A contractor tries to delay paying its subcontractor, arguing that it cannot reclaim the money later if the other firm goes into administration. What did Mr Justice Ramsey think?

Jeffrey Brown

In this case the court had to consider whether any summary judgment following an adjudicator’s award should be the subject of a stay of execution. The principal argument being that the monies, once paid, were unlikely ever to be recoverable.

The case in question was Farrelly (M & E) Building Services Limited and Byrne Bros (Formwork) Limited, and the judgment was delivered by Mr Justice Ramsey on 9 May 2013.

Byrne had been appointed as main contractor on a contract with London Underground for the refurbishment of Hammersmith underground station.

By a subcontract, Byrne subcontracted the mechanical and electrical work and services to Farrelly. The subcontract was in the form of a NEC3 agreement with bespoke amendments. Farrelly was successful in an adjudication against Byrne but in the absence of payment, proceedings were commenced to enforce the adjudicator’s decision claiming payment of £561,194.92, plus interest. Byrne raised a number of grounds challenging the adjudicator’s decision. However, it is its submission that any judgment in favour of Farrelly should be stayed that commands particular attention.

Byrne sought to stay enforcement of the judgment, claiming the probability that Farrelly would be unable to repay the judgment sum at a later date if ordered to do so. The latest filed accounts of Farrelly were to the year ended 30 September 2011, which meant that they were more than 16 months old. Byrne acknowledged that they appeared to show that Farrelly was solvent, at least at that time, but concerns existed over the reliability of these accounts. A negative adjustment of £49,500 is all it would take to render the balance sheet insolvent. The 2011 accounts showed Farrelly’s most significant asset was its debtor figure, which stood at £3,215,000.

However, Byrne stated that £860,467 related to its own alleged liability, which was being challenged, and £595,000 related to work that had not in fact been applied for but had been based upon its own assessment of amounts due.

Limited value only can attach to accounts over 16 months old

Furthermore, Byrne had commenced its own adjudication against Farrelly claiming a payment of £2.3m arising from the termination of Farrelly’s subcontract. Byrne contended that this decision was likely to be received in the 28 days following from the date of the hearing of 9 May and would resolve the final account between the parties. Byrne contended that Farrelly had refused to supply more recent management accounts, which Byrne interpreted as evidence of deterioration in Farelly’s financial standing.

Byrne’s analysis was supported by evidence from KPMG, as well as from a Mr Steven Fellows of UK Electrical. He had been appointed as a subcontractor of Farrelly on this contract. Mr Fellows indicated that there were sums owed by Farrelly, but Farrelly argued that the UK Electrical claims were in dispute.

The court endorsed the principles applied by Mr Justice Coulson in Wimbledon Construction vs Vago [2005]. The general rule is that adjudicators’ decisions are to be enforced. In the absence of actual insolvency, there had to be the probability that the beneficiary would be unable to make the repayment, if it were ordered to be made on the hearing of the substantive issues.

Furthermore, this insolvency could not be due to failure to pay the sum awarded by the adjudicator and the beneficiary’s financial position could not be the same or similar to its financial position when the contract was originally made.

Ultimately, the court concluded that there were no grounds for imposing a stay and granted summary judgment for the amount claimed. The judge said that this was not a case where Byrne had established the grounds to justify the exercise of discretion to stay the judgment. Farrelly could not be compelled to produce management accounts. The essence of adjudication is to provide cash flow and one party’s contention that an adjudicator’s decision, at a future date, may require the payment of sums by the party entitled to payment, could not deflect the court from its responsibility to allow the enforcement of the adjudicator’s decision.

This case demonstrates that limited value only can attach to accounts which are more than 16 months old and that a subcontractor’s financial standing may have deteriorated in the interim. It also shows the difficulties in persuading a court to impose a stay, in the absence of actual insolvency.

As a postscript to this judgment, five days later Farrelly called in administrators on the 14 May 2013.

This was reported in Building on 20 May. It is not known whether or not the monies were paid by Byrne prior to the appointment of the administrators.

Jeffrey Brown is a partner in the London office of Veale Wasbrough Vizards