Latest developments in adjudication - insolvency

Our regular seminars continue to be a great success. This year we held four on topics ranging from public procurement, the education sector and, naturally, adjudication. Karen Gidwani, at the Managing and Resolving Construction Disputes Seminar held on 29 September 2010, updated our audience on the latest developments in adjudication. In an extract from her paper she discusses the effect of insolvency when it comes to enforcing adjudicators’ decisions.

The basic position at law

In the case of Pilon Ltd v Breyer Group, Breyer argued that any judgment to enforce the adjudicator’s award should be stayed given Pilon’s financial position. Although Mr Justice Coulson concluded that the adjudicator’s decision was not enforceable, he considered whether he would have ordered a stay of execution had he found that the adjudicator’s decision should be enforced. The Judge concluded that had he been minded to enforce the adjudicator’s decision, either in whole or in part, then he would have granted the stay of execution sought by Breyer.

The Judge started by reviewing the caselaw on staying the execution of a judgment enforcing an adjudicator’s award. He started with his own judgment in the case of Wimbledon Construction Company 2000 Ltd v Derek Vago1 which summarised the relevant principles as follows:

“26 … d) The probable inability of the claimant to repay the judgment sum (awarded by the adjudicator and enforced by way of summary judgment) at the end of the substantive trial or arbitration hearing, may constitute special circumstances within the meaning of Order 47 Rule 1 (1)(a) rendering it appropriate to grant a stay (see Herschel Engineering Ltd v Breen Property Ltd (unreported) 28th July 2000, TCC).

e) If the claimant is in insolvent liquidation or there is no dispute on the evidence that the claimant is insolvent, then a stay of execution will usually be granted (see Bouygues and Rainford House Ltd v Cadogan Ltd (unreported) 13th February 2001, TCC).

f) Even if the evidence of the claimant’s present financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:

i) The claimant’s financial position is the same or similar to its financial position at the time that the relevant contract was made (see Herschel), or

ii) The claimant’s financial position is due, either wholly, or in significant part, to the defendant’s failure to pay those sums which were awarded by the adjudicator (see Absolute Rentals v Glencor Enterprises Ltd (unreported) 16th January 2000, TCC).”

Mr Justice Coulson then referred to another of his judgments, this time Mead General Building Ltd v Dartmoor Properties Ltd.2 In that case, the claimant was the subject of a CVA which was relied on by the defendant in support of an application for a stay. The Judge said in that case:

“12 …. a) The fact that a claimant is the subject of a CVA will be a relevant factor for the court to take into account when deciding whether or not to grant a stay under RSC Order 47.

b) However, the mere fact of the CVA will not of itself mean that the court should automatically infer that the claimant would be unable to repay any sums paid out in accordance with the judgment, such that a stay of execution should be ordered.

c) The circumstances of both the CVA and the claimant’s current trading position will be relevant to any consideration of a stay of execution.”

Pilon Ltd v Breyer Group

The Judge clarified the point that, it being their application, the burden of proof lay on Breyer to establish that the money was unlikely to be repaid. Three questions arose. Firstly, whether Pilon’s financial position was significantly different from its position at the time when the contract was made; secondly, whether Pilon’s financial position was due to Breyer’s non-payment of the sum awarded by the adjudicator; and finally whether, on the evidence, there was a significant risk that any sums paid by Breyer to Pilon would not be repaid if or when there was a final determination in Breyer’s favour. There was no dispute that Pilon’s financial position had changed significantly since the contract was made. Turning to the second question, the Judge observed that the adjudicator had awarded Pilon £207,000 whereas when Pilon’s CVA was agreed, the total owed to Pilon’s creditors was in excess of £2.7 million. Therefore, on the face of the evidence, the sum owed by Breyer was less than 10% of the sums Pilon owed to others. The Judge concluded that it was not possible on these figures for Pilon to demonstrate that their financial position, and the CVA in particular, was caused by Breyer’s non-payment of the sum awarded by the adjudicator. The Judge also stated that whilst Pilon had raised the issue of non-payment by Breyer of sums arising from other contracts, this was irrelevant and those sums were disputed. In any event, those sums would only take the amount owed by Breyer to Pilon to £1 million at the most, leaving £1.7 million still owed to creditors. With regard to the final question, on the evidence, the Judge found that it would be unlikely that Pilon would be able to repay the judgment sum, had it been awarded.

Anrik Ltd v AS Leisure Properties Ltd3

The Vago case has been applied on many occasions. Here, Mr Justice Edwards-Stuart provided an interesting variation on the question of the date of the relevant contract. The parties entered into a contract in 2006, disputes arose, but to avoid a dispute about jurisdiction, an ad hoc adjudication agreement was entered into in 2009. After the adjudicator had awarded £516k to Anrik, AS Leisure applied for a stay of execution on the basis that Anrik’s financial position had deteriorated between 2006 and 2009. Anrik argued that the court should assess any change in its financial position from the date of the ad hoc adjudication agreement. The Judge agreed, holding that this was the “relevant” contract as referred to by Judge Coulson at paragraph f(i).

Integrated Building Services Engineering Consultants Ltd (t/a Operon) v PIHL UK Ltd4

Here, the Scottish Court considered whether three adjudicator’s awards should be enforced in light of the supervening insolvency of Integrated Building Services Engineering (“IBS”). PIHL entered into contracts with IBS relating to the refurbishment of schools in Aberdeen. Disputes arose, culminating in three adjudicator’s awards in IBS’s favour. PIHL refused to pay. On 11 January 2010, IBS issued a letter before action. On 18 January 2010, IBS commenced court proceedings to enforce the awards. Just under two weeks later, administrators were appointed. PIHL defended the enforcement on the basis that IBS was insolvent and so PIHL was entitled to retain sums which may be due to IBS until its claims against IBS had been determined and offset against its liability. This process is known as “balancing accounts in bankruptcy” which is an equitable doctrine. At the hearing, IBS contended that:

• The 1996 Act altered the common law and restricted the circumstances in which a party could rely on the principle of balancing accounts in bankruptcy. Further, it was the task of the courts to assist the prompt enforcement of decisions.
   
• Averments of insolvency, that fell short of liquidation did not constitute a defence in either Scotland or England to enforcement of such decisions.
   
• Whilst the courts had the discretion to stay execution of a judgment where there was no dispute that the claimant was insolvent, if the defendant’s failure to pay sums which an adjudicator had awarded caused or significantly contributed to the insolvency, then a stay would not be justified: Wimbledon v Vago.
   
• The parties must be taken to have addressed the contingency of insolvency in their agreement as it contained warranties of solvency and a provision which allowed the agreement to be brought to an end in specified circumstances, including IBS’s insolvency, the appointment of an administrator or the winding up of a company.
   
• To allow retention based on IBS’s insolvency, which occurred after the commencement of the enforcement proceedings, would defeat the purpose of the 1996 Act and allow a person against whom an adjudicator had made a decision to use “capricious manipulation” to avoid its obligations.
   
• The enforcement of the adjudicator’s awards was entirely consistent with the decision in Melville Dundas Ltd v George Wimpey UK Ltd5.

The Judge analysed the 1996 Act and the equitable doctrine of balancing of accounts and concluded that the purpose of the 1996 Act was to encourage cooperation between the parties to a construction contract to preserve the cash flow of contractors6 and subcontractors during the contract and improve the efficiency of the construction industry. Adjudication must be viewed in this context. It is clear from the caselaw7 that adjudicators’ decisions are a method of providing a summary procedure for the enforcement of payment provisionally due under a construction contract. The Judge viewed the provisional nature of an adjudicator’s decision and the reservation of a final determination to another decision maker as important characteristics of the procedure. He also cited Lord Hoffmann in the Melville Dundas case at paragraph 12:

“It seems to me most unlikely that Parliament intended that provisions intended to improve the efficiency of the construction industry should determine priorities between the employer and an insolvent contractor’s creditors.”

The Judge found that the approach of the majority in Melville Dundas was consistent with the view that the obligation to implement an adjudicator’s decision without delay does not necessarily supersede an employer’s other entitlements on a contractor’s insolvency. He also noted that the English courts have not as a general rule enforced decisions of an adjudicator in favour of a contractor who was demonstrably insolvent and unable to repay the sums to be paid. The Judge concluded that whilst mere averments of insolvency should not provide for a court to delay enforcement of an adjudicator’s award, he did not agree that the undisputed insolvency of a claimant cannot be a defence if the claimant is not in liquidation. The Judge reached this view on the basis of the Melville Dundas judgment and on the basis that he was persuaded that when a company enters administration, the principle of balancing of accounts in bankruptcy can be invoked. Finally, the Judge held that the 1996 Act does not exclude the principle of balancing of accounts in bankruptcy. He said:

“28 …. The obligation to pay the sum due under the adjudicator’s decision is a contractual obligation to implement the result of the provisional dispute resolution procedure. Following the approach of the House of Lords in Melville Dundas Ltd, I do not consider that that obligation supersedes the obligant’s rights to assert the principle on the claimant’s insolvency. The decision of the adjudicator is a provisional award. The speed of the process by which he or she reaches the decision, on occasion, may not allow the parties to present their positions in full. But that is the nature of the process, which is designed to facilitate cash flow in the context of a continuing contract by reaching interim decisions and leaving the final resolution of disputes until later. It would be strange in my view if an adjudicator’s decision, provisional as it is, were, in the absence of misbehaviour by an obligant, to prevent the obligant from asserting its rights occasioned by the supervening insolvency of the claimant. I doubt if allegations of insolvency, which were seriously contested, would justify the application of the principle in the context of the 1996 Act. But those are not the circumstances of this case.”

Accordingly, the Judge found in favour of PIHL. This case demonstrates that the Scottish Court will take a similar view to the English and Welsh courts in the enforcement of adjudicators’ decisions where the receiving party is insolvent.

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• 1. [2005] BLR 374.
• 2. [2009] EWHC 200 (TCC) (4 February 2009).
• 3. Unreported, but see comments of Jonathan Lewis in Issue 11 of the 4 Pump Court Newsletter..
• 4. [2010] ScotCOS CSOH 80 (1 July 2010).
• 5. 2007 SC (HL) 116.
• 6. In this regard the Judge referred to Melville Dundas Limited v George Wimpey Limited, per Lord Hoffmann at paragraph 12 and Lord Hope at paragraph 36.
• 7. The Judge cited Bouyges (UK) Limited v Dahl-Jensen (UK) Limited [2000] EWCA Civ 507 (31 July 2000) and Rainford House Limited v Cadogan Limited.