Adjudication rules remain work in progress

Here’s another case addressing the knotty combination of adjudication and insolvency. Emily Sinclair, associate solicitor at Irwin Mitchell, reports.

Courts have recently said that the regimes of adjudication and insolvency are incompatible. To what extent is adjudication a useful tool where one of the parties falls into insolvency? In May 2019, another judgment was published dealing with this difficult area – Indigo Projects London Ltd and Raizin and Another [2019] EWHC 1205 (TCC).

Background

The defendants had engaged Indigo Projects London as main contractor on a JCT Standard Building Contract with Quantities 2011 to construct a house. Disputes arose between the parties concerning the standard of the work, delays in completion and liquidated damages.

Indigo issued an interim payment application; the defendants did not agree with it but they failed to issue a pay less notice in accordance with the contract.

The defendants did not pay the sum due to Indigo but paid £30,000 on account. Indigo referred the dispute to adjudication and was awarded £177,662.72, being the full sum with interest, less the £30,000 paid on account. Crucially the award was on the basis that a payless notice was not served; it did not consider the merits of the defendant’s cross-claims.

What happened next?

Indigo applied for summary judgment to enforce the adjudication award and then entered into a company voluntary arrangement (CVA). The defendants resisted the application and sought a stay of execution, primarily on the basis that if the decision was enforced Indigo may be unable to repay any sum that was ultimately found due to the defendants.

Indigo argued that the adjudication award should be enforced because it pre-dated the CVA. The CVA would not be undermined because an account could be taken once the payment had been received.

The defendants argued that under the CVA that both sums claimed and counter-claimed between Indigo and the defendants had to be taken into account in determining the balance due. The defendant’s counter-claims had not yet been determined, so paying the adjudicator’s award would result in the CVA supervisors distributing that sum amongst the general body of creditors.

What was decided?

The judge dismissed the application for summary judgment to enforce the adjudication award.

The effect of the adjudicator’s award on the accounting process of the CVA was different depending on whether it had been paid before or after the commencement of the CVA:

• If the adjudication sum was paid before the start of the CVA, then the supervisors would have had to take it into account in determining the final balance due between Indigo and the defendants;
• If the adjudication award was paid after the commencement of the CVA, it would be a recovery that would go into the general fund available for distribution amongst creditors. If the defendant then had a successful cross-claim, the money it had paid into the CVA would not be applied for its sole benefit. An order to pay the sum found due by the adjudicator would therefore work harshly against the defendants.

Lessons

So where does the law stand and what does this mean for companies on the brink of a CVA?

This case follows on from January’s Court of Appeal decisions in Bresco Electrical Services v Michael J Lonsdale and Cannon Corporate v Primus Build [2019] EWCA Civ 27.

In Bresco it was held that an adjudicator had jurisdiction to determine a claim by a company in liquidation but if the company faced a separate cross-claim an adjudicator’s decision would not ordinarily be enforced. In Bresco, the Court of Appeal said that the judge in that case had been right to enforce an adjudication decision in favour of Primus who were in a CVA. The judge in Indigo said he was not sure that his reasoning was consistent with the decision in Bresco.

It is difficult to reconcile those two cases and we will need further decisions to clarify the currently blurred boundary between those cases where a company in a CVA will be able to enforce an adjudicator’s award and those where it will not.

A copy of this article first appeared in Construction Index