Interim payment disputes – Stop winding me up!

Last month the Court of Appeal handed-down judgment in a case concerning contractor’s insolvency and payment in winding-up proceedings (Wilson and Sharp Investments Ltd v Harbour View Developments Ltd). The case is of interest because of its wide interpretation of the JCT contractual insolvency provisions. It also sends a clear message as to how interim payments should be enforced.

In 2012, property developer Wilson and Sharp Investments Ltd (the Employer) engaged Harbour View Developments Ltd (the Contractor) for the development of student accommodation in Bournemouth. There were two building contracts, both based on the JCT Intermediate Contract with Contractor’s Design 2011.

In August and September 2013 four interim certificates were issued – one of which was later paid – leaving an amount of over £1M outstanding. No Pay Less Notices were issued by the Employer. As a result, the sums certified became due and payable. The Contractor subsequently suspended its services on the grounds of non-payment. It was common ground that the contracts were terminated in late January 2014.

Rather than issuing adjudication proceedings to recover the sums certified, the Contractor, having first notified the Employer of its intention to do so, issued a winding-up petition against the Employer. The Employer subsequently issued an application for an injunction restraining the petition, on the basis that the interim certificates grossly overvalued the Contractor’s works.

The financial standing of the Contractor subsequently deteriorated. Prior to the hearing at first instance the Contractor proposed a CVA, which was subsequently rejected and notice was given that a meeting of creditors was to be held for the purpose of appointing a liquidator.

The Court at first instance dismissed the Employer’s application for an injunction to restrain the winding-up petition because:

1. the JCT provisions allowing the Employer to suspend payment on insolvency did not apply where the contracts had already been terminated before the contractor became insolvent
2. as the Employer had not served Pay Less Notices and acknowledged the interim payments were due and payable, the Employer’s cross claim for overvaluation of the works was a ‘put-up job’ and not genuine.

The Employer appealed. So what did the Court of Appeal decide?

The Court of Appeal agreed with the Employer that the JCT provisions regarding suspension of payments to the Contractor on insolvency apply regardless of whether the contract had already been terminated or was capable of termination.

The Court of Appeal also disagreed that the cross-claim was a ‘put-up job’; the evidence showed that the cross-claim was reasonably arguable. Further, the Court stated that an acceptance by an employer that an amount was due under an interim certificate (because a Pay Less Notice was not served) did not preclude an employer from challenging the valuation later.

This, of course, is a hot topic since the outcome of the appeal in the case of Harding v Paice, where parties were not permitted to challenge the valuation of interim payments in the absence of a Pay Less Notice, is due at any time.

But possibly the most important message from the Court of Appeal to contractors is that even where there has been a failure to serve Pay Less Notices, don’t use winding-up proceedings to enforce interim payments where there is a challenge to a valuation or a cross claim. The most appropriate route is to pursue adjudication proceedings followed by enforcement in the TCC.

 

Kasia Dickson, Legal Assistant, Thomas Eggar LLP

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