Sub-contractor ‘robbed Peter to pay Paul’

Posted: 9th October 2013

In the context of a construction dispute, the High Court has taken the rare step of staying execution of an adjudicator’s award on the basis that the precarious financial position of the successful party made it unlikely that it would be able to repay the money if the adjudicator’s decision were subsequently overturned.

ConstructionIn an unusual departure from the usual principle that adjudicator’s awards should be enforced on a ‘pay now, argue later’ basis, the Court identified severe weaknesses in a sub-contractor’s business model and found that  its grave cash-flow problems probably dated back to before the relevant contract was signed.

The sub-contractor had been employed by the main site contractor to carry out cladding and curtain walling works. After the parties fell out, there were two adjudications which resulted in a net award to the sub-contractor of more than £190,000. The sub-contractor had sought enforcement of that award.

The Court found that a provision within the contract which purported to require that the adjudicator’s award be paid into an escrow account, rather than forthwith to the sub-contractor, fell foul of the Housing Grants (Construction and Regeneration) Act 1996 and was thus invalid. A clause that purported to require the sub-contractor to pay the entirety of the adjudicators’ fees was also unenforceable.

Staying enforcement of the award pending arbitration proceedings, the Court noted the sub-contractor’s ‘bleak financial position’. Although the contractor had ‘robustly vetted’ the sub-contractor prior to entering into the contract, it had been ‘misled’ into reaching the gravely mistaken view that the latter was a substantial and financially stable business.

The Court found that the sub-contractor’s performance of other contracts in which it had engaged had been ‘nothing short of calamitous’ and that it had never had sufficient cash reserves to run its business properly. The clear and unambiguous pattern that emerged was that the sub-contractor was ‘always robbing Peter to pay Paul’ and that its financial problems were inherent in its business model.

Although judgment was entered in the sub-contractor’s favour in the amount of the adjudicator’s award, less 50% of his fees, the Court found that it was ‘one of those rare occasions’ where execution should be stayed pending the outcome of the on-going arbitration proceedings.