Approach with caution! The dangers of contracting with dormant companies

Background

WRB (NI) Limited (“WRB”) (a newly formed, dormant company), was engaged by a main contractor, Henry Construction Projects Limited (“Henry Construction”) to design and supply mechanical, electrical and public health systems for a development in London.

A payment dispute arose with WRB seeking payment from Henry Construction. Absent a resolution, the adjudicator held that the main contractor, Henry Construction, owed WRB £120,655.35 plus interest, VAT and fees.

Application for a stay of enforcement

Henry Construction failed to pay the adjudicator’s award. WRB therefore sought to enforce the award in the High Court. In response to WRB’s application for summary judgment, Henry Construction cross-applied for a stay of execution on the basis that WRB owed them liquidated damages and other costs. In particular, Henry Construction asserted that WRB’s “parlous financial standing” would mean any monies paid to WRB now, would not be available to be repaid later, were the cross-claims to succeed.

WRB responded by stating that Henry Construction chose to contract with WRB despite being aware of their financial standing at the time of entering into the subcontract. It also argued that a stay of execution would defeat the whole purpose of the adjudication. WRB did however, offer to a guarantee of repayment from a separate WRB company if the fresh adjudication would prove to be in favour of Henry Construction.

What did the court decide?

Civil Procedure Rules dictate that the court may stay the execution of a judgment in ‘special circumstances which render it inexpedient to enforce the judgment or order’ applying the principle summarised in the well-known case of Wimbledon Construction Company 2000 Ltd v Vago.

The court agreed that WRB would be unlikely to repay any judgment in Henry Construction’s favour but found that the situation was entirely of its own making. Henry Construction was aware WRB was dormant from the outset and still chose to place a subcontract with it. The risk was an “inevitable consequence” of entering into that subcontract. The court also found that the guarantee offered from another WRB group company was not necessary. The stay was therefore refused.

Comment

This case highlights two important points particularly pertinent in the current economic climate (but always important):

• Strong due diligence is more important than ever – this may include carrying out sufficient credit checks and obtaining appropriate references before entering contracts. Planning effectively at the outset can help mitigate the risk of any unwanted surprises down the line. We previously shared some ideas about how to mitigate risk in the predictably unpredictable economic climate here.
• Approach with caution! – Choosing to enter a subcontract with a dormant company is a decision Henry Construction took with their full knowledge. Therefore, any risk of subsequent non-payment by WRB was essentially “the result for which it contracted”. It is critical to understand the risks that come with contracting with financially unstable companies.

Our Construction team can help you across the board when it comes to issues raised in this update. From understanding the potential risks of contracting with a dormant or financially unstable company, to advising on or drafting contracts to handling payment disputes including adjudications. Please get in touch.