Facts:
A construction contract was entered into in November 2017 with the works commencing shortly thereafter. The original contract sum was £18,796,450, exclusive of VAT. There were some variations which added a further £645,329. The defendant paid the claimant £9,013,019.
On 4 June 2019, the defendant's agent issued a payment notice, agreeing that the value of the work done by the claimant was £9,369,927. However, on 24 July 2019, the defendant's agent wrote to the claimant stating that the correct value of the work done by the claimant was not £9,013,019 but rather £8,169,052 and, therefore, the defendant had overpaid the claimant by £844,867. They demanded repayment of the latter sum within 14 days. No repayment was made by the claimant.
The works were not close to being complete at this stage. For work done thus far, the claimant claimed in an interim payment application that the defendant owed it a further £752,628, over and above the £9,013,019 the defendant had already paid. The claimant's estimate of the value of the total contract works was stated, in that interim payment application, to be £20,277,563.57.
The claimant went into administration on 17 June 2019 and was declared insolvent. The work was attributed to Grainger. Following adjudication, the amount due to the claimant was estimated at £9,369,927. The claimant is contesting this finding, arguing it should have been £20,277,563. The defendant went into liquidation in December 2022.
Decision:
The key issue was whether the defendant owed £9,369,927 or £20,277,563 based on clause 8.7.4.3 of the contract. If the submission succeeds, the claimant would be a creditor of the defendant in the liquidation owing £11,264,544.57 rather than £356,008.
Mr Justice Kerr agreed with the claimant that the natural and ordinary meaning of clause 8.7.4.3 is to cover the contract price and not only the value of the work actually performed. There is nothing in the background facts to point to a different conclusion other than applying the ordinary principles of interpretations as established by the Supreme Court’s case law. Moreover, those terms are “expertly crafted standard industry terms”. He also agreed that the contract’s terms mean that “if the employer decides not to complete the works, then the contractor receives a payment based on quantum merit. If the employer decides to complete the works, then the payment regime is governed by the contract price but adjusted to take account of the cost of completing the works and any part payment made”.
The claim was a declaratory relief and, since the defendant was in liquidation and not represented, Mr Justice Kerr had to consider what could have been said if it had attended. Analysing the evidence provided by the defendant during the second adjudication, the Judge questioned himself whether the assignee could be regarded as an employer and then measured the amount the claimant was entitled to by reference to the expenses incurred and losses suffered by Grainger. This approach is not consistent with clause 8.7.4.3 and would “confer some degree of legitimacy on an unauthorised assignment.” However, the Court agreed that Grainger was in a sense an employer and preserved the ‘integrity and commercial logic of the accounting exercise’.
He disagreed with the second adjudicator’s interpretation that a “debt could never be payable to an insolvent contractor. If the contractor became insolvent late in the process, having nearly completed the works and earned nearly the whole contract price; if the employer were far behind with payments to the contractor, with a substantial amount outstanding; and if the employer were able to complete the (already nearly complete) works at a low price using a different contractor, there could well be a debt due to the insolvent contractor, adopting the (in my view erroneous) second adjudicator's interpretation”.
The Judge found none of the solutions satisfactory or correct but did not agree with the solution of the claimants to receive a windfall of millions of pounds. This windfall would cause an injustice. Mr. Justice Kerr then made an analogy with the equitable principle that “where it is a condition of enjoying the benefit that a burden is assumed, the assignee cannot enjoy the benefit without discharging the burden". Here, it is not the assignee but the other party, the claimant, which is denying the effectiveness of the assignment to transfer the defendant's rights and obligations to the assignee; yet relying on the effectiveness of the assignment to deny the incurring of expenses and the suffering of losses by the defendant”.
He also found that the absence of the defendant was not based on their own fault and that if the defendant had access to sufficient funds, they would have come.
Implications:
The Court ruled that granting the amount sought would have been an unlawful windfall. This judgement demonstrated that despite the ordinary interpretation pointing to one aspect, judges will refuse to order something that would be judged to be unfair.
Here the Court allowed for a broad interpretation of the term employer to avoid unfairness. The fact that the defendant was absent due to being in liquidation was not regarded as a problem.