Court enforces adjudicator’s decision in favour of an insolvent party

Background

The dispute in question related to the value of the final account on a building contract for the development of a residential property in Manchester.

The Claimant, a fit-out contractor, commenced adjudication proceedings in February 2020 concerning the valuation of variations, a claim for an extension of time and associated loss and expense. However, part way through the adjudication the Claimant entered into administration. The adjudicator nonetheless proceeded and subsequently issued his decision in April 2020 in favour of the Claimant for circa £700,000 plus VAT and interest.

The Defendant failed to pay and the Claimant issued Court proceedings to enforce payment of the adjudicator’s decision. In the Court proceedings, the Defendant resisted enforcement of the adjudicator’s decision on the grounds of “futility” (given that it intended to bring arbitration proceedings for a full final account valuation) and sought a stay of execution.

The Court cited very little case law and, indeed, focused largely on the decision in the Bresco case and also the case of Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Co Ltd [2019] EWHC 2651 (TCC).

Decision

As set out in our earlier article, in Bresco the Court considered the difficulties of enforcing adjudication awards in favour of an insolvent party. Enforcement of the award would mean that the funds may become part of the assets to be distributed to creditors, depriving the paying party, who may subsequently seek a final determination of the dispute (by way of arbitration or litigation), of a potential set off. The Court in Bresco considered solutions to preserve the possibility of set off, including appropriate undertakings being provided by the liquidators (such as ring-fencing any enforcement proceeds).

In the present case, the administrators were offering clear undertakings to ringfence the awarded sums, together with an After the Event (ATE) Insurance policy to the value of £200,000, to cover any adverse costs in any subsequent proceedings which the Defendant might bring in relation to the final account.

The Defendant disputed the suitability of the undertakings offered and, in turn, sought costs protection for between £800,000 to £1m worth of costs. The Court therefore had to consider whether the undertakings offered were sufficient to enforce the adjudicator’s decision and ensure that the paying party was not deprived of any subsequent right of set off.

The Court carefully looked at the level of costs which might be incurred in any subsequent arbitral proceedings, noting that the Defendant had already incurred circa £280,000 in the adjudication. The Defendant had spent heavily in preparing evidence for the adjudication, including the production of detailed expert delay analysis. The Court took the view that savings would be made in any arbitration as, for example, the evidence was already there. The Court recognised that the costs of the adjudication would not be recoverable by the Defendant in any event and also took issue with the Defendant’s failure to particularise the costs being sought. A comment was made to the effect that costs should be particularised to the same level of detail expected in a costs budget.

In the circumstances, the Court considered the level of costs protection sought by the Defendant to be unsustainable on the evidence put forward and instead considered the Claimant’s suggested allowance of circa £330,000, subject to a conventional 60% cost recovery, to be reasonable. In this context, the Court therefore held that the ATE policy for £200,000 that the Claimant offered was sufficient and appropriate.

As to the ringfencing offered, this entailed the whole of the sum awarded in the adjudication and the Court directed that such ringfencing should continue until the end of any appeal process in the arbitration. On the basis of the above conditions, the Court enforced the adjudicator’s decision.

Practical implications

This case takes the Bresco ruling one step further from the starting point of companies in liquidation (or, it would appear, in administration) potentially being able to refer disputes to adjudication. We now have a practical example of a particular set of circumstances in which the Court might be persuaded to enforce an adjudicator’s decision in favour of an insolvent party. The Court’s pragmatic approach to the administrators’ undertakings as a condition to the enforcement indicates to parties that, where sufficient and acceptable security is provided, the Court may enforce adjudication decisions despite the insolvency of the party with the benefit of the decision. It is now increasingly evident that Courts will allow enforcement provided that appropriate protections are in place to ensure the paying party is not deprived of the opportunity to bring a subsequent set off claim.

Office holders such as liquidators and administrators will be encouraged that the Court looked beyond the enforcing party’s insolvency status in connection with the requirement to provide security. They will take note that the Court was persuaded as to the sufficiency, on these particular facts, of the undertakings to ringfence the award combined with the level of adverse costs coverage which the administrators had put in place.

The case is also a useful guide for any application for security for costs and the level of detail required in such requests. Whilst it can be difficult, at the time security is sought, to estimate costs to the level of detail required in a formal costs budget, some concerted attempt needs to be made or a party risks the Court being persuaded to accept a lower figure ventured by the party opposing the application.