Stay’in alive – Court accepts manifest injustice in granting stay

An underlying tenet of the Construction Act is to encourage cash flow. Accordingly, courts are reluctant to grant a stay of enforcement on an adjudicator's decision unless certain limited circumstances are found to be present.

In the recent case of JRT Developments Ltd v TW Dixon (Developments) Ltd [2020] the TCC held that, on the basis of the “very unusual” facts of the case, there would be manifest injustice if the judgment were not stayed to allow substantive disputes of fact to be heard in a subsequent trial.

The Project

TW Developments Limited (TWD) was a company formed by Mr and Mrs Dixon for the purpose of carrying out a development of 14 houses on a farmland plot in Shropshire.

JRT Developments Limited (JRT), owned and controlled by Mrs Dixon’s nephew, Mr Woodcock, was the contractor tasked with building the houses and related infrastructure. The development was his first major project and funding was provided by the Homes and Communities Agency (HCA).

The parties entered into a JCT Minor Works Contract with Design 2011 Edition in June 2016, though it was later disputed whether the contract also incorporated the terms of a separate document entitled “Commercial Agreement”, executed on the same date. The disputed constitution of the contract, which would have a significant effect on its value, later formed an aspect of the cross-claim issued by TWD.

The relationship between the parties deteriorated and in June 2019 the contract was terminated by JRT. Although provided for in the contract, neither Architect nor Contract Administrator were ever appointed. In fact dealings between the parties were very informal. The parties did not operate the payment procedure contained in the contract in the three years prior to termination. Instead, JRT liaised directly with the HCA’s valuer and issued invoices to TWD for the amounts approved by the HCA which were then paid by the HCA’s funding.

Adjudication proceedings, enforcement and application for a stay

On 4 November 2019, JRT issued a purported payment notice totalling £925k, to which TWD failed to respond. JRT commenced a “smash and grab” adjudication and the Adjudicator decided in favour of JRT. JRT issued enforcement proceedings in March 2020. TWD issued proceedings seeking a declaration that the 4 November payment notice should be declared invalid.

At the enforcement hearing, TWD conceded JRT was entitled to summary judgment on the adjudication award. However, it sought a stay of enforcement pursuant to CPR 83.7(4), pending resolution of the legal proceedings on the basis of the following “special circumstances”:

• the probable inability of JRT to repay the judgement sum at the end of the cross-claim trial, relying on the case of Wimbledon Construction Company v Vago [2005]; and
• the risk of manifest injustice if no stay was granted, as a result of TWD’s inability to pay and all the circumstances of the case.

Consideration of the law and granting a stay

Referring to guidance provided by HHJ Coulson, as he then was, in the case of Wimbledon, HHJ Watson noted that she was satisfied that:

• it was very highly probable that JRT would be unable to repay the judgment sum if ordered to do so after the trial of the Part 7 proceedings;
• the financial position of JRT was substantially different from when the JCT contract was entered into and that this now posed a significantly higher risk than it did in 2016; and
• JRT’s financial position was not caused either wholly or in significant part by TWD’s failure to pay the sums awarded by the adjudicator.

As to whether a manifest injustice would be caused, HHJ Watson considered the decision in Galliford Try Building Ltd v Estura [2015] in which the court found that, in the unusual circumstances of that case, it would be unjust to the defendant to be forced to pay the judgment in full, and granted a partial stay of execution in a sum that would be fair to both parties.

HHJ Watson set out a number of the “exceptional circumstances” in the case at hand which justified a stay execution of the judgment sum until the trial of TWD’s claim:

• HHJ Watson was satisfied that TWD could not pay any of the judgment sum without rendering itself immediately insolvent and being forced into liquidation. Accordingly, if the claim was not stayed, TWD would recover little, if any, of the judgment sum following trial.
• TWD’s reliance on JRT (owned and controlled by Mrs Dixon’s nephew) and the method of funding through HCA were unusual in a commercial contract. HHJ Watson noted that it was “clearly not a project where the relationship between the parties was that of employer and contractor at arm’s length”.
• A key aspect was the manner in which JRT obtained the adjudication award. During the three-year course of the contract, the JCT payment terms were ignored by both parties and it was only after JRT terminated the contract that it demanded money from TWD in excess of funding received from the HCA through the November 2019 payment notice. TWD’s manager, Mr Neville (another nephew of Mrs Dixon), who was blind and had no previous experience of the construction industry, did not appreciate the significance of the November 2019 payment notice, but had promised to investigate it. Despite this, JRT referred the matter to adjudication as soon as it could do so. Although the November 2019 payment notice may well have been valid (to be determined in the subsequent legal proceedings), HHJ Watson considered these factual circumstances to be relevant when considering the fairness of enforcing the judgment sum.
• Finally, HHJ Watson also noted certain sums had been included in the payment application that were clearly not payable to JRT and JRT had provided no explanation for this. Whilst it would not be appropriate to pre-judge the proceedings for the true valuation of any sums due, HHJ Watson considered it likely that, following trial, there would be an order for a significant repayment to TWD.

Enabling justice to be done

As has been emphasised in recent months during the COVID-19 pandemic, the construction industry works on tight margins and the risk of insolvency for contractors is high. Accordingly, courts are reluctant to frustrate the underlying purpose of the Construction Act by preventing enforcement.

Yet, as noted by HHJ Coulson (as he then was) in Hillview Industrial Developments (UK) Ltd v Botes Building Ltd [2006], “I am also satisfied that the purpose of the 1996 [Construction] Act is to provide a statutory framework which would enable justice to be done between parties to a dispute. It was not intended to cause injustice”.

As demonstrated in Gosvenor London Ltd v Aygun Aluminium Ltd [2018] (which extended the principles established in Wimbledon), the courts, while reluctant to interfere with adjudicator’s decisions, are also reluctant to see the adjudication process being utilised to create injustice. Notwithstanding the significant high bar demanded for an enforcement to be stayed in order to prevent manifest injustice, JRT Developments highlights that courts are prepared to exercise their discretion and order a stay when the circumstances demand it.