Pioneer Cladding Ltd v John Graham Construction Ltd

[2013] EWHC 2954 (TCC)

Graham instructed Pioneer to carry out the cladding and curtain walling sub-contract works at a site in South Shields. The sub-contract incorporated the following provisions in clause 21:

“(iii) Notwithstanding clause 29 of MAP the Adjudicator’s fees are to be borne by the Party which refers the dispute to adjudication…

(v) In the event that the decision of the Adjudicator is the making of a monetary award (“Adjudicator’s Award”) in favour of the Sub-Contractor, the following provision shall apply:-

(a) Graham shall place on deposit the amount of the Adjudicator’s award with Northern Bank Limited in the joint names of the solicitors acting for Graham and solicitors acting for the Sub-Contractor within seven days from the date of receipt by Graham of the Adjudicator’s decision.”

Pioneer referred two disputes to two separate adjudications. The net result was that there was a sum due to Pioneer of £193,005.53.

The Court stated that on the face of it, clause 21(v) would suggest that Pioneer are not entitled to be paid that sum and instead the money is to be paid into an escrow account. However, Pioneer argued that the provision was contrary to the HGCRA and contrary to the principles behind the entire adjudication process whereby the need for the “right” answer has been subordinated by the need to have an answer quickly.

In relation to this the Judge stated:

“I am in no doubt that clause 21(v) is in breach of both the policy behind the 1996 Act and the Act itself. It is not in accordance with the Scheme for Construction Contracts introduced by the Act. Because it would deprive a claiming party of the money they had been awarded by the adjudicator, the clause is designed to discourage a party from exercising its right to take disputes to adjudication.”

The Court reiterated the conventional view that:

“If one part of the contract offends against the 1996 Act and/or the Scheme, the adjudication provisions in the contract fail in their totality, and are to be replaced by the Scheme.”

The Court went on to state:

“Even if that is wrong, and clause 21(iii) can survive, I consider that that clause too is contrary to the 1996 Act and the Scheme.”

The Court found that although the provision was not as extreme as the provision in Yuanda v Gear, which made the referring party liable for the whole of the costs of the adjudication, it was still a provision which could discourage a claiming party from commencing adjudication and was therefore unlawful. Consequently, Graham could not rely on the provision. One practical effect of this was that each party was liable for half of the adjudicator’s fees. As Graham had paid some of those fees on behalf of Pioneer, the parties agreed that the sum of £4,340.04 must be deducted from the £193,005.53 due to Pioneer, making a net sum due of £188,665.49.

The Court then turned to the issue of the stay of execution and put forward three questions:

“(i) Is it probable that Pioneer would be unable to repay the £188,665.49 if that was the outcome of the ongoing arbitration?

(ii) Is Pioneer’s financial position the same or similar to the financial position of which Graham was aware at the time that the contract was made?

(iii) Is Pioneer’s financial position due either wholly or in significant part to Graham’s failure to pay the sums awarded by the Adjudicator?”

In response to the first question the Court was in no doubt that if the money was paid over to Pioneer, they would not be in a position to repay it if the arbitration subsequently went against them.

In response to the second question the Court found that Graham were right to conclude, as they did at the time, that they had “robustly vetted” Pioneer. In the absence of any proper accounts or independent financial information, they had done the best that they could. The judge also expressed that he was satisfied that Graham entered into that sub-contract on a false premise.

In relation to the third question the suggestion that Pioneer’s financial difficulties were caused or substantially contributed to by Graham were rejected. On the contrary, the Court considered that those financial problems were inherent in Pioneer’s business model and that Pioneer’s cash flow difficulties stemmed back to a time before they had sub-contracted with Graham.

The Court therefore concluded that, notwithstanding the relatively high hurdles noted in Wimbledon v Vago, Graham had made out a good case for a stay of execution pending the outcome of the on going arbitration.

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