Court avers the right to legal proceedings but you may still have to pay up front on existing judgments

Kew Holdings Ltd v Donald Insall Associates Ltd [2020] 7 WLUK 206

This case acts as a reminder of the hierarchy to seeking a remedy in construction contracts. The right to legal proceedings in construction contracts is more fundamental than the payment provisions. The payment provisions are superior to the adjudication provisions.  However, a party will still have to honour judgment debts in related proceedings. 

Background

This was an application by the Defendants for:

• an order requesting a strike out of the Claimant’s claim due to non-compliance with the order dated 5^th February 2019
• alternatively, a stay of proceedings pending the Claimant’s payment in satisfaction of the judgment dated 5 February 2019.

Facts

The Claimant is a vehicle company and the registered proprietor of a property in Richmond under a long leasehold interest (the “Property”). The Defendant is a company providing architectural services. The Defendant was retained by the Claimant in connection with the conversion and refurbishment of the Property to form a private residence.

In 2018 disputes arose between the parties concerning the Defendant’s entitlement to unpaid fees. The Defendant referred the dispute to adjudication (the “Adjudication”) and obtained an adjudication award in its favour. The Claimant failed to pay the sums due and the Defendant commenced proceedings to enforce the adjudication award. On 5 February 2019 summary judgment was granted to the Defendant. The Claimant failed to pay the judgment sum by 19 February 2019 as ordered or at all.

On 15 March 2019 the Court granted an interim charging order over the Property in respect of the outstanding judgment sum. On 10 May 2019 the Court granted a final charging order over the Property in respect of the outstanding judgment sum. On 13 September 2019 the Defendant commenced Part 8 proceedings pursuant to CPR 73.10C for a sale order in respect of the Property to enforce the judgment sum (the “Sale Order Proceedings”). The Sale Order Proceedings are ongoing.

The Claimant opposes an order for sale of the Property on the grounds that it has a claim against the Defendant for damages, which amounts to an equitable set-off. On 6 March 2020 the Claimant commenced alternative litigation proceedings, claiming damages against the Defendant of approximately £2 million for professional negligence and breach of contract (the “Professional Negligence Claim”). The allegations include late and inadequate drawings, inadequate advice and overcharging for the Defendant’s services.

Application in the Professional Negligence Proceedings to stay proceedings

It is relevant to mention this application even though the Claimant did not oppose a stay of the Professional Negligence Proceedings pending payment of the outstanding judgment sum.  The commentary below explains why but it is useful at this juncture to remember the circumstances in which the court can justify a stay of separate legal proceedings concerning the same subject matter, pending payment of a previous adjudication decision and court judgement.  These are set out by Akenhead J in Anglo-Swiss Holdings Ltd v Packman Lucas Ltd [2009] EWHC 3212 (TCC) at [21]:

“(i) The Court undoubtedly has the power and discretion to stay any proceedings if justice requires it.

(ii) In exercising that power and discretion, the Court must very much have in mind a party’s right to access to justice and to issue and pursue proceedings.

(iii) The power is one that is to be used sparingly and in exceptional circumstances.

(iv) Those circumstances include bad faith and where the claimant has acted or is acting particularly oppressively or unreasonably.”

Application to strike out the Professional Negligence Proceedings

This was pursued in line with CPR 3.4(2)(b) and (c), which states that

“The court may strike out a statement of case if it appears to the court:

…

(b) that the statement of case is an abuse of the court’s process or is otherwise likely to obstruct the just disposal of the proceedings; or

(c) that there has been a failure to comply with a rule, practice direction or court order.”

The Defendant submitted that a paying party is not entitled to commence a fresh adjudication claim seeking the determination of the parties’ true entitlements unless and until it has first discharged its obligation to pay the amounts determined as payable in a prior adjudication.

As stated by Jackson LJ in S&T (UK) Ltd v Grove Development Ltd [2018] EWCA Civ 2448 (CA) at [107]:”the adjudication provisions are subordinate to the payment provisions [of the Housing Grants, Construction and Regeneration Act 1996 as amended (“the Act”)].”   An important policy of the Act is to promote cashflow in the construction industry. Thus, there should be prompt payment followed by any necessary financial adjustments via adjudication.

Additionally, generally speaking a party is not entitled to rely on any subsequent ‘true value’ adjudication as a defence to the enforcement of the outstanding adjudication award. As emphasised by Stuart-Smith J in M Davenport Builders Ltd v Greer [2019] EWHC 318 (TCC) at [21], a claimant should not be entitled to do so since that would enable a defendant: “to string the claimant along while he goes about getting the true value adjudication decision rather than discharging his immediate obligation and then returning if and when he has obtained his true value decision.”

However, Mrs Justice O’Farrell DBE stated that the above authorities are not relevant to this case. As stated at paragraph 23: “unlike the adjudication provisions, which are subordinate to the payment provisions in the Act, the right to bring legal proceedings to determine rights and obligations and seek remedies is more fundamental. [The Act] provides that an adjudication award is binding only until the dispute is finally determined by legal proceedings, arbitration or by agreement.”  Therefore, there is nothing in the Act or in the above authorities that would render the current legal proceedings unlawful or an abuse of process.

Further, the Defendant submitted that these proceedings were an abuse of process because they had been commenced by the Claimant with the improper collateral purpose of facilitating its opposition to the Defendant’s claim for a sale order over the Property. In other words, the Defendant’s position was that, in light of the sale order, the Claimant already owed them the Property and could not use it as collateral for damages.

However, Mrs Justice O’Farrell DBE stated that the Claimant’s complaints about the Defendant’s professional services were not new and were raised prior to the adjudication and the enforcement proceedings. There was no evidence that the complaints were disingenuous and thus not an abuse of the court’s process.

Commentary

Whilst the result may be surprising, considering the clear and fragrant disobedience by the Claimant of the order dated 5^th February 2019, Mrs Justice O’Farrell DBE used her judicial discretion to stay proceedings pending payment of the outstanding judgment sum, in the light of the genuine claim made by the Claimant which was financially substantial. Strike out at this stage was considered too draconian.

Mrs Justice O’Farrell DBE may have leaned towards the option of staying proceedings pending payment because it was not disputed between the parties and the Claimant’s failure to pay the outstanding judgment sum put it well within the guidelines for a stay set out in Anglo-Swiss Holdings Ltd (point iv in particular). However, if a party is facing a strike out application for commencing legal proceedings before paying an adjudication award, it is useful to provide evidence that demonstrates the claim is genuine. This evidence may be in the form of email complaints or other forms of correspondence between the relevant parties.

This case acts as a reminder that construction contracts, as governed by the Act, have a policy objective of maintaining cashflow. Therefore, when considering adjudication, if there are debts due the position is ‘pay now, argue later’. However, the right to bring legal proceedings will usually trump the payment provisions of the Act. As Mrs Justice O’Farrell DBE stated at paragraph 23: “clear words would be required to make [the right to bring legal proceedings] subordinate to the payment provisions in the [Act].”   It is not clear whether ‘clear words’ means from the Act or the construction contract itself. Nonetheless, had there been something in the contract stipulating that all disputes (not just those relating to fees) must first be dealt with via adjudication, then it is likely that any legal proceedings commenced without seeking adjudication first would be struck out.