FG Skerritt Ltd v Caledonian Building Systems Ltd

[2013] EWHC 1898 (TCC)

Caledonian engaged FGS as a subcontractor in a number of contracts between 2009 and 2010, including the design and build of the mechanical and electrical works on a project at HM Prison Eastwood Park. The contract was based on the DOM2 standard form with a contract price of over £1.8 million. FGS submitted an invoice for the outstanding balance of the subcontract sum, less half the retention. This was on the basis that practical completion had been achieved. Caledonian did not accept that practical completion had been achieved and did not pay that invoice. FGS went into administrative receivership.

The administrative receivers sold FGS’s book debts to Nathu Ram Puri Environmental Design Consultants (“EDC”). The sale to EDC was ineffective in assigning FGS’s book debt because the DOM2 conditions included a prohibition on assignment. EDC was not therefore the owner of the relevant debt. The legal position was that the assignment took effect by way of a trust, so that FGS held the debt on trust for EDC.

FGS ceased work on the project in 2010 following the administrative receivership, but then submitted an invoice for the remaining half of the retention, 12 months after it contended practical completion had been achieved. The administrative receivers ceased to act as such on 14 March 2011. FGS was not wound up but did not trade. It had not yet been struck off the register of companies. FGS issued a notice of adjudication and was awarded £184k (plus VAT).

As a result Caledonian’s counterclaim relating to costs incurred in completing the subcontract works and rectifying defects as a consequence of FGS’s administrative receivership could not be set-off against the invoiced sums. FGS issued proceedings seeking to enforce the adjudicator’s award, FGS’s parent company, Melham Group Limited (“MGL”) having offered a guarantee.

Mr Justice Ramsey also referred to the Wimbledon v Vago case. and noted that if a claimant is insolvent then a stay of execution will usually be granted. However, if the party who has to pay has no real grounds for challenging the adjudicator’s decision, then even if the party is insolvent a stay would not be appropriate because it would deprive creditors of the opportunity of making some recovery from the insolvent company. Here, whilst there was no challenge to the correctness of the adjudicator’s decision in relation to the sums due on the two invoices, there was a challenge by way of defence of equitable set-off both for the sums already expended in remedying defects in FGS’ s work at HM Prison Eastwood Park and also arguable claims for future remedial work to those works. These raised real grounds of equitable set-off amounting to a sum exceeding the sum awarded by the adjudicator.

In considering the terms of the guarantee that was offered, the Judge had to consider the obligation of a party to disclose confidential financial information to another party so that that other party can consider whether to apply for a stay. He said that there was no general obligation for a party to provide confidential financial information to another party in order to allow that other party to investigate the solvency, so as to seek to establish that the judgment should be stayed. However:

“when as here, a party is seeking to avoid a stay where it has been shown to be insolvent and where it is proffering a bank guarantee to avoid the stay, the position is quite different. Where it is proffering a guarantee it is only appropriate that it provides the necessary current financial information of the company proffering the guarantee so that the Court and the other party can properly assess the worth of that guarantee.“

The fact that the money is held in trust by FGS for EDC and therefore has to be paid to EDC did not affect the general principle that an adjudicator’s decision is temporarily binding and should be enforced. In general there was no requirement for a party to show or establish that the money was to be used in one way or another, in order to obtain enforcement of an adjudicator’s decision. Therefore the Judge ordered that there should be summary judgment based on the sums in the adjudicator’s decision but that that judgment should be stayed pending the production of a satisfactory guarantee.