Enforcing interim payments—winding-up or TCC? (Wilson & Sharp Investments v Harbour View Developments)

What is the best way to enforce interim payments? Krista Lee, barrister at Keating Chambers, examines Wilson & Sharp Investments Ltd v Harbour View Developments Ltd.

Original news

Wilson & Sharp Investments Ltd v Harbour View Developments Ltd [2015] EWCA Civ 1030

What was the background to the appeal?

Wilson & Sharp was the developer of two blocks of student accommodation. The project was running late and over-budget. Without any explanation as to the cause of the delays or increased costs, from either the contractor (Harbour View) or the contract administrator, Wilson & Sharp refused to pay two interim certificates amounting to about £1m pounds. Wilson & Sharp however failed to serve pay less notices, as they were not properly advised. Accordingly, the sums certified were due and payable.

Rather than commencing adjudication to recover the sums certified, Harbour View threatened to present a winding-up petition against Wilson & Sharp based on the sums due. Wilson & Sharp sought an injunction restraining the presentation of a petition on the grounds that the interim certificates had grossly overvalued Harbour View’s works. Alternatively, Wilson & Sharp relied upon the fact that Harbour View was insolvent and likely to enter liquidation imminently. In such circumstances the interim payment obligations should not be enforced and/or under the terms of the JCT contract, Wilson & Sharp were no longer required to make any further payments. It should be noted that the construction contract had been terminated three months prior to the injunction proceedings.

What issues did the Court of Appeal examine?

Should a winding up petition be presented where:

  • the debtor accepted that in the absence of any pay less notices, the interim certificates had become due and payable
  • the debtor maintained, with the support of a quantity surveyor’s report, that on a proper valuation of Harbour View’s works, no sums were due
  • the debtor had failed for over six months to litigate its claims against Harbour View by way of adjudication or other legal process
  • at the time of the first instance decision, Harbour View was plainly insolvent and likely to enter company voluntary liquidation and by the Court of Appeal hearing had entered voluntary liquidation
  • the JCT termination provisions provided that where the contractor enters liquidation the employer need not pay any sum that has already become due, but where the contract had already been terminated some six months prior to the contractor’s liquidation

Why did these issues arise?

These issues arose because the judge at first instance found that, having acknowledged the interim payments were due and payable, Wilson & Sharp’s cross claim was a ‘put-up job’. He therefore rejected the quantity surveyor’s valuation. He also disregarded Wilson & Sharp’s explanations as to why they had not been able to put forward their alternative valuation and claims at an earlier stage, which included the lack of disclosure from the contractor, a desire to focus on completing the project and the uselessness of bringing proceedings against an insolvent contractor. He also found that the JCT provisions only applied where the contract was still on foot at the time of the contractor’s insolvency.

What were the main legal arguments put forward?

Two main points were put forward as to why there shouldn’t be a winding-up petition because:

  • the interim certificates overvalued the works, and
  • when a contractor becomes insolvent, no further payments have to be made

At the time the application at first instance was made, there was a proposal for a company voluntary arrangement (CVA) on the table, so it was clear that Harbour View was insolvent, but wasn’t yet in a CVA. After the first instance decision, it went into creditors’ voluntary liquidation so there wasn’t any doubt that it was insolvent at the time of the appeal.

Harbour View said the court should reject Wilson & Sharp’s quantity surveying evaluation, because it said it would mean that no petition could get off the ground so long as an employer found a quantity surveyor who was prepared to write an evaluation that supported them. It didn’t adduce any expert evidence to challenge the evaluation. The court had no hesitation in saying that this was obviously a dispute that should be in court and not in the ‘winding up’ lists.

What did the Court of Appeal decide, and why?

The Court of Appeal found that Harbour View was insolvent within the meaning of the JCT provisions and therefore Wilson & Sharp were not required to pay the sums due by way of interim payment certificates. It did not matter that the contract had been terminated for other reasons six months prior to insolvency.

The fact that the debts were due and no pay less notices were served did not prevent Wilson & Sharp raising a cross claim, namely for over-valuation and damages for repudiatory breach. The quantity surveyor’s report was adequate to establish a good enough claim for the purposes of an injunction.

It is no longer the law that a debtor is not entitled to an injunction where he has not litigated his cross claim. This is only one factor, and the judge at first instance should have taken account of Wilson & Sharp’s explanations as to why they had not litigated their cross claims.

Does the judgment help to clarify the use of winding-up proceedings in the context of interim payments?

This is the first time that provisions drafted in compliance with the new section 111(10) of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) have come before the court. The Court of Appeal confirmed that the JCT provisions comply with HGCRA 1996, s 111(10) and that even the JCT provisions that come under the heading termination apply irrespective of whether the contract is terminated or capable of termination by reason of the contractor’s insolvency.

The Court of Appeal also confirmed that the absence of a pay less notice does not prevent an employer from later arguing that the valuation in an interim certificate was wrong. The Court of Appeal’s reasoning arguably applies not only in the context of winding-up proceedings, but also in other proceedings in the Technology and Construction Court (TCC).

Finally, the Court of Appeal confirmed yet again that a winding-up petition should not be used to enforce an interim payment obligation, where the employer challenges the valuation or has a genuine cross claim. In determining this issue, the employer will not be prejudiced by the absence of a pay less notice or the fact that it has not started adjudication or other proceedings against the contractor, if it has reasons for not doing so.

What practical lessons can those advising take away from the case?

Don’t use winding-up provisions to enforce interim payments. Adjudication followed by enforcement in the TCC is a better route.

An insolvent contractor will have difficulty enforcing interim payment obligations in the TCC and the Companies Court, where the employer has a cross claim or challenges the interim valuations.

Despite the aims of HGCRA 1996 to improve payment in the construction industry and prevent contractors going into insolvency, it is still possible for an employer to refuse to pay interim payments for a long time and thereby contribute to a contractor’s liquidation so as to avoid payment under contractual provisions in line with HGCRA 1996, s 111(10).

Interviewed by Duncan Wood.

Krista Lee acted for the appellant in this case.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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First published on LexisPSL Restructuring and Insolvency

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