Pioneer Cladding Limited v John Graham Construction Limited

[edit] Introduction

This is another case of an impecunious party in an adjudication seeking to enforce payment but the opposing party successfully securing a stay of enforcement. Previous cases concerning a stay of execution of an adjudicator’s award have been covered in Westshield v Buckingham 2013 and FG Skerritt Ltd v Caledonian Building Systems Ltd 2013. Here though, interesting points emerged from due diligence inquiries made by the contractor before appointing the subcontractor.

[edit] Background

John Graham Construction, the defendant contractor (“Graham”), engaged Pioneer Cladding, the claimant subcontractor (“Pioneer”), in June 2011 for cladding and curtain walling works at a site in South Shields.

A dispute arose under the subcontract which Pioneer successfully referred to adjudication. It was awarded approximately £193,000 and began enforcement proceedings to which Graham sought a stay of execution based on Pioneer’s financial circumstances.

The matter came before Mr Justice Coulson in the Technology and Construction Court (TCC) who reiterated the principles in deciding whether to grant a stay, including:

• The inability of the claimant to repay the judgment sum in subsequent proceedings.
• That a stay will usually be granted if the claimant is insolvent.
• If the claimant’s present financial position is weak that would not usually justify a stay if the claimant’s financial circumstances were similar to its circumstances at the time the contract was made and the claimant’s financial situation is due to the defendant’s non payment of the adjudicator’s award.

On the evidence, the court found that Pioneer would be unable to repay the outstanding sum in subsequent proceedings.

Interesting findings emerged in response to whether Pioneer’s financial position was similar to that at the time the parties contracted. Two firms were nominated by the employer for the cladding subcontract: Baris and Pioneer. Graham had undertaken detailed checks to investigate the financial position of the front-runner, Pioneer and had been concerned by the results thrown up by its investigations. Searches revealed the company had not traded and conflicting accounts given as to the company’s turnover. Baris contacted Graham to inform it that Pioneer had gone into administration the previous year. Naturally Graham was concerned by such news, so much so that it convened a meeting with Pioneer’s director to discuss the issue. The director painted a rosy picture of Pioneer’s finances in terms of its turnover and order book. Luckily for Graham, its director took contemporaneous notes of the meeting with his counterpart: this is music to a lawyer’s ears and demonstrates the importance of keeping good written records. It was that contemporaneous note that would prove significant in Graham’s evidence.

[edit] The court’s findings

The judge found that Pioneer’s director had misled Graham into thinking that its financial position was better than it in fact was. It further decided that on the basis of these assurances and following criticism of Baris’s unprofessional conduct from the project architect, Graham was influenced to engage Pioneer as its cladding subcontractor.

This was not a case where a party knew of its counterparty’s poor financial situation at the time of subcontracting so cannot now argue this as a reason to stay enforcement of an adjudicator’s award. Neither could it be said that Pioneer’s impecuniosity was due to the non payment of the adjudicator’s award. The stay was granted due to Pioneer’s actions in misleading Graham into thinking it was financially sound thereby inducing it to contract on a false premise. The court granted a stay of the enforcement proceedings in Graham’s favour pending the outcome of the arbitration.

[edit] Conclusion

This case is a useful reminder of the importance of undertaking background financial checks before deciding who to contract with. In the current economic climate, comprehensive and thorough checks are vital, both as a risk management tool and to provide a level of assurance as to the financial viability of a fellow contracting party in meeting its contractual obligations. The law will not assist parties contracting with financially weak companies which they knew about at the time of contract. Graham’s saving grace was that it had plainly done its homework in performing the necessary checks but was ultimately misled.

Maintaining good written records is a must.

This article was created by construction lawyer --Najma Dunnett as part of an ongoing series of legal articles. Follow Najma on Twitter to keep up to date with the latest changes in construction law @NDunnett_Cons.

[edit] Related articles on Designing Buildings Wiki

• Due diligence when selecting contractors or subcontractors.
• FG Skerritt Ltd v Caledonian Building Systems Ltd 2013.
• Westshield v Buckingham 2013.

[edit] External references

• BAILII, The decision in full.