J B Leadbitter & Co Ltd v Hygrove Holdings Ltd

This is an application for summary judgment brought by the Claimant, J B Leadbitter and Company. On this application the Claimant is represented by Counsel Mr Andrew Kearney and the Defendant, Hygrove Holdings Ltd, has been represented by one of its directors, Mr Hugh Francis. The claim arises out of a residential property development near Swansea. The construction work on that development has been (and is still being) carried out by the Claimant, Leadbitter, under the provisions of a JCT Design and Build contract, 2005 edition, which was entered into in or around 2009. Under that contract, Hygrove was the employer and Leadbitter was the contractor. I shall refer to that contract as the “Hygrove contract”.

In fact, the development was commissioned by a company called Coastal Housing Group Ltd. There was a head contract entered into between Coastal Housing Group Ltd and Hygrove which I shall call the “Coastal contract”. The Coastal contract was concluded at or about the same time as the Hygrove contract on the same JCT standard form. Thus the contractual chain ran from Coastal as employer to Hygrove as contractor to Leadbitter as subcontractor. Leadbitter was subcontractor of the entire works.

Around the time the JCT contracts were entered into, a third contract was concluded called the “Supplemental Agreement”. This was a tripartite agreement between Coastal, Hygrove and Leadbitter. Under the terms of the Supplemental Agreement, an escrow account was set up which was to be administered by a firm of solicitors called Hugh James. The Supplemental Agreement provided for all remittances from Coastal under the Coastal contract to be paid into the escrow account and sums due from Hygrove to Leadbitter under the Hygrove contract to be paid out of the escrow account after deduction from Coastal’s payments of Hygrove’s profit share.

The evidence suggests that the development proceeded satisfactorily until the events which gave rise to the present dispute. Leadbitter applied for payments under the Hygrove contract, certificates were issued by Hygrove, Hygrove applied for payments under the Coastal contract and certificates were issued by Coastal. Coastal paid Hygrove by making payments to the escrow account, and Hugh James, as administrators of that account, made payments to Leadbitter of the sums due under the Hygrove contract, after deducting from Coastal’s payments into the account, Hygrove’s profit share.

The dispute which has arisen concerns the payment of Certificates 10 and 11 under the Hygrove contract. Those certificates were preceded by applications for payment made by Leadbitter in accordance with clause 4.9 of the JCT standard form. Certificates 10 and 11 were in due course issued under clause 4.10.3 of the JCT form by Hygrove to Leadbitter. No withholding notice in respect of either Certificate was issued by Hygrove under clause 4.10.4. Therefore, in accordance with the provisions of clause 4.10.5, the final dates for payment of the two certificates were, respectively, 13 September 2011 (for Certificate 10) and 9 January 2012 (for Certificate 11). The amount of Certificate 10 was £162,142. The amount of Certificate 11 was £34,125, making a total of £196,267.

Subject to the matters raised in defence to the application, Hygrove admits that the sums became due and payable on the final dates I have just indicated. That follows inevitably from the fact that the sums were certified and no withholding notice was served: see the judgment of Jacob LJ in Rupert Morgan Building Services (LLC) Ltd David & Harriet Jervis [2004] BLR 18, where he held at paragraph 11 that a certificate determines the sum due and that, absent a withholding notice, section 111(1) of the Housing Grants Construction and Regeneration Act 1996 (“the Act”) operates to prevent an employer from withholding payment, with the result that the money is immediately payable on the due date. I refer also to the judgment of Coulson J in Balfour Beatty Construction Northern Ltd v Modus Corovest (Blackpool) Ltd [2008] EWHC 3029 (TCC) at paragraphs 68-74.

Accordingly, on 28 February 2012, Leadbitter issued the claim in the present action and followed that up on 15 March with an application for summary judgment. Hygrove filed a Defence on 23 March, and Mr Francis has provided a witness statement in opposition to the application for summary judgment which, in substance, expands on the matters that are raised in the Defence. The reason why it is said by Hygrove that it has a defence to the present claim which has a real prospect of success is that the obligation to make payment under the two certificates has not yet arisen, or alternatively has been postponed, by virtue of the provisions of the Supplemental Agreement. The Supplemental Agreement provides in clause 1.1 that it varies and supplements the two JCT contracts. In clause 2.8, the Supplemental Agreement provides that payments made by Coastal under the Coastal contract are to be paid into the escrow account to which I have already referred and that the escrow account is to be administered by Hugh James Solicitors on behalf of Hygrove and Leadbitter. Clause 2.10 of the Supplemental Agreement contains an undertaking by Hugh James to hold the sums received into the escrow account on behalf of Hygrove and Leadbitter on the terms of the Supplemental Agreement. Clause 2.12 of the Supplemental Agreement then provides as follows: “Provided sufficient funds exist in the escrow account (which, if not the case, the payments to [Hygrove] and [Leadbitter] shall be reduced proportionately) Hugh James shall pay [Hygrove] and [Leadbitter] the sums due to them under the respective clauses 4.10.5 of the JCT contracts by no later than the final date for payment under clause 4.10.1 of the [Hygrove contract] as amended by paragraph 2.4 above, or as soon as practicable thereafter”.

The way the point is put, both in the Defence and by Mr Francis in his oral submissions this morning, is that more money is due to be paid by Coastal under the Coastal contract than Coastal has yet paid into the escrow account. So Hygrove is entitled to further payments out of the escrow account, just as much as Leadbitter claims that it is entitled to the payments which are the subject matter of the present application. Accordingly, Mr Francis submits that Hygrove cannot be liable for the sums that are now claimed by Leadbitter if Coastal has failed to pay sufficient money into the escrow account to enable Hygrove to pay Leadbitter. The Defence goes on to allege, in the alternative or additionally, that Hygrove cannot be liable for Leadbitter’s claim if the escrow account has not been administered correctly. The Defence then relies on clause 2.12 of the Supplemental Agreement as establishing that, if insufficient funds are paid by Coastal into the escrow account to pay Hygrove and Leadbitter, then either the payments due to both Hygrove and Leadbitter are to be reduced proportionately, or, if no funds at all are available, there is no obligation on Hygrove to make any payment to Leadbitter until funds become available. In other words, there is no obligation to make payment until it is “practicable” to do so.

In his witness statement Mr Francis says there has been an anomaly in the way in which the escrow account has been operated. The only evidence I have read of an anomaly or of the escrow account or any sums held by Hugh James not being properly and correctly administered is (1) that it is asserted by Coastal that it has paid into the escrow account more than Hugh James say that they have in fact received from Coastal, and (2) that Hugh James have retained, in a separate fund outside the escrow account, more retention monies under the Hygrove contract than should have been retained and that, therefore, there is a sum of money which ought to be paid to Leadbitter in any event. It is not suggested that Hugh James have incorrectly administered the funds which they have received from Coastal in any other respect.

As to the first suggested anomaly, the evidence is poor. Mr Francis has exhibited to his witness statement an exchange of emails in which a representative of Hugh James has told Hygrove that Coastal is saying that it has paid more into the escrow account than Hugh James can account for having received. But I have been provided with no evidence of the applications for payment made under the Coastal contract or of the payments alleged by Coastal to have been made under that contract or of Hygrove’s records of receipt of such payments.

As to the second suggested anomaly, it is now admitted by Hygrove that Hugh James have erroneously retained against sums due to Leadbitter under certificates issued under the Hygrove contract a sum of £28,331 more than they should have done. Mr Francis has now indicated that his company is prepared to give an undertaking that it will cooperate with Leadbitter in giving an instruction to Hugh James for the immediate release of those funds to Leadbitter. At one point Mr Kearney was content to accept that this sum should no longer be the subject of the application for summary judgment. However, the way in which he now suggests that the sum should be dealt with is that judgment should be given for the entirety of the claim but that there should be a stay of execution of the judgment to the extent of £28,331 pending the joint instruction being given to Hugh James for payment of that sum to Leadbitter. Whichever way that figure is dealt with, the over-retention of monies by Hugh James is no defence to the claim in this action.

Mr Kearney submits that any underpayment by Coastal into the escrow account, or alternatively any accounting error by Hugh James as to the sums which it believes it has received from Coastal into that account, is no defence either. It can only operate as a defence, and it is only suggested that it can operate as a defence, if the effect of clause 2.l2 of the Supplemental Agreement is to remove, or rather to postpone, the entitlement to payment which would otherwise arise under the Hygrove contract. Whether that is the true interpretation and effect of clause 2.12 is plainly arguable, but if it is the effect of clause 2.12, Mr Kearney submits that clause 2.12 is not lawful by virtue of section 113(1) of the Act. Section 113(1) states as follows: “A provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective unless that third person, or any other person payment by whom is under the contract directly or indirectly a condition of payment by that third person, is insolvent.”

Section 113(1) is the provision in the Act which outlaws clauses in construction contracts which are sometimes referred to as “pay when paid” or “pay if paid” clauses. The only exceptions, where such provisions are permitted, are (1) where there is insolvency up the contractual chain (this is the express exception in section 113(1)) or (2) where the construction contract in question is itself a PFI contract (which is excepted from the Act by its associated secondary legislation). Neither of those exceptions applies here. There was no PFI element in this development: nor is it suggested that Coastal is in any way involved in an insolvency procedure.

So far as Mr Kearney’s researches can detect, section 113(1) only been considered directly in one previous reported case: that is the decision of Jackson J (as he then was) in Midland Expressway Ltd v Carillian Construction Ltd [2005] EWHC 2963 (TCC). That case concerned the construction of the M6 toll road. It is not necessary to go into the details of that case other than to say that the particular problem about entitlement to payment under the subcontract arose in part from the fact that the contract between the employer and the main contractor was a PFI contract under which it was lawful for a ‘pay when paid’ clause to be inserted. The argument was that the subcontractor should be restrained from proceeding to adjudication on its claim for payment under the subcontract, by virtue of provisions in the immediate head contract which governed the valuation of variations as between the Department of Transport and the main contractor, and a provision of the subcontract which purported to postpone liability to pay for works falling within the ambit of such variations until such time as the value of them was established by a process which was laid down in the head contract.

Jackson J had no hesitation in rejecting any argument to the effect that the clause in the subcontract purporting to postpone the subcontractor’s entitlement to payment was lawful. At paragraphs 68 to 72 of his judgment he set out why, in his view, clause 39.6.2 of the subcontract was ineffective to achieve a postponement of entitlement to payment under the subcontract by virtue of section 113(1). There is no dispute that section 113(1) applies to the Supplemental Agreement since the Supplemental Agreement states in terms that clause 1.1 (which purports to vary the JCT contracts) must itself be treated as if it were part of the JCT contracts. And it is beyond argument that both the JCT contracts were construction contracts to which the Act applies. I therefore see no answer to the point made by Mr Kearney that, by virtue of section 113(1) of the Act, clause 2.1.2 of the Supplemental Agreement is void if and insofar as it would have the effect contended for in the Defence. There must be judgment for the claimants on the two sums which they claim in this action, since I see no defence to the claim which would have a real prospect of success at trial.

The consequence of granting judgment is that Hygrove is liable to pay Leadbitter even though it may be the case that Coastal has not yet paid enough money into the escrow account to cover the payment. I have some sympathy for Hygrove being caught in that position; but that sympathy is tempered by the realisation that several months have now elapsed since the problem first surfaced and in this period there has been plenty of opportunity for Hygrove, without the assistance of Leadbitter, to negotiate with Coastal to unravel the problem over Coastal’s alleged shortfall in payment or, if negotiation was unsuccessful, to have established its own entitlement to payment under the Coastal contract through a process of adjudication. Those steps, for whatever reason, have not been taken. Hygrove has yet to establish with Coastal what the true accounting position is. My sympathy is also tempered by the fact that Mr Francis was candid enough to acknowledge that Hygrove has already made a sufficient profit out of this project that it has the funds available from which it could pay Leadbitter for Certificates 10 and 11. Accordingly there will be judgment for Leadbitter.

The only remaining question is whether it would be appropriate to impose a stay of execution for a short period in order to enable Hygrove to re-establish the sequence of payment under the Coastal contract and consequent payment under the Hygrove contract, by sorting out the accounting and payment position with Coastal. Mr Kearney has pointed out with some force that the evidence before the Court of precisely what the problem was about the administration of the escrow account or the short payment by Coastal is inadequate. He also relies upon the fact that Hygrove admittedly has funds with which it can pay immediately. I am conscious of the fact that the scheme of the Act is to maintain cash flow and that, to impose a stay of execution of sums which are payable in accordance with the contractual mechanism under a construction contract is a step which should be avoided if possible. Nevertheless, I do think that in the unusual circumstances of this case it would not be inappropriate to direct that the judgment (aside from the sum of £28,331) should not be enforceable until 21 days from today’s date. In practice that may make very little difference, because no enforcement procedure would be likely to be effective within 21 days. I would expect that if Hygrove is not successful within that period in sorting out the problem with Coastal, it will honour the judgment immediately thereafter, whether or not it has in fact been placed in funds under the Coastal contract. I will therefore grant judgment for the claimant which is not to be enforceable until 21 days from today’s date, save in respect of the £28,331 where there will be a general stay for the reasons given earlier in this judgment.