Lovell Partnerships Ltd & Anr v Merton Priory Homes

[2014] EWHC 1615 (TCC)

The claim here related to the ACA Standard Form of Contract for Term Partnering, which as Mr Justice Edwards-Stuart said was specifically devised for situations where one party requires the other to carry out a series of relatively minor but repetitive or cyclical tasks over a substantial period or “Term”: here building, repair and related services for a local authority. The employer or client would place orders for particular “Tasks” during the Term and the contractor (or Connaught), referred to as the “Service Provider”, would carry them out and submit monthly valuations for payment. However, the contract provided that it would terminate automatically if either party became insolvent.

The question for the Judge was whether, and if so to what extent, the Service Provider was entitled to any further payment for work carried out where, as here, it had been put into administration, when in such circumstances, clause 13.9 provided that the client “shall not be bound to make any further payment” to the Service Provider. Merton said that Connaught was not entitled to any further payment and that, following a termination caused by insolvency, absent bad faith, any loss lay where it fell. However, Merton did suggest that it would be entitled to make a claim after termination against the Service Provider for defective work. Connaught said that clause 13.9 served to suspend the operation of the contractual machinery for payment and instead left the parties to pursue their rights under the contract either by adjudication or litigation.

Clause 13.10 said that termination of the appointment of any Partnering Team Member “shall not affect the mutual rights and obligations of the Partnering Team Members accrued at the date of termination”. Clause 7 dealt with payment. The Service Provider was to submit an application for payment at the end of each month. Within five days of receipt of the application, the Client’s Representative issued a valuation specifying the proposed payment. The final date for payment was 15 days later.

Connaught said that the effect of clause 13.9 was to deprive the Service Provider of any right to insist on any further payment under clause 7 following an automatic termination on insolvency. The effect of clause 13.10 was that clause 13.9 did not deprive either party of its accrued rights up to the date of termination, which could be enforced subsequently by way of adjudication or litigation. Merton submitted that the words of clause 13.9 meant exactly what they said and that the Client did not have to make any further payment following an automatic termination for insolvency. The “mutual rights and obligations” referred to in clause 13.10 did not extend to rights confined solely to the payment of money, but rather claims for defective work, confidentiality, TUPE rights etc.

The Judge gave an example: say that a valuation was submitted for £100k. Then, as per clause 7, the Client Representative (acting in good faith) issued a valuation within five days for £70k. In the absence of insolvency, Connaught would become entitled to payment of £70k 15 days later. However, Connaught was placed into administration on 8 September 2010. Connaught submitted that the effect of clause 13.9 was that Merton did not have to make any further payment under clause 7. However, this did not prevent Connaught from seeking to recover the payment by way of adjudication or litigation, albeit that, in such a claim, Merton would be entitled to set off against Connaught’s claim any cross-claim for, say, damages for defective work.

By contrast, Merton said that the effect of clause 13.9 was that Connaught simply had to forego its claim for £70k. However, it also submitted that nothing in clause 13.9 prevented Merton from taking separate proceedings to recover damages for defective work carried out prior to termination (although it would not recover the additional cost of completing unfinished work or the additional cost of employing a fresh contractor to carry out other Tasks that would have been carried out and completed if the contract had not been terminated).

The Judge preferred the reasoning of Connaught. Clause 13.10 was a freestanding clause. It is not made subject to clause 13.9 by the introduction of words such as “Subject to clause 13.9 ...”. The effect of depriving clause 13.10 of any application to an accrued payment entitlement under clause 7 would have the effect of preferring other creditors of the Service Provider over the Client, thereby undermining the general principles of insolvency. Instead of the Client being able to retain the amount of the valuation against any loss it may have suffered by reason of, say, defective work, it would have to pay it straight out so that it would become part of the assets available for general distribution to the Service Provider’s creditors.

This was a simple and straightforward outcome more consistent with the overall purpose of the contract. The reference to “any further payment” in clause 13.9 referred to any further payment to which the Service Provider would or might otherwise be entitled pursuant to the contractual payment provisions. The clause did not prevent the Service Provider from pursuing separately, by way of adjudication or other claim, any rights or obligations that had accrued by the date of termination.

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