Construction – Contract – Payment – Respondent carrying out works for appellant under construction contract – Respondent proposing to present winding-up petition against appellant in respect of unpaid sums under interim certificate – Judge refusing to grant injunction restraining presentation of petition – Whether appellant disputing petition debt on substantial grounds – Whether liability to pay precluded by respondent’s insolvency on proper interpretation of contract – Whether appellant having serious and genuine cross-claims – Appeal allowed
The respondent contractor carried out works for the appellant on two developments of student accommodation in Bournemouth pursuant to two building contracts which incorporated the conditions of the JCT Intermediate Building Contracts with Contractors Design (2011 ed), including the provisions, under sections 110 and 111 of the Housing Grants Construction Grants and Regeneration Act 1996, for the making of monthly interim payments.
The appellant failed to pay the full amount of four interim payments certified by the contract administrator in August and September 2013. It considered that the contract administrator had substantially over-valued the respondent’s work; however, it did not serve “pay less” notices as contemplated by the contract conditions with the effect that the certified sums became payable.
The respondent ceased work and ultimately, in January 2014, the appellant gave notice to terminate the contracts for repudiatory breach. The respondent indicated that it intended to present a winding-up petition against the appellant for £902,506 as the balance due under the interim certificates; the appellant therefore applied to the court for an injunction restraining the respondent from presenting the petition.
Meanwhile, a hearing of the respondent’s creditors was scheduled for the day after the application hearing, with a view to placing the respondent in creditor’s voluntary liquidation (CVL). The appellant claimed that, by virtue of the respondent’s insolvency and clause 8 of the contract conditions, it was not liable to pay the sums liable under the interim certificates. It relied in particular on clause 8.7.3, which provided that “If the Contractor’s employment is terminated… the Employer need not pay any sum that has already become due” and clause 8.5.3, which provided that “As from the date the Contractor becomes insolvent” clause 8.7.3 was to apply whether or not the employer had served notice to terminate the contract. The appellant also asserted that it had a cross-claim based on over-valuation of the respondent’s works and for damages for repudiatory breach and defective and late works.
The judge dismissed the appellant’s application and awarded costs of £28.196.98 in favour of the respondent. He held that the contractual provisions on which the appellant relied were dealing only with the position where a contract was still on foot and did not apply where it had already been terminated prior to the insolvency of the contractor. He accordingly held that the proposed petition debt was not disputed on substantial grounds. The appellant appealed.
Held: The appeal was allowed.
(1) Construing the contracts according to their objective, natural and ordinary meaning, against the background knowledge which would have been reasonably available to both parties and which might have affected the language used, clauses 8.5.3 and 8.7.3 could still apply if the contracts had already been terminated prior to the insolvency. The provisions of clause 8.7.3 were intended to operate after termination of the contract. The entire scheme of clause 8.7, and the following provisions of clause 8, were directed at setting out the respective rights and obligations of both parties after the contractor’s employment under the contract had been terminated by the employer and necessarily the contract had come to an end. There was no wording in clause 8 which in any way suggested that the consequential provisions were not to apply after termination.
Moreover, clause 8.5, dealing with the insolvency of the contractor, had a wider ambit than simply conferring a right of termination on the employer in the event of the contractor’s insolvency. Clause 8.5.3 expressly stated that clause 8.7.3 applied as from the date when the contractor became insolvent, whether or not the employer had given notice of termination based on the contractor’s insolvency. Accordingly, there were no grounds for implying a term that clauses 8.5.3 and 8.7.3 had no operation in circumstances where the employer had already terminated the contractor’s employment on the grounds of repudiatory breach, as it was entitled to do pursuant to clause 8.3.1. There was nothing in the nature of the interim payment obligation or in the provisions of section 111 of the 1996 Act to suggest that the provisions of the contracts should be construed narrowly, so as to restrict their application to situations when the contract was still in full operation or could still be terminated by reason of the insolvency of the contractor. In any event, the fact that an employer was not obliged, in the event of the contractor’s insolvency, to make an instalment payment did not mean that the employer was discharged from all liability to make such payments as might be due on the taking of the final account.
(2) As at the date of the hearing before the judge, the projected meeting of the respondent’s creditors was almost inevitably going to result in the respondent being subject to a CVL and becoming “insolvent” for the purposes of clauses 8.5.3 and 8.7.3. That was a matter which the judge was obliged to take into account in deciding whether to grant the injunction sought, since, from the date of the meeting, the appellant would be able to say that it had a bona fide dispute on substantial grounds, pursuant to clauses 8.5.3 and 8.7.3 of the contracts, that it was not obliged to pay sums due under the interim certificates but was entitled to delay payment until the taking of the final account.
(3) Furthermore, the appellant had serious and genuine cross-claims which exceeded the sums alleged to be outstanding under the interim payment certificates, such as to justify an injunction restraining presentation of a winding-up petition against the appellant. The fact that the proposed petition debt was not disputed did not prevent the debtor from raising a cross-claim in defence of a winding-up petition, and the fact that an employer was obliged to make an interim payment did not preclude it from challenging disputed items at a later stage: In re Bayoil SA [1999] 1 WLR 147 and Rupert Morgan Building Services (LLC) Ltd v Jervis [2003] EWCA Civ 1563; [2004] 1 WLR 1867; [2003] PLSCS 257 applied. An employer should not be prejudiced by sits acceptance that interim payments had become due because of its failure to serve a pay less notice. The evidence demonstrated that the appellant had cross-claims which were reasonably arguable and were sufficiently strong to be tested in court proceedings or in the context of a determination in the course of the respondent’s winding-up. This was therefore a classic case where, based on the evidence before the court, the judge should have concluded, in accordance was well established principles, that there were substantial disputes between the parties which could not be appropriately determined in winding-up proceedings. Accordingly, he should have granted the injunction sought restraining the issue of a winding-up petition: Tallington Lakes Ltd v Ancasta International Boat Sales Ltd [2012] EWCA Civ 1712 applied.
Per curiam: Had there been no contractual entitlement under the terms of the contracts themselves to refuse payment of interim certificates, there would have been no requirement for the judge to restrain presentation of the petition in accordance with any established practice of the Technology and Construction Court (TCC) not to enforce interim payment obligations in favour of insolvent contractors. There was no absolute rule that the TCC would decline to give summary judgment or restrain presentation of a winding-up petition based on an adjudication merely because the contractor was insolvent. Whether or not the court would adopt such a course would depend on the facts of the particular case: Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 522 considered.
Krista Lee (instructed by BPL Solicitors Ltd, of Dorchester) appeared for the appellant; Clifford Darton (instructed by Watkins Ryder Solicitors LLP, of Southampton) appeared for the respondent.
Sally Dobson, barrister
Click here to read transcript: Wilson & Sharp v Harbour View