Third party funding: A third wheel?

A recent case highlighted the issues which arise when third parties get involved in financing construction companies. This is not an unusual occurrence. Cash flow has been an issue in the industry for as long as I can remember (dare I say even before Lord Denning’s suggestion that cash flow was construction’s life blood in the early seventies).

While obviously the Construction Act has offered greater protection to contractors and subbies in this respect, there are still times when parties withhold money rightly or wrongly, and which can require time to resolve (for example by adjudication). As a result the party not being paid needs to look to the help of a funder so that it can make it through such periods.

The referenced case is Stopjoin Projects Ltd vs Balfour Beatty Engineering Services in the Technology and Construction Court. Brunel Control Systems Ltd was employed by Balfour Beatty as a subcontractor relating to control system work being carried out on two different subcontracts.

Stopjoin is a factoring company which had provided financial support to Brunel and in 2006 a loan facility agreement was entered into where Brunel obtained a loan for approximately £500,000 in return for it assigning its book debts and fixed assets to Stopjoin.

Stopjoin issued a claim against Balfour Beatty for sums it said were due to Brunel under the subcontracts. The claim relied on two arguments:

• there had been a valid assignment
• an implied trust had been set up.

An “unfairness” is caused where an assignment is made “improperly” – for example, without consent – as though it is effective between assignor and assignee the right to claim is not transferred

Under these proceedings Balfour Beatty was seeking to strike out Stopjoin’s claim on the grounds that the arguments had no real prospect of success if the claim was allowed to continue.

Stopjoin’s first argument was a strictly contractual one: that the contract under clause 7 included a bar on any assignment by Brunel without the consent of Balfour Beatty. Stopjoin argued that as Brunel had confirmed in the pre-contractual negotiations that the assignment of the debts had occurred, Balfour Beatty had somehow accepted the assignment or waived its right to object to it by allowing Brunel to continue with its works. The judge was not persuaded.

The second argument made by Stopjoin was a device designed to circumvent the issue.

An “unfairness” is caused where an assignment is made “improperly” – for example, without consent – as though it is effective between assignor and assignee the right to claim is not transferred. This leads to an unsatisfactory position where the claim falls into a black hole. In this case Brunel can’t claim (because the assignment between Brunel and Stopjoin is effective) and Stopjoin does not have the right to sue because of the prohibition against assignment.

To get round this, Stopjoin argued that a trust had been effectively created by the assignment between Brunel and Stopjoin and that it was the beneficiary of this implied trust. By utilising a device known as “the Vandepitte procedure” (named after the 1933 case) Stopjoin could sue Balfour Beatty itself by joining Brunel as an additional defendant. While the Court said that Stopjoin may encounter evidential obstacles in implying such a trust, this argument still raised the prospect of success and Stopjoin could therefore pursue its claim on this basis.

This case once again demonstrates the Court’s willingness to assist parties who pursue claims in such circumstances. Yet, as many of the issues turned on what the contract terms actually were, the case more widely illustrates that parties entering into third party funding arrangements need to give thought to the effect of the terms of the relevant contracts which exist (or will exist).

Failure to get your formal contracts in place, in time, continues to be an ever present factor in the contents of this blog as well as a contributor to my own and fellow lawyers’ pockets … So please take note.

Steven Carey is head of construction and engineering at Speechly Bircham LLP