Make sure you do your homework

The recent judgment in Pioneer Cladding Limited vs John Graham Construction Limited usefully highlights some pitfalls to be avoided in the procurement process.

Pioneer Cladding Limited was awarded around £190,000 in adjudication against the contractor John Graham Construction Limited.

In the subsequent enforcement proceedings John Graham Construction resisted payment as Pioneer was in financial difficulty. This may seem harsh, but as adjudication is an interim process the courts will “stay” such payment if the paying party may ultimately succeed with counter claims in court or arbitration, and there is a serious risk that the party to be paid will not be able to pay any such judgment sum (e.g. due to insolvency). The Technology and Construction Court was persuaded that Pioneer was technically insolvent.

However, was Pioneer’s financial position any different to when it entered into its subcontract in June 2011?

Any accounts are a snapshot in time and things change quickly – as Enron demonstrated

The court will not grant a stay where you have contracted with a man of straw – it’s assumed you have taken the risk if you contract with a flaky party. Pioneer’s argument was that evidence from 2011 showed it was financially unstable, so nothing had changed.This would usually have got it home on securing payment.

The twist in this case was that John Graham Construction had diligently done its homework to investigate Pioneer’s standing pre-contract, but what was provided by Pioneer did not tell the true story.

During tender, Pioneer provided a document suggesting it was working on schemes worth £2.9m, and that £4m worth of work was in the pipeline. John Graham Construction had also started to investigate allegations by Pioneer’s tender competitor that Pioneer’s financial history was questionable, only to stop on the advice of its architect due to the perceived improper behaviour by the competitor.

Finally, and crucially, the credit report procured by John Graham Construction which indicated Pioneer had not traded prompted John Graham to source the information directly from Pioneer. Pioneer obliged painting a rosy financial picture, including an oral representation at a meeting (which John Graham Construction sensibly recorded in a contemporaneous note) that it had £1.2 million cash in the bank. This was denied in the proceedings by Pioneer but the court was persuaded otherwise by the existence of the note. John Graham Construction had entered into the contract with Pioneer on a false premise. The judge granted John Graham Construction its stay.

This case demonstrates (‘t’was ever thus!) the importance of checking the financial standing of who you contract with. Any accounts are a snapshot in time and things change quickly – as Enron demonstrated. John Graham Construction had the sense to investigate Pioneer further.

Also, dare I say it, the case highlights the benefits of transparency and - something I shamelessly preach to my clients – the importance of records and a paper trail. That John Graham Construction could support its position was clearly fundamental to the grant of the stay.

This case doesn’t reverse the general principle that if you willingly contract with someone that is financially weak you should be prepared to deal with the possible consequences. But if that person has over egged the pudding then you might just stand a chance.

Steven Carey is head of Construction and Engineering at Speechly Bircham LLP