The tension between adjudication and insolvency
The Construction Contracts (Northern Ireland) Order 1997 enables a party to a construction contract to refer a dispute under that contract to Adjudication.
Most disputes are about payment and the idea is to speed up payment and aid cashflow.
The Adjudicator must reach a decision within 28 days and the Courts give effect to that through an expedited process known as Summary Judgment. The Adjudicator’s decision must generally be complied with unless and until it is overturned. It is “pay now – argue later”.
A number of exceptions exist, an important one being in the context of insolvency. What if the paying party is ordered to pay up to a claiming party who is or becomes insolvent? The money paid to an insolvent party will probably never be recovered. Should different considerations to enforcement of an Adjudicator’s award apply in this scenario? Last year saw four cases touch on this issue.
In Bresco Electrical -v- Michael J Lonsdale Bresco agreed to perform electrical work for Lonsdale but Bresco became insolvent part way through the job. Lonsdale intimated claims against Bresco and Bresco intimated cross-claims against Lonsdale. Over 3 years after the liquidation Bresco commenced Adjudication proceedings claiming payment. Lonsdale successfully obtained an injunction to prevent the Adjudication from proceeding on the grounds that Bresco was insolvent. The Court of Appeal highlighted the “fundamental incompatibility of the separate processes of adjudication and insolvency” and described Adjudication of a claim by a contractor in insolvent liquidation in circumstances where there is a cross-claim as “an exercise in futility”. The Court granted the injunction stopping the Adjudication from proceeding.
However at the same time it was deciding Bresco, the Court of Appeal also decided a separate case of Cannon Corporate -v- Primus Build. Here Cannon engaged Primus to design and build a new hotel. Various disputes arose. Primus then entered into a Company Voluntary Arrangement or “CVA”. In a CVA the aim is to keep the company alive by making an agreement with creditors and then trading on whereas a liquidation terminates the company. Primus proposed a CVA on the basis that whilst it was currently insolvent there was a clear way forward that would lead to creditors receiving 100p in the £1. The positive prognosis was based on Primus’ view that it would be able to recover monies from third parties (including Cannon) who owed it money sufficient to satisfy all its creditors. Primus then commenced Adjudication proceedings against Cannon and obtained an award of £2.128 million. The Court of Appeal drew a distinction between the liquidation process ( i.e. the process in Bresco) and the CVA process which is designed to allow a company to trade out of trouble and decided the Adjudicator’s decision against Cannon should be enforced.
In Indigo Projects -v- Razin disputes arose and Indigo obtained an Adjudicator’s Award in the sum of £177,662. This was because the Defendants had failed to serve a “Pay Less Notice” in accordance with the contract. The Adjudicator did not therefore have to decide the dispute on the merits. Indigo then entered into a CVA proposing a dividend to creditors of 60p in the £1. The Court refused to enforce the Adjudication Award against Razin as it would distort the accounting of claims and cross-claims required under the CVA.
In Meadowside Building -v- Hill Street Management the claiming party sought to address the concerns the Court had expressed about enforcement in Bresco by offering a guarantee. The sum in question was £32,629, awarded to Meadowside by an Adjudicator whilst the company was insolvent. The Adjudicator did reach a decision on the merits of the various claims and cross-claims in an attempt to arrive at a net balance of the sums due between the parties. Although the Court refused to enforce the Adjudicator’s Decision for other reasons it did say that where a satisfactory guarantee was given that a sum awarded by an Adjudicator could either be paid back or “ring-fenced” then that could well constitute grounds for enforcement in favour of an insolvent company.
Each case will turn on its facts and circumstances and the particular insolvency process involved, but although Courts will generally give effect to Adjudicators awards, they will be cautious about enforcing in favour of a party who is not in a position to pay back a sum awarded if it later turns out that the decision of the Adjudicator was wrong.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.