Notice of intention should not be used as delaying tactic (South Coast Construction Ltd v Iverson Road Ltd)

Lucie Briggs of Atkin Chambers, who was counsel for South Coast Construction, considers the decision in South Coast Construction Ltd v Iverson Road Ltd which concerned an application to lift the administration moratorium to enforce an adjudicator’s decision.

Original news

South Coast Construction Ltd v Iverson Road Ltd [2017] EWHC 61 (TCC), [2017] All ER (D) 114 (Jan)

The Technology and Construction Court (TCC) held that, if a moratorium had continued in respect of the defendant company, the claimant company’s application, under paragraph 43(6)(b) of Schedule B1 to the Insolvency Act 1986 (IA 1986), for permission to proceed with proceedings to enforce an adjudicator’s award in the claimant’s favour would have been granted. The court further granted summary judgment in favour of the claimant to enforce the award where, applying settled law to the facts, the adjudicator had had the necessary jurisdiction.

What was the background to the case?

Iverson Road Ltd (Iverson Road) appointed South Coast Construction Ltd (South Coast) under a JCT Intermediate Building Contract as contractor for the new build construction of 33 apartments and three houses at 163 Iverson Road, London. The construction was to take place in three phases—the first two phases comprising three houses and a number of flats for private sale and the third phase comprising social flats. The works were subject to significant delay and disruption, primarily caused by the late provision of design information by Iverson Road and its design team.

The private sale units were completed on or around 22 June 2016. On 23 June 2016, South Coast suspended work on site as a result of Iverson Road’s non-payment of its application for payment no 36. On 1 July 2016, Iverson Road issued an instruction omitting the remainder of the works (to the value of £680,000) and proceeded to engage other contractors to complete the works. On 1 July 2016, Iverson Road also issued a certificate of practical completion, a certificate of non-completion, a letter setting out its intention to deduct liquidated and ascertained damages amounting to £844,330.60 and a payless notice stating that no further sums were due. South Coast disputed this, issuing its final account in the sum of £996,418.01 and claiming that the omission of the remaining works constituted a repudiatory breach of contract by Iverson Road, entitling South Coast to damages (lost profits).

On 5 September 2016, South Coast referred the following dispute to adjudication: ‘the amount of additional monies South Coast Construction Limited (SCC) is entitled to be paid by Iverson Road Ltd over and above the monies received to date…’. It claimed the principle sum of £996,418.01 (which included prolongation costs), plus lost profits on the works omitted. In its response Iverson Road denied that South Coast was entitled to any further payment and asserted its claim for liquidated damages.

On 21 November 2016, the adjudicator issued a decision in South Coast’s favour that required Iverson Road to pay South Coast the principal sum of £861,235.00. Iverson Road did not pay and on 30 November 2016 South Coast applied to the TCC for summary judgment to enforce the decision. Iverson Road defended the proceedings alleging that the decision should not be enforced on the basis that the adjudicator did not have jurisdiction to award South Coast an extension of time, thus he did not have jurisdiction to decide (as he had) that South Coast was entitled to prolongation costs (which formed part of South Coast’s claim) or to reject Iverson Road’s entitlement to liquidated damages.

At the same time (and without informing either South Coast or the court) Iverson Road issued a series of three notices of intention to appoint administrators (NoI) which each imposed a statutory moratorium on the commencement or continuation of proceedings against the company for a period of ten business days, therefore effectively imposing a moratorium up to and including 18 January 2017, which was the date of the summary judgment hearing for enforcement of the decision. Iverson Road only informed South Coast and the court about the notices and the moratorium on 16 January 2017 (two days before the hearing). South Coast consequently applied to Coulson J to exercise the courts discretion under IA 1986, Sch B1, paras 43(6)(b) and 44(5) and give permission for the enforcement proceedings to continue on 18 January 2017.

What were the legal issues the judge had to decide?

The application for permission under IA 1986 to lift the administration moratorium is certainly the more interesting point. Coulson J in fact reserved his judgment to 19 January 2017 (at which time the moratorium imposed by IA 1986 had ended) however he gave judgment on the application as he identified that it raised an issue which is likely to have wide ramifications and may be relevant to other cases in the months to come. As such he had to decide whether (had he decided the matter on 18 January 2017) he would have exercised the court’s discretion under IA 1986, Sch B1, paras 43(6)(b) and 44(5) to lift the moratorium and allow the enforcement proceedings to continue.

On the enforcement Coulson J had to decide whether the adjudicator had jurisdiction to consider South Coast’s entitlement to an extension of time—ie whether it formed part of the dispute referred and/or whether, by claiming liquidated damages in its response Iverson Road had conferred jurisdiction upon the adjudicator to determine South Coast's entitlement to an extension of time.

What did the judge decide, and why?

On the permission application, Coulson J decided that, based on the principles set out in Re Atlantic Computer Systems [1992] Ch 505, [1992] 1 All ER 476 he would have granted permission for the enforcement proceedings to continue. In particular he stated that having the enforcement application determined would cause no prejudice to the other creditors or jeopardise the purpose of the moratorium but would in fact assist the administrators because they would have an answer to the only issue between South Coast and Iverson Road. Coulson J also took Iverson Road’s conduct into account commenting that, in issuing serial notices without appointing an administrator and in failing to inform either South Coast or the court until two days before the hearing, Iverson Road had been playing a ‘deliberate double game’.

However, and more importantly for construction adjudication, Coulson J stated he would have allowed the application for permission in any event, due to the nature of adjudication enforcement proceedings. He stated that such proceedings are ‘unique’ and ‘without any real parallel in other parts of the High Court’. He held that adjudication enforcement proceedings more than meet Norris J’s test in Ronelp Marine Limited v STX Offshore and Shipbuilding Co Limited [2016] EWHC 2228 (Ch), [2016] All ER (D) 77 (Oct) and are ‘exceptional’ for the purposes of the test set out by Patten J in AES Barry Limited v TXU Europe Energy Trading [2004] EWHC 1757 (Ch), [2004] All ER (D) 160 (Sep). Thus he stated that ‘a party such as the claimant, who has a decision in its favour from an adjudicator, is in a much better position than most to argue that the court should exercise its discretion to continue to an enforcement hearing’.

(For further reading on the Ronelp case, see blog post: Lifting a stay under Cross-Border Insolvency regs).

On the enforcement Coulson J held that the defendant’s jurisdiction argument was hopeless. Firstly the dispute referred clearly conferred jurisdiction upon the adjudicator to decide South Coast’s entitlement to an extension of time as, in order to ascertain its financial entitlement, the adjudicator was necessarily obliged to consider whether or not the deduction of liquidated damages had been properly made. That in turn required the adjudicator to decide who was responsible for the delays on site. He also found that even if (contrary to his primary view) the disputed cross-claim for liquidated damages had not formed part of the notice of adjudication, it was expressly raised by the defendant by way of cross-claim and that process too came within the adjudicator’s jurisdiction and that any other conclusion would be absurd.

To what extent is the judgment helpful in clarifying the law in this area?

Coulson J has provided clear guidance the court will exercise its discretion to lift a statutory moratorium imposed by IA 1986 in favour of adjudication enforcement proceedings.

As for the enforcement proceedings, while the judgment mainly covered old and well known ground, Coulson J has confirmed that the principle that an adjudicator’s jurisdiction can be extended to include consideration of any legitimate defence the responding party wishes to put forward, also applies the other way round, ie to encompass any matter raised by the referring party in response to a defence raised by the responding party.

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

It is hoped that this judgment will deter defendants from issuing an NoI to enter into administration as a tactic to delay having to comply with an adjudicator’s decision.

At para [24(a)] of the judgment, reference is made to the ‘sketchy contents’ of the NoI. Presumably this is in reference to the board minutes/record of decision attached to the NOI. What were the contents of the board minutes that led to that criticism?

The criticism made by Mr Homer (solicitor for South Coast) in his statement referred specifically to the minutes accompanying the third NoI, which was dated 4 January 2016 as Iverson Road did not in fact disclose the first two NoIs until the day of the hearing. The criticism (which the judge accepted) was that the minutes accompanying the NoI fail to disclose any explanation as to why the company is either insolvent or likely to become insolvent, or why no appointment was made after the first NoI was filed.

Have costs been dealt with in the case and, if so, what was the outcome?

Iverson Road was ordered to pay South Coast’s costs of both the permission application and the enforcement, which were summarily assessed. No costs have been sought from any other party.

Interviewed by Anne Bruce.

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

Further Reading

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The moratorium in administration

Guide to insolvency in the construction industry

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