Cold comfort: Paying damages to a firm in the red

Relations between contractor Makers UK and Camden council had become strained, said the judge. The £4m social housing contract on the Whittington Estate in Highgate has gone ever so sour. Even more concerning, Makers was in financial straits, or in the judge’s words, “insolvent in the sense that it cannot currently pay its debts”. That is not Camden’s fault. But as Camden has slung Makers off the contract and into the middle of exciting legal consequences, it seems that whether it wins or loses, Camden will be taking a cold bath. Let me tell you the story.

When Makers and Camden’s tender courtship blossomed into a building contract in 2005, Makers was in a fair financial state. The job started in October that year. Soon, sadly, there was a falling out over variations and delays. Nothing remarkable there. Camden became fed up with Makers’ performance and formally accused it of “failing to proceed regularly and diligently”.

It formally warned it to get its act together within 14 days, then finally decided that it hadn’t done so and would have to be turfed off the project. Doing all that is a tricky strategy, believe me, and Makers politely told Camden that it was talking through its hat. It repeated that opinion to the adjudicator who was now in their midst. This same adjudicator decided that Makers had indeed been falling short of the mark, but that by day 14 of the notice had pulled itself together. So Makers was not in serious default and therefore Camden had been wrong to boot it off; worse still for Camden, he decided that Camden had improperly ended the contract.

Camden formally warned makers to get its act together, then decided it hadn’t and turfed it off the project. Makers told camden it was talking through its hat

“Camden was and remains wholly dissatisfied with the decision of the adjudicator, which it considers went against the weight and sense of the evidence that was before him,” the council said. Camden was peeved enough to begin an action in the High Court to prove that the true culprit was Makers after all, and that the firm should pay it £1m compensation.

So far, so complicated for Camden – but what of that cold bath? Makers’ balance sheet for the year ending 2007 shows a deficit of £10m. Its profit and loss for that year knocks a hole in £11m. Worse still is that in Makers’ 2007 accounts it said: “Keller Group, the company’s ultimate parent, announced its decision to withdraw from the Makers UK business.” Keller is a very big creditor to its own firm. Moreover, it has an eye on the £4m counterclaim launched against Camden. That trial is coming on in November.

There is now, as ever, a “but”. Camden spotted that Makers could immediately begin a second adjudication … and claim that £4m now. Camden feared that any sum awarded would be irrecoverable if, and when, it won. So, the parties found themselves in front of Mr Justice Akenhead, with Camden arguing that Makers ought to be prevented from calling for a second adjudicator.

There is now, as ever, a ‘but’. Camden feared that any sum awarded would be irrevocable if, and when, it won

Let’s be clear. The court has absolutely no power to prevent Makers from pursuing an adjudication. The first adjudicator binds not only the parties but also the next adjudicator. And since the first fellow decided that Camden improperly terminated Makers’ employment, the second adjudicator only has to decide on damages.

Camden’s chance to argue that the next adjudication should be blocked arose because of an administrative oversight. And it is a brave argument. But courts are not places of sympathy. They are places for rules. The judge would not block Makers. They were allowed to call for an adjudicator to argue for immediate payment of hefty damages for the wrong done them, as the first adjudicator said in the first place.

So, if Makers comes to a second adjudicator and is awarded a wad of cash, will the court enforce payment, given Makers’ financial condition? The answer is no, if the “winner” is indisputably insolvent. But what if there is merely a likelihood that the winner will not be able to repay if a court or arbitrator orders repayment? The answer is yes, it will enforce if the claimant’s financial position was caused by the defendant’s failure to pay the sums awarded, or today’s financial position is no different to when the contract was formed. That water is cold indeed.

Credit: Simone Lia