UK: Adjudication And Insolvency

Last Updated: 14 April 2009
Article by Liam Hart

A recent decision in the TCC sheds light on the approach that the Court will take in relation to referral to adjudication where the referring party is insolvent.

The Facts

The claimant local authority ("Camden") employed the defendant contractor ("Makers") to perform certain work. Camden later sought to determine Makers' employment for being slow with its works. Makers subsequently referred a dispute to adjudication about whether its employment was lawfully determined. The adjudicator found in Makers' favour.

Camden feared that, on the back of this adjudication, Makers would initiate a further adjudication and seek substantial sums for wrongful termination. Makers was balance sheet insolvent and Camden was concerned that any payments made to Makers pursuant to an adjudicator's decision would disappear to Makers' creditors.

Camden therefore issued Court proceedings against Makers, seeking to pre-empt a further referral to adjudication by establishing that Camden had in fact acted properly in determining Makers' employment, and claiming around £1m for the costs flowing from the contract's determination. Makers did not file its defence in time, and Camden successfully applied for judgment in default to be entered against Makers.

Application to Set Aside Default Judgment

Makers applied for judgment in default to be set aside. Of particular interest was Camden's submission that the court should only exercise its discretion to set aside the default judgment on the condition that Makers would not initiate any further adjudications against Camden. In refusing to impose such a condition, Akenhead J made the following observations:

  • Makers' failure to serve a Defence within the permitted time was an oversight. Camden should not be allowed to exploit this fortuitous event to get around the established principle that an adjudication can be pursued concurrently with court proceedings
  • The court will only impose conditions on a party seeking to adjudicate in the most exceptional of circumstances. The fact that the referring party is insolvent is not an exceptional circumstance
  • If an insolvent referring party plans to adjudicate it must weigh the potential advantages of doing so against the risk that a court could stay a judgment to enforce an adjudication decision on the grounds of insolvency and inability to repay. Even if an insolvent referring party were to be successful in an adjudication, the responding party would in any event be able to get a stay of execution on any enforcement judgment relating to that adjudication unless
  1. the insolvent claimant's financial position was similar to its position at the time the relevant contract was made; or
  2. the insolvency was due in significant part to the defendant's refusal to pay the sums awarded by the adjudicator

Implications

The court's emphasis on the primacy of the right to refer a dispute to adjudication "at any time" is nothing new, but this is a striking example of just how far the Court will take this and is all the more noteworthy in the current economic crisis.

Given that a stay of execution will ordinarily be granted it may be tempting simply to ignore an adjudication initiated by an insolvent referring party, as in any event the referring party will not be able to enforce a judgment obtained from an adjudication (subject to the exceptions set out above).

This tactic is ill advised. A party appearing at first sight to be in terminal financial health may subsequently be rejuvenated, leaving the responding party to face an uncontested adjudicator's decision, without recourse to enforcement arguments based on the insolvency. An insolvent party to an adjudication will often be a foe that needs to be guarded against, irrespective of the fact that in the majority of cases a victory by the insolvent party will ultimately prove to be a hollow one.

Third-party bankrollers?

This decision also throws up the intriguing possibility that an "investor" or claims consultant could bankroll the adjudication of an insolvent referring party in return for a share of the proceeds of a successful adjudication. Such an arrangement may not fall foul of the existing restrictions on a third party funding litigation (as adjudication is a different beast to litigation).

One can imagine circumstances where it would be difficult for the unsuccessful responding party to apply for a stay of enforcement of the judgment, notably if the party bankrolling the referral was a well-funded company which had taken assignment of the rights (but not the obligations) of the insolvent referrer. As the economic climate worsens, it is to be expected that the legality of such a scenario will be played out in the courts.

Reference: The Mayor and Burgesses of the London Borough of Camden v Makers UK Limited

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 01/04/2009.

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