which is or may be pointless in practical terms. The proposed condition, it is argued, is designed to enable the Court to place the parties on an equal footing to contest the merits of the case in the litigation, and to avoid the defendant being placed in a superior and oppressive position in relation to
42. To consider that premise, it is necessary to remind oneself of the point to which the law and practice has reached currently in relation to the relevance of the financial position of the party which successfully enforces an adjudication decision in its favour. The impact of insolvency or the likely inability of that party to repay any sums paid out pursuant to such an enforcement was properly and effectively reviewed and summarised in Wimbledon Construction Co 2000 v Derek Vago [2005] BLR 374 by HHJ Coulson QC (as he then was), having reviewed the cases, at Paragraph 26:
“(a) Adjudication (whether pursuant to the 1996 Act or the consequential amendments to the standard forms of building and engineering contracts) is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.
(b) In consequence, adjudicators’ decisions are intended to be enforced summarily and the claimant (being the successful party in the adjudication) should not generally be kept out of its money.
(c) In an application to stay the execution of summary judgment arising out of an Adjudicator’s decision, the Court must exercise its discretion under Order 47 with considerations (a) and (b) firmly in mind …
(d) The probable inability of the claimant to repay the judgment sum (awarded by the Adjudicator and enforced by way of summary judgment) at the end of the substantive trial, or arbitration hearing, may constitute special circumstances within the meaning of Order 47 rule 1(1)(a) rendering it appropriate to grant a stay (see Herschell).
(e) If the claimant is in insolvent liquidation, or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted (see Bouygues and Rainford House).
(f) Even if the evidence of the claimant’s present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:
(i) the claimant’s financial position is the same or similar to its financial position at the time that the relevant contract was made (see Herschell); or
(ii) the claimant’s financial position is due, either wholly, or in significant part, to the defendant’s failure to pay those sums which were awarded by the adjudicator (see Absolute Rentals).”
I followed and applied this approach in Air Design Kent Ltd v Deerglen (
43. I have found that, although Makers is not currently in liquidation, it is insolvent by ordinary standards. I assume that the only reason it is not in liquidation is that nobody currently wishes to put it into liquidation. It may well be the case that Keller, as the ultimate holding company, currently sees a financial advantage to it in not liquidating the company. In the ordinary course of events, based on the evidence currently before the Court, there would be a stay of execution on any judgment in Makers’ favour if the Court was today addressing enforcement proceedings.
44. One therefore needs to consider the two exceptions set out in Paragraph 26(f) (i) and (ii) of the
(a) at the time that the relevant contract was made, that is in September 2005, the filed accounts showed Makers as solvent and trading profitably. Profits were some £400,000 and the capital value of the company was some £1.5m. That is to be compared with a trading loss of over £8m and a negative capital value of over £10m. The claimant’s financial position is now wholly different to its financial position in 2005.
(ii) There can be no doubt that Makers’ financial position is not on any count wholly attributable to Camden’s failure to pay those sums which might be awarded by an adjudicator in the future. Makers’ claims are for some £4m which in large part (over £3m) relate to uncertified or otherwise unpaid sums allegedly due for work done. Given the trading loss of over £8m and the capital liability of over £10m, even if Makers succeed in full before the adjudicator, the current insolvency is not wholly due to
45. This view is based only on what would currently be the position if there was an effective adjudication decision in favour of Makers. During argument, Mr Ghaly for Makers indicated that he was instructed that Keller would give a company guarantee that Keller would repay any sum paid out pursuant to a further adjudicator’s decision. That might impact upon a decision by the Court as to whether to stay a summary judgment enforcing a future adjudicator’s decision but that would probably depend on Keller’s financial ability to repay, information on which is not before the Court. It is also at least possible that other financial information may be before the Court at that stage, such as the accounts for the year ending 31 December 2008.
46. On balance, I decline to impose any condition preventing or limiting Makers from pursuing any further adjudication. My reasons are:
(a) The failure to serve a Defence within the permitted time, without securing an extension of time was an oversight on the part of Makers or its Solicitors. It was thus purely fortuitous that
(b) It will at best be an exceptional course for the Court on setting aside a judgment to prevent a party from pursuing a statutory right to adjudicate at any time.
(c) This is not an exceptional case. Although the evidence currently before the Court shows clearly that Makers is insolvent and would be in no position to pay back any money paid out by
(d) Parliament has altered the commercial balance as between employers and contractors by passing the 1996 Act. It has given parties the lever of adjudication. The threat to adjudicate might encourage settlement; an actual adjudication decision might induce a final settlement.
(e) If Makers or those financing Makers wish to take the risk of proceeding to adjudication, they will bear in mind the potential advantages in so doing and the very real risk that a Court could well stay any judgment to enforce any adjudication decision in Makers’ favour by reason of insolvency and inability to repay. The Court should generally not interfere in the commercial relationship between the parties. The parties should be permitted to pursue such courses as are open to them.
48. I now turn to consider whether any condition should be imposed with regard to security for the costs of the counterclaim. I can deal with this shortly as it was not ultimately pressed by Mr Matthias QC for
(a) Unless grounds exist pursuant to CPR Part 25 upon which to order security for costs, the imposition of a security would in effect involve punishing the Defendant in this case. However, in an appropriate case, it is open to the Court to impose a condition requiring security for costs on setting aside a default judgment where the defendant is also a counter-claimant.
(b) Although the evidence establishes in this case that Makers would be unable to pay Camden’s costs if ordered to do so (within the meaning of CPR Part 25.13.1), this would be an inappropriate stage at which to order security.
(c) The court may make an order for security from costs in favour of a claimant such as Camden in respect of the counterclaim brought against it if the counterclaim raises issues which go beyond the defence of its claim (see Thistle Hotels Ltd v Gamma Four Ltd 2004 EWHC 322)
(d)
(e) As the parties have agreed and the court will order, there will be a trial on liability which will take place in November 2009. Directions will be given accordingly so that costs will not be incurred to any significant extent in relation to the counterclaim. If any order for security for costs was to be made, the most appropriate time to make it would be at the stage immediately after any judgement on liability when it becomes clear that the counterclaim will be pursued and that the parties will commence incurring expenditure in relation thereto.
(f) As security for costs will not be ordered against a defendant in relation to its defence of a claim against it, it should not be ordered at this stage when costs are only or primarily being incurred in relation to the pursuance of
Costs
47. It was resolved that all its use relating to costs should be dealt with in writing. Makers argue that because it “won” its application to set aside the default judgement
48. Having considered all the arguments,
(a) Makers has won its application; the need for such application however arose as a result of Makers’ default in serving its Defence in time. Makers offered to pay its own and
(b) Makers contested a number of issues in the course of the occasion upon which it failed; some time and costs was therefore wasted.
(c) Given that it was necessary to consider the Insolvency Issue, my findings on that aspect should be of use to the parties in planning for the future conduct of this case and for the saving of expense.
(d)
(e) Makers’ cost bill if assesses by a cost judge would probably have been reduced somewhat in any event.
Conclusion
49. The judgment in default will be set aside. No conditions will be imposed.