Tera Construction Ltd v Lam

MR. JUSTICE CLARKE: This is an application by the Claimant, Tera Constructions Limited, which I will call Tera, for summary of judgment to enforce the decision of an adjudicator made on 13^th October this year by which the Defendant, Mr. [Yung Ton] Lam – whom I will refer to as Mr. Lam – was ordered to pay the Claimants £40,308 together with interest of £4,490 and the RIBA nomination fee of £282, making a total of £45,080 on or before Thursday, 27^th October.

The matter arises in this way: Tera is a small company carrying out traditional building work. Mr. Lam employed Tera to demolish a house and to construct two new houses at Croxdale Road, Berkhamsted, under a JCT Minor Works Agreement dated 26^th August 2003. That agreement was administered by a Mr. Shannon of Shannon & Leach Surveyors, who acted as contract administrator. The commencement date of the contract was the 1^st October 2003. The completion date, subject to extensions, was the 30^th April 2004. The contract sum was £385,000.

On the 1^st September 2004, the contract administrator notified Tera that in his view it was entitled to an extension of time, pursuant to Clause 2.2 of the agreement, of five weeks, making a completion date of the 4^th June 2004.

According to the adjudicator, practical completion took place on the 17^th September 2004, upon which date half of the retention, that is to say 2.5%, was due to Tera. Mr. Lam took possession of the houses on the 19^th September 2004. According to him he did so, although the work was not complete, against a promise by Tera that they would make a concerted effort to complete within a few days. On the 5^th November 2004, Tera submitted, pursuant to Clause 2.2 of the agreement, details of variations and causes of delay in order for the contract administrator to assess a reasonable extension time to the contract period, which Tera submitted would be eleven weeks.

On the 6^th November 2004, Tera submitted to the contract administrator, pursuant to Clause 4.5.1.1 of the agreement, details of the work completed in order for him to compute the final certificate. Tera submitted that the variations were to be valued at £84,042.80 and that the final account was £488,963.56, with a final sum due of £53,865.37 together with the £2,404.15.

On the 3^rd December 2004, the contract administrator issued a certificate for payment that certified a gross valuation of £461,296.80. He had issued a letter on the 2^nd December 2004, setting out details of the computation, which Tera claims to be incorrect. Under this certificate, £40,068.19 was due on the 17^th December 2004. On the 10^th December 2004, Mr. Lam issued a withholding notice under Clause 4.4 of the agreement, and said that a payment of £2,702.48 would be made by the 17^th December against the certificate and in the event, no payment was in fact made.

On the 18^th January 2005, Mr. Lam gave Tera a notice to complete, pursuant to Clause 7.2.1 of the agreement, following an earlier conditional notice of the 10^th January 2005. On the 25^th January 2005, the contract administrator sent a letter setting out why Tera was not, as he thought, due an extension of time as requested and why certain sums were omitted from the draft final accounts and stating that defective works were outstanding.

On the 22^nd August, 2005 Tera served a notice of intention to refer a dispute to adjudication, which I will refer to as ‘the notice’, and an application to the RIBA for nomination of an adjudicator. Mr. David C. Watkins was duly nominated as an adjudicator on the 26^th August, and on the 2^nd September a referral, to which I will refer hereafter as ‘the referral’, was forwarded to him. That referral was amended on the 6^th September.

On the 13^th October, the adjudicator issued his decision to the effect that I have described. Under supplemental condition D7.1 of the agreement, the decision of the adjudicator is binding on the parties until the dispute or difference is finally determined by arbitration or by legal proceedings or by an agreement in writing. In the present case, the arbitration clause has been crossed out of the agreement, and any dispute in default of agreement must be determined by legal proceedings.

Under supplemental condition D7.2, the parties agree, without prejudice to their other rights under the agreement, to comply with the decision of the adjudicator and to ensure that it is given effect. The notice recited the facts to which I have referred, and declared that a dispute existed in respect of:

On the 13^th October, the adjudicator issued his adjudication. In it, he rejected a challenge to his jurisdiction that had been made, and decided that he would deal with all the matters referred to him in the referral. In his adjudication he decided, amongst other things:

The purpose of adjudication is to provide a speedy interim determination as to what payment is or is not due to the contractor at any given time, so that he may then be paid, without prejudice to what may be the ultimate outcome of any subsequent arbitration or suit. The parties agree to be bound by the adjudication and to comply with it. In those circumstances, the scope for resisting summary enforcement of the adjudication is necessarily limited, and CPR 24.2(a)(1) and (b) requires the Defendant to show, in order to avoid summary judgment, that he has a real prospect of successfully defending the claim for enforcement, or that for some other reason there ought to be a trial.

Enforcement is resisted in this case on three grounds:

I say “coupled with” because Ms. Vaughan-Neil for the Defendant accepted that the mere fact that the Defendant asserted a settled for counterclaim would have not of itself been sufficient to avoid judgment.

The contractual provisions for notices and referrals are contained in Clause D4 of the supplemental conditions of the contract. Clause D4.1 provides as follows, and I quote:

“When, pursuant to Article 6, a party requires a dispute or difference to be referred to adjudication, then that party shall give notice to the other party of his intention to refer the dispute or difference, briefly identified in the notice, to adjudication. If an adjudicator has agreed or appointed within seven days of the notice, then the party giving the notice shall refer the dispute or difference to the adjudicator (‘the referral’) within seven days of the notice. If an adjudicator is not agreed or appointed with seven days of the notice, the referral should be made immediately on such agreement or appointment. The said party shall include with that referral particulars of the dispute or difference, together with a summary of the contentions on which it relies, a statement of the relief or remedy which is sought, and any material he wishes the adjudicator to consider. The referral and its accompanying documentation shall be copied simultaneously to the other party.”

As is apparent from that provision the Notice is "briefly" to identify the dispute, and the referral is to give particulars of the dispute or difference with the summary of the contentions relied on, and the relief or remedy sought. A comparison of the notice and the referral in the present case clearly shows that the former is indeed a brief statement of the nature of the dispute and the latter gives particulars and details of the contentions that are made.

Thus, as it seems to me, each of the matters identified as the subject matter of the dispute, in Paragraph 9 of the notice or referred to in the summary of issues, is developed in the referral and summarised in its conclusion. In the end, the respects in which the adjudicator was said to have gone beyond his jurisdiction boiled down to three items. Firstly, it is said that the adjudicator was wrong to decide that the Notice of Determination of January 2005 was invalid. In my judgement, the validity of the notice of determination was necessarily bound up with the question, indisputably the subject of the notice, as to whether or not there had been practical completion. Under Clause 7.2.1 of the agreement the default of the contractor must occur before practical completion in order for a notice to be capable of being served under that clause. If, as the adjudicator held, practical completion took place on 17^th September, the notice in January 2005, which relied on default after that date, could not be valid. Conversely, if the notice was valid there could have been no practical completion on 17^th September 2004. A determination as to the date of practical completion thus went hand in hand with the determination as to the invalidity of the notice. A determination as to that invalidity was, in my judgement, well within the scope of the notice.

If I am wrong on that it does not in any event seem to me that any want of jurisdiction to determine the invalidity of the notice affected the validity of the adjudication made by the adjudicator as to the amount due. Ms. Vaughan-Neil referred me to the case of KNS Industrial Services (Birmingham) Limited v Sindall – a decision of His Honour Judge Humphrey Lloyd, Queen’s Counsel, of 17^th July 2000, in which His Honour said this:

Ms. Vaughan-Neil invited me to approach any question of severance with caution in the light of that decision. That case appears to me however to be entirely different from the present case, since in that case a claimant sought to rely on those parts of the adjudication which favoured him, but to ignore those that did not.

Secondly, it is submitted that it was outwith the adjudicator's jurisdiction for him to decide that there had been a breach of Clause 4.3 of the agreement by reason of the failure to release retention on the 4^th October 2004 and for him to decide that a payment should have been made on that date. But both of those questions were in my view covered by the reference in Paragraph 9.3 of the notice to the dispute being in respect of the sums due on the penultimate certificate for payment and to be covered by Issue (c), to which I have referred. The penultimate certificate was, under Clause 4.3, the certificate due on practical completion.

Lastly, it is said that it was not open to the adjudicator to consider the value of the outstanding work. But that appears to me to be covered by Clause 9.4 of the notice and also by clause (d) together with the recital under the heading ‘Brief particulars of the dispute’, Item 5, which read:

In those circumstances it seems to me that even taking a strict approach to the construction of the notice as the source of the adjudicator’s jurisdiction there is no reasonable or realistic prospect for the Defendant of establishing that the adjudicator exceeded his jurisdiction.

Mr. Lam, however, denys that he has a claim in respect of outstanding and defective work, said to be in the sum of £49,128 together with VAT, as supposedly explained in a Schedule compiled by the Contract Administrator. Ms. McCredie described this claim as one that was "cobbled together”, and it is certainly true that it is not in the best of order.

The bulk of the claim is for the cost of snagging. Clause 2.5 of the Agreement provides as follows, under the heading ‘Defects liability’:

Of the total claim, £31,461.16 together with VAT constitutes the estimated cost of dealing with snags as in accordance with this clause as set out in a schedule of some thirteen pages, prepared on 28^th September of this year.

There are a number of other claims, the basis of which is not entirely clear. There is a claim for £2,200.00 in respect of surveying costs said to have been associated with additional snagging/defective work inspections after the 19^th September, 2004 in the sum of £2,200.00. Those are said by Ms. Vaughan-Neil to have been incurred as a result of the outstanding works not having been done, though it must be open for question as to whether some of the amounts claimed constitute the cost of determining what is the outstanding work in the first place.

Item 2 is the sum of £150.00 for building costs associated with complying with a building control letter which has not, I think, been exhibited. Item 3 is a claim for £4,972.00 for certain decorations; and Item 4 is the claim for material and plant purchases of £1,392.00; and Item 5 is for certain heating costs in the sum of £1,392.00 – the precise basis upon which that is said to be the responsibility of Tera is not apparent.

There is also a claim for additional fees of the contract administrator of £7,560.00 together with VAT, which appears to be said to be attributable to various delays in one form and another and costs involved in abortive snagging and dealing with the building inspector; again the precise basis upon which that is said to be the responsibility of Tera is not immediately apparent in relation to all the items.

Dealing with the most important claim, in relation to snagging works, the position is as follows: a snagging list was drawn up on about the 17^th September 2004 and some of the items in it appear to have been dealt with between then and the 1^st October 2004. On that date, an inspection appears to have been carried out by Mr. Lam and the contract administrator. A list of that date identifies work which had been completed, works which were neither snagging nor part of the works, and works which could not be done as a result of the denial of access. That is Mr. Malinauskas of Tera’s construction of the document. According to him he went through this list with the contract administrator and it showed, in his view, a sum of £1,630.00 as being due. It was that sum for which the adjudicator made allowance in his adjudication.

A list of outstanding items was subsequently drawn up by the contract administrator and attached to his letter of the 10^th January 2005. In that letter he referred to two previous letters, to a previous letter and email of his of 2^nd and 4^th December 2004 respectively “listing the outstanding work items that remain to be completed on this project”. The letter went on to give notice under Clause 7.21 of the contract, that unless Tera’s default ended within seven days its employment under the contract would be determined, and ended by saying: “for the avoidance of doubt, we attach the lists of outstanding items and also include the items notified by the employer in his withholding notice dated the 10th December 2004.”

The aggregate of the items referred to as additional outstanding items in the list attached was £18,890.00. As I have said, a further inspection took place on the 28^th September of this year, as a result of which, a claim for £31,461.16 plus VAT is now put forward.

So far as Tera’s financial position is concerned, Mr. Lam contents that Tera is in a precarious financial position such that no order should be made, or at least not one that makes him bound to make payment forthwith. The latest filed accounts, which are for the year ending 31^st August 2003, show Tera to have net assets of £76.00 and to have only one shareholder, with a £1 share, namely Mr. Malinauskas.

In addition, since the company was incorporated on the 30^th August 2002 it has had a number of County Court judgements registered against it in 2005, of which four remain unsatisfied, totalling some £7,677.00. Tera’s trading telephone number is apparently not answered by someone in person, but goes on to an answerphone without a company name. That is the gist of the evidence filed by Mr. Lam.

In response, Mr. Malinauskas in his written statement, states that Tera has some seven to fifteen employees and uses sub-contractors. Its premises are on two floors with 2,200 square feet of space, the ground floor being used as a joinery shop. He indicates that there was, in the middle of this year, a change of accountants from Charltons to another firm, whose address became the registered office, but that there has recently been a change back to Charltons, whom he described in his statement as being due to file the overdue accounts by the end of this week. I was, however, told that they are not to be filed until next week. A letter has been produced from those accountants which records that the company is trading, and that its turnover in the accounts for the year ended the 31^st August 2004 was £477,894.00. Beyond that, the letter contains no relevant information.

He also, Mr. Malinauskas also says that the reason why Tera had suffered financial difficulty was because of Mr Lam’s failure to make payments under the agreement, and that it was that which led to the County Court judgements. These judgements do indeed all postdate the date of practical completion, at which time according to the adjudication, Tera should have received a sum of £45,000.00.

Equally significantly, there were during 2005, six judgements recorded against Tera, two of them, they being the earliest in time – in the sum of £8,219.00 and £3,796.00 respectively have been paid off. According to Mr. Malinauskas’s evidence, Tera has four current contracts for the sums of £185,000, £258,000, £43,000 and £13,000, respectively.

What course then should the Court take in light of the position that I have described? The essential question, as it seems to me, is whether, although there is, as I hold, no defence to the claim for enforcement, there ought for some reason to be a trial; that is a matter of discretion in which it is necessary to consider broad questions of justice and the underlying purpose of the adjudication regime. Ms. Vaughan-Neil invites me to stay any judgement that I might make in whole or in part against, if necessary, payment in of an appropriate amount and the fixing of a stringent timetable for the pursuit of Mr Lam’s claim.

I have come to the conclusion that this is a not an appropriate case in which to grant a stay. I reach that conclusion for these reasons:

Firstly, the adjudication system is designed to give a summary, albeit not final remedy, whereby the contractor can obtain payment as it becomes due as the contract proceeds. The adjudicator has held that practical completion took place over a year ago. Payment should then have been made against the certificate that should then have been issued. It does not seem to me appropriate, in the absence of special circumstances, to hold up such payment on account of counterclaims that are said to have arisen thereafter.

Secondly, there seems to me to be considerable doubt as to both liability and quantum in relation to the principal part of Mr Lam’s claim. So far as liability is concerned, it is Tera’s case that they were willing to deal with the snags that existed, but were prevented from doing so and were denied access to the works from the 15^th October 2004. It is common ground, as I understand it, that they were denied access from the date of the notice of termination.

There is contemporaneous support for Tera’s stance in the form of the letters of the 26^th and 30^th November 2004 (at pages 176 and 175 of the bundle) and the reference in the letter from Tera of the 5^th November 2004 (on page 180 of the bundle) and to the fact that on the 15^th October it was made plain that no further access would be given to either property.

So far as quantum is concerned, it is noticeable that the claim has risen from the £18,000 that was put forward at the beginning of January to a sum in excess of £31,000 that was put forward on the 28^th September. I find it somewhat surprising that the claim has increased by so large an amount over that period.

Thirdly, the contention that nothing should be paid because of the amount that is due on account of snagging is a matter that could have been raised in the adjudication. Notice of adjudication was given on the 29^th August; the inspection which produces the figure of £31,500-odd took place on the 28^th September. It seems to me that contentions in relation to snagging could have been raised within the adjudication.

In fact, what appears to have happened according to the adjudicator is that he suggested that there should be an inspection of the works and that the scope of his jurisdiction should be extended to allow him to carry out such an inspection in order, as he put it, ”hopefully to provide a basis for bringing the dispute to a final conclusion”, in order that he might review the outstanding items on the snagging schedules and thereby making the argument as to which was the latest addition of them irrelevant.

He records in paragraph 8.21 of his adjudication that it was the Respondent, that is to say Mr. Lam, who raised an objection in regard to how he intended to proceed and that he had therefore dealt with the snagging on the basis only of the submitted documentation. He therefore was only able to record, as he said at Paragraph 8.31 that:

“In the absence of any detailed cost submission from the Respondent, I had no alternative but to deduct the sum of £1,630 accepted by the Claimant.”

Thirdly, it is true that on the material available to the Court, Tera does not appear to be in good financial shape and there is significant material that the Court does not have to hand in the form of recent accounts, even in draft, revealing either the profitability or the net asset status of the company. In short, it is not clear what the present position of the company is, but it is not shown to be insolvent.

There is evidence that its financial difficulties have been caused by the non-payment of the amounts which are the subject of their adjudication. There is evidence that the County Court judgments which were entered against it in 2005, after payment should have been made on practical completion, are ones that Tera has endeavoured to pay off in which it has been partially successful. There is also no evidence that Tera is in a worse position now than it was when the agreement entered into. In Herschel Engineering Ltd v Breen Property Ltd (reported 28^th July 2000), His Honour Judge Lloyd said this at Paragraph 19:

“In my view, on an application for a stay where a party has entered into a contract with company whose financial status is or may be uncertain and finds itself liable to pay money to that company under an adjudicator's decision, the question may properly be posed: is this not an inevitable consequence of the commercial activities of the applicant that it finds itself in the position it is in? It has, as it were, contracted for the result. That is not normally a ground for avoiding the consequences of a debt created by the contractual mechanism (which is how in the absence of express terms adjudication operates – see section 114 of the Act). It is very easy (and prudent and relatively inexpensive) to carry out a search or to obtain credit references against a company whose financial status and standing is unknown. Not to do so inevitably places a person at a significant disadvantage. It has only itself to blame if the company selected by it proves not to have been substantial (as opposed to a material deterioration in its finances since the date of contract).”

Those observations seem to me to be apposite in the present case. Further in Absolute Rentals Limited v Gencore Enterprises Limited (16^th July 2000), his Honour, Judge David Wilcox sitting in this Court said of the circumstances then before him, the following, and I quote:

“I am not in a position to judge the financial standing of either company. It is not desirable that I should on such limited evidence before me, neither is it desirable to do so on such an application. It is entirely possible that if there is any impecuniosity in the claimants, it could derive from the defendant’s default. I do not know the timetable for the arbitration is or what the resolution will be by the arbitrator or agreement. The purpose of the scheme is to provide a speedy mechanism for settling disputes on the construction contracts on a provisional interim basis and by requiring decisions of adjudicators to be enforced pending final determination of disputes by arbitration, litigation or agreement. Whether those decisions are wrong in point of law or fact if within the terms of the reference. It is a robust and a summary procedure and there may be casualties although the determinations are provisional and not final. (See Bouygues (UK) Limited v Dahl-Jensen (UK) Limited, TCC, Dyson J, judgment of the 17^th November 1999 at Paragraph 35).”

I respectfully agree. Taking all those matters into consideration, it seems to me, I regard it as inconsistent with the underlying purpose of the adjudication system and not necessarily for the purposes of doing justice for me to grant a stay of the judgement in the present case and accordingly, I decline to do so and propose to enter judgement for the sum now claimed.