COD Hyde Ltd v Space Change Management Ltd

This is an application by COD Hyde Ltd (“the Employer”) to restrain the presentation of a winding-up petition against Space Change Management Ltd (“the Contractor”). The intended petition is based on a statutory demand dated 9 February 2016 served on the Employer by the Contractor claiming the sum of £680,692.27. The Employer contends that the entirety of the debt is disputed on substantial grounds and further that there is a counterclaim against the Contractor which exceeds the sum claimed. The Contractor contends that the case is clearly in its favour and that there is no genuine dispute on substantial grounds.

The Employer’s alleged claim arises out of a bespoke JCT Design and Build Contract 2011, dated 2 October 2015 (“the Contract”). It is a “construction contract” within the meaning of the Housing Grants, Construction and Regeneration Act 1996 (“the 1996 Act”) and, in accordance with that Act, provides for interim payments.

I identify the material parts of the Contract in the following paragraphs.

Section 4 of the Contract deals with payment. Clause 4.7 provides for the Employer to make Interim Payments in accordance with Section 4. The sum due is an amount equal to the Gross Valuation under clause 4.13 or 4.14 (as appropriate) less the sum of (i) the Retention (ii) the cumulative total of advance payments due for reimbursement to the Employer and (iii) the amounts already paid in previous Interim Payments.

Clause 4.8 provides for the Contractor to make, in relation to each Interim Payment, an application to the Employer (referred to as an “Interim Application”) stating the sum which the Contractor considers to be due to it and the basis of calculation.

Clause 4.9 makes provision for the final date for payment of an Interim Payment and its amount:

Clause 4.11 provides that, without affecting the Contractor’s other rights and remedies, if the Employer fails to pay the Contractor the sums payable under clause 4.9 by the final date for payment and the failure continues for 7 days after the Contractor has given notice to the Employer of its intention to suspend the performance of its obligations and the grounds on which it is intended to suspend performance, the Contractor may suspend further performance of all or any of its obligations until payment is made in full.

Section 8 of the Contract deals with termination of the Contract. For the purposes of these provisions, clause 8.1 identifies when a party becomes Insolvent. In the case of a company, it becomes Insolvent in a number of situations including entering into administration within the meaning of Schedule B1 Insolvency Act 1986. The Contractor entered into administration on 7 April 2016. I made the relevant administration order not long before embarking on the hearing of the application now made by the Employer.

Clauses 8.4 to 8.8 deal with termination of the Contract by the Employer and the consequences of such termination. Clause 8.4 is headed “Default of Contractor”. Clause 8.4.1 contains a list of events following which the Employer may give to the Contractor a notice specifying the default. The list includes where, without reasonable cause, the Contractor wholly or substantially suspends the carrying out of the Works. If the Contractor continues a specified default for 14 days from the receipt of the notice, the Employer may on, or within 21 days from, the expiry of that 14 day period, by a further notice to the Contractor, terminate the Contractor’s employment.

Clause 8.5 is headed “Insolvency of Contractor”. It provides that, if the Contractor is Insolvent, the Employer may at any time by notice to the Contractor, terminate the Contractor’s employment. As from the date the Contractor becomes Insolvent, whether or not the Employer has given such notice of termination, clause 8.7.3 to 8.7.5 (to which I come next) apply as if such notice had been given.

Clause 8.7 provides for what is to happen if the Contractor’s employment is terminated under clause 8.4 or 8.5:

Clauses 8.9 and 8.10 deal with the termination of the Contract by the Contractor. If the Employer fails to make a payment under clause 4.9 which it is obliged to make by the final payment date, the Contractor is entitled to serve a notice specifying the default. If the specified default is not rectified within 14 days, the Contractor may, after a period of 21 days from the expiry of the 14 day period, terminate its employment under the Contract.

These payment and termination clauses are highly prescriptive. The consequences of specified failures are spelt out.

Schedule 1 to the Contract is a list of amendments to the standard form contract. Paragraph 5 inserts a new Article 11 which is concerned with the procuring by the Contractor of a performance bond. The bond amount must be no less than 10% of the Contract Sum. It is provided that:

“If the Contractor does not procure execution and delivery of the bond, then, notwithstanding any other term of this Contract, the Employer may deduct £[SUM] from the Contract Sum or the sums that would otherwise be due to the Contractor under this Contract, until the Contractor procures such execution and delivery.”

The SD refers to a sum of £680,629.27. That sum has been reduced in correspondence to £628,689.27. It is based on three applications for interim payment being Payment Applications, Nos 6, 7 and 8. I shall refer to them simply as “Application No [x]”.

Application No 6. This was submitted by the Contractor on 29 October 2015 with an effective due date of 29 October 2015 in the gross sum of £620,548.52 excluding VAT. The amount previously paid prior to retention was stated to be £313,874 making the net amount of the Contractor’s Application No 6 £303,673.76 (which was subject to deduction of £15,333.69 as retention).

The response to Application No 6 was a purported Payment Notice specifying a proposed interim payment of £162,120.22. It is dated 9 November 2015. This was later than the 5 day period provided for in clause 4.9.2 of the Contract (which reflects the 5 day period set out in section 110A of the 1996 Act). This has the consequence that, subject to any Pay Less Notice, the amount of the Interim Payment is the amount specified in Application No 6.

A Pay Less Notice was not subsequently served. The amount outstanding against Application No 7 was stated to be £291,340.07 (after deduction of retention and excluding VAT).

Application No 7. This was submitted by the Contractor on 30 November 2015 with an effective due date of 30 November 2015 in the gross sum of £846,161.54 excluding VAT. The amount previously applied for in Application No 6 (before deduction of retention) was stated to be £620,548.52 making the net amount of the Contractor’s Application No 7 £225,613.20 (which was subject to a 5% deduction of £11,280.65 as retention).

The response to Application No 7 was a purported Payment Notice specifying a proposed interim payment of £103,975. It is dated 10 December 2015. This was again later than the 5 day period provided for in clause 4.9.2 of the Contract. This has the consequence that, subject to any Pay Less Notice, the amount of the Interim Payment is the amount specified in Payment Application No 7.

A Pay Less Notice was not subsequently served. The amount outstanding against Application No 7 was stated to be £214,332.37 (after deduction of retention and excluding VAT).

Application No 8. This was submitted by the Contractor on 18 December 2015 with an effective due date of 24 December 2015 in the gross sum of £959,535.45 excluding VAT. The amount previously applied for in Application No 7 (before deduction of retention) was stated to be £846,161.54 making the net amount of the Contractor’s Application No 8 £113,379.91 (which was subject to a 5% deduction of £5,668.70 as retention).

No Notice of Interim Payment was given by the Employer. No Pay Less Notice has been given either. The Employer says it was not served with Application No 8. The amount outstanding against Application No 8 was stated to be £107,705.22 (after deduction of retention and excluding VAT).

The SD then sets out a calculation including interest to arrive at a total figure due of £649,659.27.

I do not think that the material facts are really in dispute.

From the evidence before me, it appears that the service of Notices is accurately recorded in the SD as set out above. I proceed on that basis.

On 29 January 2016, the Contractor wrote a letter to the Employer headed Notice of Default and Notice of Suspension. That letter refers to Applications Nos 6 and 7 and to the other notices which had and had not been given by the Contractor and the Employer respectively. The Contractor identifies the letter as a notice pursuant to clause 8.9.1.1 of the Contract in respect of the relevant defaults, namely failures to pay. In addition, the letter gives notice, pursuant to clause 4.11.1, of the intention to suspend the performance of obligations arising under the Contract. A request is made to rectify the default by payment within 7 days of £650,081.14. The result was that the Contractor was entitled, after 7 days, to suspend work if payment was not made.

I have not been shown any response to that letter. On 9 February 2016, the Contractor wrote to the Employer referring to the notice of suspension and notice of default, stating that the suspension “is now in effect and we have no further obligations under or arising from the contract until payment of the outstanding balance is made”. That letter also states that it was enclosing a statutory demand.

On 15 February 2016, the Contractor wrote again to the Employer referring to the previous Notice of Suspension and Notice of Default and enclosing a copy of the letter dated 9 February 2016. The default not having been rectified, it is stated that all obligations of performance became suspended from 6 February 2016.

It appears that the Contractor had walked off site on or about 22 December 2015. At some time after that, the Employer had engaged other contractors who were on site certainly by 6 February 2016 and probably considerably before that. The precise date does not matter.

In the letter dated 15 February 2016, the Contractor notes that others have been engaged to carry out the work which was evident from activity on site. Works were being carried out during the period of suspension. It writes:

“Unless and until our employment has been terminated, we have a right to the opportunity to carry out and complete the Works, and you have no right to replace us with other contractors without our agreement or appropriate instruction. Our right to carry out and complete the Works is obvious and fundamental and your actions in employing others evince a clear intention on your part not to be bound by the contract and are a repudiation of the contract which is accepted.”

Reference is then made to the outstanding payments under Applications Nos 6, 7 and 8, the failure to pay being asserted to be a repudiatory breach which was accepted. To cover the position in the event that the breaches are not repudiatory, the letter invokes the provisions of clause 8.9.3 of the Contract. That invocation of clause 8.9.3 was within the period (14 + 21 days from the default notice on 29 January 2016) specified in that clause.

On 15 February 2016, the Employer wrote to the Contractor’s agent, Robert Pearce Associates, referring to the letter from the Contractor of 9 February 2016. The demand for payment was rejected “on the basis of the sums included being in dispute at this time. There is also an error in your summing up as you have included offset payment rather than discounting them.” The letter makes reference to the fact that the Contractor had been put on notice that payment would be withheld until such time as a performance bond was put in place. It appears from the letter that the absence of the performance bond was, in fact, the main reason for withholding payment. There may have been disputes about the exact amount due to the Contractor but it was not suggested, at least at this stage, that a substantial sum would not be due. Indeed, the out-of-time Payment Notices in relation to Applications Nos 6 and 7 demonstrate that the Employer recognised that something was owing.

On 23 February 2016, Mr Pearce (of Robert Pearce Associates) wrote to the Employer thanking it (i) for acknowledging receipt of the letter of 15 February 2016 and the SD and (ii) for the Employer’s letter dated 9 February 2016. Mr Pearce corrects the error identified by the Employer which he accepts had been made in the amount claimed in the SD, stating a correct figure of £628,689.27 (the calculation of which is explained later in the letter). He draws attention to the alleged invalidity of the Payment Notices in relation to Applications Nos 6 and 7 because, for one reason given, they were late. He rejects the Employer’s assertion that Application No 8 had not been received, since it had been sent to the Employer’s agent by email on 18 December 2015 and receipt was acknowledged (I have not seen this correspondence either).

In that letter, Mr Pearce also refers to the requirement to provide a performance bond. I have not seen precisely what the Employer had by then said about the performance bond, but I infer that it was suggesting that the absence of the bond somehow absolved it from making payment. Mr Pearce makes some observations which seem to me to be of considerable force. I do not propose to spend any time on this aspect of the case. In the course of discussion during the hearing, Mr Bheeroo abandoned, for the purposes of the present application, any reliance on the absence of the provision of a performance bond by the Contractor.

On 29 February 2016, the Employer wrote to the Contractor. The letter puts the Contractor on notice of default under clause 8.4 of the Contract. The specific defaults are identified simply by setting out the wording of clause 8.4.1.1 (suspending works without reasonable cause) and clause 8.4.1.2 (failure to proceed regularly and diligently with performance of obligations). If it is suggested that the identification of those paragraphs is by itself enough to amount to a valid notice under clause 8.4.1, that suggestion is clearly wrong. The clause requires the Employer to give a notice “specifying the default or defaults (the ‘specified default or defaults’)”. The notice needs to specify the default with more particularity than that.

In fact, the letter of 29 February 2016 does explain in more detail the specified default in relation to suspension. Thus the letter states that the Contractor had been put on notice that certified payments would be suspended until such time as the contractual obligation of providing a performance bond had been discharged. As I have just explained, no reliance is placed, for the purposes of this application, on the absence of a performance bond. The letter also refers to occurrences of the Employer making clear to the Contractor its

“dissatisfaction in the way the Works were not being progressed sufficiently. This is well recorded at Formal Monthly Site Progress Meetings as well as in general correspondence. … [The Contractor was] unable to maintain progress against their issued programme/Cash Flow Forecasts and were requested in a number occasions to issue “recovery programmes”. These were issued but again [the Contractor] failed to maintain their progress accordingly.

….

This has left [the Employer] in the unenviable position where termination of the Contract is the only way forward with the specific defaults by the Contractor as stated above.”

The prima facie effect of that notice under clause 8.4, if valid, is that the Contractor has 14 days in which to remedy the defaults. A wrongful suspension of works would, presumably, be rectified by recommencing the works. A failure diligently to proceed would, presumably, be remedied by proceeding with the works in a diligent fashion and not continuing the failure to progress the works effectively. If reliance is placed on clause 8.4 to achieve termination of the Contract, the Employer has to wait 14 days and then serve a notice of termination. But for reasons which will become apparent, that difficulty facing the Employer is not relevant for the purposes of this application.

On 2 March 2016, Robert Pearce Associates wrote to the Employer. The second paragraph of that letter is as follows:

“Please note that the [Contractor] is not in default, having first suspended the performance of all its obligations following its notice to do, and subsequently having accepted your repudiatory act. The contract has been terminated due to your default.”

The next letter I refer to is dated 7 March 2016. It is written by Goodman Derrick LLP, the Employer’s solicitors, to Blake-Turner & Co, the Contractor’s solicitors. They state that the threat to present a winding-up petition is misplaced because the alleged debt to which the SD relates is disputed. That, they say, is abundantly clear because there is a dispute about whether the Contract has been terminated and if so by whom. Thus:

On 15 March 2016, the Employer wrote to the Contractor. Reference is made to the second paragraph of Robert Pearce Associate’s letter dated 2 March 2016. It is said that that paragraph purports to accept a repudiation of the contract which Robert Pearce Associates had no authority to do; that was said to be a repudiation which the Employer was entitled to accept. There is nothing in those points. The second paragraph was not accepting a repudiatory breach: it was recording an earlier acceptance of a repudiatory breach (that is to say, in the letter date 15 February 2016). In any case, if Robert Pearce Associates did not have authority to accept the Employer’s breach, it is not at all easy to see how its (non-acceptance) of the breach could of itself amount to conduct giving rise to a repudiatory breach by the Contractor.

More to the point is the reference by the Employer to its letter of 29 February 2016 and confirmation “that the Contract is terminated and that the provisions of clause 8.7 of the Contract now apply”. If the Contract had not already been terminated by the Contractor, then no doubt there will be questions as to whether the Employer was entitled to invoke clause 8.4. It might be argued that the Contractor would have been prevented by the Employer from remedying any default because it would not, in practice, be allowed back on site. Clearly, the Contractor would, if matters reach this stage, be unable to say that there was no dispute about the debt. It would, putting it at its lowest from the Employer’s point of view, be arguable that it was entitled to terminate the contract and did so, and that clause 8.7.5 then applies to absolve it from the obligation to make, at that stage, any payment at all. There would be a bona fide dispute on substantial grounds.

The Contract is a standard form contract with special provisions included for the particular requirements of the parties in the present case. The standard form is carefully drafted to reflect a balancing of the interests of an employer and a contractor. It is inevitable in a construction project of any value (or perhaps in any such contract) that disputes, of a more or less serious nature, will arise.

The provisions relating to payment reflect that balance. The employer is protected: the contractor can seek an interim payment but, if the amount is not accepted, the employer can serve its own Payment Notice or, failing that, a Pay Less Notice. If it does so, it only has to pay the lesser amount which it considers is due, with the contractor being left to other remedies, such as adjudication, if it considers that it is entitled to more on an interim basis. The contractor’s interests are recognised too: it will have the right to the payment which it has specified in an application for interim payment unless that application is met with a Payment Notice or Pay Less Notice. If an employer fails to observe the clear contractual procedure laid down, the contractual consequences follow and it cannot be heard to say that the interim sum is not due and is excessive. Any necessary adjustments can be effected at a later stage of the contract.

The provisions relating to default also reflect that balance. If an employer fails to make an interim payment which is due, the contractor can invoke a procedure for suspension, and ultimately termination, if the default continues. The contractor does not, of course, have to follow that route: it may consider that it is in its commercial interests simply to continue with the contract and attempt to recover payment in some other way, ultimately by litigation, either at the end of the contract or even before. The amount which is actually due under the contract will thus reflect the balance which I have considered in the preceding paragraph. If an employer has failed to challenge an application for interim payment by a Payment Notice or Pay Less Notice, the amount due may be more than the employer considers reasonable, but that provides no ground on which to object to the contractor’s notice of suspension or, ultimately, termination when the contractual provisions in respect of the unchallenged amount are relied on.

If a contractor is in default, the employer can invoke the provisions which will, ultimately, entitle it to terminate the contract if the default is not rectified. Again, the employer may consider it to be in its commercial interests to continue with the contractor notwithstanding the default, in order to avoid delay and possible litigation. If an employer is dissatisfied with the progress of the project and considers that this is because of a failure by the contractor regularly and diligently to proceed with the performance of its obligations, the employer can serve notice of default, leading ultimately to the power to terminate the contract if the default is not remedied. That is one of the main protections which the contract affords to an employer. Moreover, an employer has this added protection in that the service of a default notice puts it in a stronger position if the default is repeated: see clause 8.4.3. But whether or not the employer serves a default notice, it is not excused from making the interim payments which are due following the implementation of the procedure under clause 4.9.

In the present case, the Contractor has followed the procedure which is set out in the Contract. The Employer had the opportunity to respond to the applications for interim payment in relation to Applications Nos 6 and 7 by serving a Payment Notice and a Pay Less Notice. It did not do so within the time-limits imposed by the Contract. The Contractor’s case is that it therefore had an unanswerable claim for the amounts set out in the Applications. It was entitled to implement the default provisions in the way which it did. It was entitled, therefore, to suspend work and, ultimately, to terminate the Contract. It purported to accept the conduct of the Employer in engaging other contractors and in failing to pay three outstanding applications as repudiation of the contract; but even if it was not entitled to do so, it simultaneously terminated the Contract in accordance with its terms. There was, accordingly, no subsisting contract in place to terminate when the Employer purported to do so in its letter dated 15 March 2016.

The Employer nonetheless contends that there is a dispute sufficient to justify an injunction restraining presentation of a petition. It is said that there is a dispute about the progress of the works which the Contractor has failed diligently to pursue. I have no detail at all in relation to that. There are only the most general of assertions in the letter dated 7 March 2016 from Goodman Derrick referred to above and at paragraph 10 of Mr Connaughton’s witness statement in support of this application. But even if those assertions could be substantiated, the fact is that no default notices were ever served in respect of them and they afford no answer to the claims under the interim applications which were not answered by valid Payment Notices or Pay Less Notices. Nor was it suggested, prior to the time when the Contractor terminated the Contract, that it had repudiated the Contract by walking off site. And even if the defaults were so serious that the Employer would have been entitled to accept them as repudiatory breaches of contract, they were not accepted as such, at least until 15 March 2016 at the earliest. There was, in my judgment, clearly nothing to prevent the Contractor relying on the provisions of the Contract concerning interim payment, suspension and ultimately termination.

It should be noted that, in any case, the Employer, in refusing to make payment, has relied heavily on the failure by the Contractor to provide a performance bond. That point not being open to the Employer, a large plank in its case is removed.

Finally, the Employer asserts that it has a counterclaim which will exceed the amount of the SD (as corrected on the figures). There is simply no evidence before me that that is so. There is not even a shadowy case to suggest that that is so. The contents of Goodman Derrick’s letter dated 7 March 2016 (which, so far as I am aware, is the only even remotely relevant material in evidence apart from the passage in Mr Connaughton’s witness statement referred to above) do not give any information to justify the assertion that the Employer will be entitled to recover an amount in excess of the sum sought by the Contractor. Mr Bheeroo told me at the hearing that there were correspondence and minutes of meetings which would show that the Contractor had been dilatory in its progression of the works and that complaints had regularly been made. That may be so; but there was no suggestion made to me that it would be possible, from that material, to form any view about what quantum of loss the Employer is said to have suffered or to conclude that the loss, however difficult to quantify at this stage, would be more than the amount claimed. I declined to allow the Employer the opportunity to adduce further material for the purpose of its own application.

I do not need to decide on this application whether Application No 8 was effectively served and if so when. The amount due under Applications Nos 6 and 7 is substantial. Unless and until those are paid, there is no need for the Contractor to place reliance on Application No 8 for the purposes of presenting a petition; and even if Application No 8 should not have been included in the SD, the SD still stands as a demand for the amounts due under the other notices.

In all of the circumstances, I do not consider, on the material before me, that there is even a shadowy claim (see Etherton LJ in Tallington Lakes Ltd v South Kesteven District Council [2012] EWCA 443 at [22]) concerning the liability of the Employer to make the interim payments claimed in Applications Nos 6 and 7 in the amounts as corrected by Mr Pearce. I do not consider, either, that there is even a shadowy claim that the Contractor was not entitled to suspend work and ultimately terminate the Contract. Nor is there any claim that it was the Employer who terminated the Contract: the Contract was validly, in my view, terminated by the Contractor before the Employer purported to terminate it. It may or may not be the case that, hereafter, the Employer will be able to demonstrate that it does have a counterclaim, whether more or less than the amount due to the Contractor. But that is not the position before me, where I find myself unable to accept that the Employer has even a shadowy counterclaim in any identifiable minimum amount.

I refuse to grant the injunction sought and dismiss the application.