Member Article

Westshield Limited v David and Lisa Whitehouse [2013] 3576 EWHC (TCC); Akenhead J, 18 November 2013

Executive Summary

In this decision the TCC considered the impact of a CVA ("Company Voluntary Arrangement") on an adjudication decision and confirmed that challenges to the enforcement of adjudicators' decisions are not necessarily limited to jurisdictional or breach of natural justice arguments. The TCC ruled that where a CVA provides for accounting where there have been mutual credits, debits or other mutual dealings, then an adjudicator’s decision will not be enforceable by summary judgment before the Supervisor undertakes the necessary accounting process to determine the balance due on the basis of set off of claims and counterclaims.

Background

Mr and Mrs Whitehouse (“the clients”) instructed Westshield (“the contractor”) to carry out sub-structure works for a residential property in Cheshire. The contract was in the standard Joint Contracts Tribunal form for Minor Building Works and the contract sum was approximately £260,000. At final account stage the contractor made an application to the clients seeking sums well in excess of the original contract sum, attributing these significant increases to variations and delays.

By the end of 2010, before the issues between the parties were resolved, the contractor entered into a CVA due to financial difficulties arising out of the economic climate. The terms of the CVA provided for an account to be taken where there were mutual credits, debits or other mutual dealings i.e. it provided for the set off of sums due to one party against sums due to the other in the same way as set off rules apply in liquidation. Therefore, only the balance could be claimed by the creditor.

Adjudication proceedings

The contractor’s total claim was for £645,000. After deduction of payments which had been made by the clients, the contractor’s claim was reduced to approximately £270,000.

In March 2013, the contractor commenced adjudication proceedings against the clients for this sum. Following the appointment of the adjudicator, a Referral Notice was served by the contractor, followed by a Response from the clients. The Response reserved the clients' position on whether or not a dispute had crystallised and also on the impact of the CVA and then went on to challenge the contractor’s claim on its merits.

The adjudicator’s decision was that the clients should pay £132,667.56 to the contractor in relation to the claim, as well as paying the adjudicator’s fees. The clients paid the adjudicator’s fees, but did not pay the sum awarded to the contractor.

The contractor thereafter sought to enforce the adjudicator’s decision by way of summary judgment in the TCC. At this stage, the clients raised a counterclaim for defects and also challenged various parts of the adjudicator’s decision.

TCC Proceedings

Before the TCC, the clients argued, amongst other things, that there should be a stay of execution in the enforcement of the adjudicator’s decision by reason of the poor financial position of the contractor. 

The contractor argued that the adjudicator’s decision should be enforced by way of summary judgment and challenged the credibility of the clients’ counterclaim, pointing to its very late emergence and its lack of detail and support. In retaliation to the comments on the contractor’s financial position, the contractor highlighted the commercial viability of the company, explaining that the CVA was coming to an end and that it had complied with its terms.

Reasoning

Before considering the effect of the CVA, it is worth taking a moment to reflect on how the clients came to be bound by its terms. The CVA could only become binding if 75% of the creditors (by value) agreed. In this case there was no dispute that this happened; however, the list of creditors at the stage the CVA was entered into did not include the clients because their counterclaim was not raised until much later. On the basis of Section 5 of the Insolvency Act 1986 as amended, the TCC found that the clients were bound by the CVA even though they did not participate or register their claim at the time the CVA was entered into.

Turning to the impact of the CVA on the enforceability of the adjudicator’s decision, the TCC looked to Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC) for guidance in relation to stays of execution in the enforcement of an adjudicator’s decision. In Mead General Building Ltd the judge refused to grant a stay of execution and held Dartmoor liable to make payment of the adjudicator’s award notwithstanding the existence of a CVA. This was principally because Mead's financial troubles were directly caused by the Dartmoor’s failure to pay the adjudicator’s award and Mead was too small a business to be able to withstand losses of the magnitude created by Dartmoor. 

That case set out the following principles:

• The fact that a claimant is the subject of a CVA will be a relevant factor for the court to take into account when deciding whether or not to grant a stay under RSC Order 47. 
• However, the mere existence of the CVA will not of itself mean that the court should automatically infer that the claimant would be unable to repay any sums paid out in accordance with the judgment, such that a stay of execution should be ordered. 
• The circumstances of both the CVA and the claimant's current trading position will be relevant to any consideration of a stay of execution.
• Whether or not the claimant's financial position and/or the CVA is due, either wholly or in significant part, to the defendant's failure to pay the sums awarded by the adjudicator will also be a relevant factor for consideration.

Decision

Applying these principles, the TCC dismissed the contractor’s application for summary judgment and stayed the proceedings pending the outcome of the account, as the TCC held that the provision in the CVA requiring such an account to be taken bound both the contractor and the clients and that the position on accounting was the same under the CVA as if the contractor had gone into liquidation.

The TCC also found that the belated counterclaim put forward by the clients was “sufficiently credible” to challenge the substance of the adjudicator’s decision. The TCC therefore held that it could not summarily enforce the adjudicator’s decision, as the CVA provisions meant that the claims and cross claims would merge and only the balance of the account would be due.