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Contractor can hold back compensation from subbie, says judge

A contractor has been given permission to withhold an adjudication payment during ongoing arbitration because the subcontractor was in financial difficulty.

The judge, Hon Mr Justice Coulson, said Pioneer Cladding Ltd had given John Graham Construction Ltd “misleading” information about its finances when they entered into the contract.

Justice Coulson said the case was “unusual” because Graham had made a “good case” for the adjudication payment to be left in a joint account until the arbitration of the decision is complete, rather than paying it directly to Pioneer.

Adjudicators had ruled that Pioneer was owed £193,005.53 by Graham from two disputes over the subcontract to carry out the cladding and curtain walling of one of Graham’s projects in South Shields in June 2011.

A clause in the contract between the two firms said Graham would put any adjudication award made to Pioneer in a bank account in the joint names of the two firms’ solicitors.

Pioneer’s lawyers brought the case because they argued that this was unlawful and that the money should be paid to directly to Pioneer.

The judge agreed that the clause was unlawful but found Graham should not have to hand over the money to Pioneer before the final outcome of current arbitration about the adjudication. Instead it will stay in the joint bank account.

Justice Coulson said Pioneer would be unable to repay the money to Graham if it lost the arbitration.

He also said Pioneer had “misled” Graham. He said: “Graham entered into that subcontract on a false premise.

“The various exchanges with Pioneer demonstrated to Graham that Pioneer were a substantial company and financially stable. That was incorrect.

“While Pioneer’s turnover (then and now) still remains uncertain, they were not making any significant profit, as the subsequent accounts demonstrate. They did not have the cash reserves that they were suggesting.”

Therefore, he said Pioneer could not use their “bleak” financial position now to argue that they should be given the adjudication payment now because it was “the opposite” of what they told Graham about their position when they won the subcontract.

He also said Pioneer’s performance on some other contracts had been “nothing short of calamitous”. The judge cited a contract with MAF Developments at Eccelsall Road in Sheffield and another with Pelikaan, which were both terminated by those main contractors.

The judge said: “Pioneer never had sufficient cash reserves to run their business properly. They were always robbing Peter to pay Paul. 

“For Pelikaan, for MAF and for Graham, they entered into large subcontracts and were then unable to pay for materials, with the consequence that the contractors had to buy the materials on their behalf, and in the end, their subcontracts were terminated.”

He also rejected the idea that Pioneer’s financial difficulties were a result of Graham not giving it the adjudication payment.

He said: “I consider that those financial problems were inherent in Pioneer’s business model and that Pioneer’s cashflow difficulties stem back to a time before they even subcontracted with Graham.”

The judge reduced the amount owed to Pioneer to £188,665.49 after deducting adjudication fees that John Graham had paid on Pioneer’s behalf.

The arbitration over the adjudication is ongoing.

The case is one of a handful in the last eight years where a judge has allowed one construction firm to delay directly handing over adjudication monies to another, according to Bill Barton, director of Barton Legal, which acted as solicitors for John Graham Construction.

Mr Barton said the case illustrated how statements made by construction firms trying to win work were relevant to adjudication cases.

“I would imagine there have been lots of instances where a contractor has embellished how good a position they are in to an employer or a main contractor and now these matters can come back to bite them,” he said.  

“It [court action to enforce an adjudication] is not a blanket imposition of payment and equally parties seeking enforcement should not think that other factors are irrelevant.”

Construction News has contacted Pioneer Cladding Ltd for comment.

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