Earlier this year, the Technology and Construction Court (TCC) of the High Court handed down judgment in Shaylor Group Limited (in administration) v Valescure Property Limited (in liquidation).
The claimant, Shaylor, had brought a claim under Part 8 of the Civil Procedure Rules (CPR) for declaratory relief from the court pursuant to CPR rule 40.20. Shaylor argued that an adjudicator had erred in its calculation of the monies owed to it from the defendant, Valescrure, following the termination of the building contract between the parties, and that actually it was owed around £11m from the defendant.
The Court dismissed the claim, citing its broad discretion and noting that to exercise this discretion could "bestow an unlawful windfall on the claimant". An important factor in its consideration was that the defendant was in liquidation and without funding so was unable to represent itself at the hearing or subsequent proceedings.
Background
On 16 November 2017 a building contract to construct 157 apartments in the Jewellery Quarter of Birmingham was entered into between the parties, with a contract sum (as amended) of just under £20m exclusive of VAT. The defendant paid the claimant on account around £9,013,019 before 31 May 2019. On 31 May 2019, the claimant issued its next interim payment application (no.19) citing these figures and claiming it was owed a further £752,628.80 for work done. It estimated the total value of the works at £20,277,563.57.
On 4 June 2019, the defendant's agent issued a payment notice agreeing the value of the work done by the claimant was £9,369,927 (a difference of £356,908). The defendant's agent later wrote that the correct value was not £9,013,019 but £8,169,052, i.e. the defendant had overpaid by £844,867, and demanded repayment of this sum from the claimant.
The claimant went into administration on 17 June 2019 and so became "Insolvent" under the contract. The defendant appeared to give notice of the termination to the claimant, and decided to complete the works itself. It later assigned its rights and obligations under the contract to Grainger plc (Grainger) on 27 April 2020.
First and second adjudications
The claimant referred the matter to adjudication twice, in August 2022 and September 2022.
In the first adjudication, the claimant argued that under clause 8.7.5 of the contract it was owed the full contract sum less any amounts already paid to it (i.e. the £9,013,019), and any amounts the defendant paid in carrying out the works. This was £11,264,544.57 (being the estimated value of the works less the amount already paid to the claimant).
The claimant also argued that under clause 8.7.4 the defendant was obliged to prepare a statement of account within three (3) months of practical completion setting out this amount, which the defendant had breached by not preparing. The defendant was not represented at this adjudication.
The first adjudicator agreed there was a breach.
He held that the defendant had already paid the claimant £9,013,019. He also agreed that it was the defendant's obligation to prove any expense they had incurred in carrying out the works, which they had not done. However, he set out that he did not have information available to calculate the amounts actually due to the claimant, but that the Employer likely carried out works costing in excess of any sums due to the claimant and so the claimant was entitled to no payment. As such, the first adjudicator did not make decisions on the amount of expenses incurred by the employer.
In the second adjudication, the claimant claimed again that they were entitled to rely on their sums in the interim payment application i.e. that they were entitled to the difference between the contract sum and the amounts paid and expensed by the defendant; alternatively that they were entitled to £752,628.80 (i.e. the work done as set out in the no.19 interim payment application); or alternatively £356,908 (being the difference between the no.19 interim payment application's value of the work done and the payment notice).
The adjudicator assessed the amounts due to the claimant were to be calculated by reference to the value of the works yet to be done. On the facts, he held this was the payment notice figure i.e. £9,369,927. The claimant was therefore entitled to £356,908.
Following this decision, the defendant went into liquidation and so was not represented at the subsequent TCC hearing.
Accordingly, the claimant obtained permission to bring the claim to the TCC under section 130 of the Insolvency Act 1986. At the TCC, the claimant argued that the second adjudicator had erred in stating the quantum owed was the value of the works as adjusted by sums already paid or incurred by the defendant, rather than the contract sum.
The Court agreed with the claimant. The contract clearly stated the amount due was the contract sum less any sums already paid to the claimant and less any amounts incurred by the Employer.
However, the Court objected to the implication that this misinterpretation could allow the claimant to receive a windfall for work "which it had not done and would never do". The Court held as a result that from the date of assignment Grainger would be the "Employer" for the purposes of calculating the sums owed under clause 8.7.5 of the contract, so that the defendant could subtract works done by Grainger from any amounts owed to the claimant. This also meant the Claimant could not enjoy the commercial benefit of the assignment whilst also arguing it was invalid.
Impact of defendant's liquidation
The defendant, being in liquidation, did not have money to defend the claim and so did not appear at the hearing. It also did not submit written representations after the hearing, which it and the claimant were invited to do by the Court. The Court was sympathetic to this position and set out that:
- it "must be especially cautious when considering…exercising…[its] discretion";
- it was required to take into account what could have been said on the defendant's part, and so took into account the defendant's written submissions for the second adjudication;
- the claimant's arguments that the defendant could have brought separate proceedings challenging the first and second adjudicator's decisions, were not valid as the defendant was clearly in a position where they could not fund this or any other litigation.
Courts' discretion is vital
This case is a good reminder that parties should be careful when seeking to use declaratory relief to get them out of tight spots or seek to recover greater sums under the contract. Declaratory relief is at the discretion of the courts and as such it is on the party claiming declaratory relief to prove they are entitled to it. The Court in this case was concerned that any exercise of its discretion would lead to an unfair result, namely the claimant receiving a £10m windfall for not carrying out the works.
It is clear that the Courts take numerous factors into account when deciding when to exercise their discretion, including the financial position of the parties. Contractors and Employers alike should consider carefully which claims, including whether to serve insolvency petitions on and or seek declaratory relief from their opposite numbers, they should pursue in the face of non-payment.
