Practical Law

Some may ask why an insolvent party would start (or continue with) an adjudication, but it is often the case that administrators make a commercial call that there is “something in the adjudication”. For them, it may be worthwhile incurring costs if the insolvent party can recover money due to it that will help to help boost the financial pot. After all, if the insolvent party obtains an adjudicator’s decision in its favour, it is also possible that the responding party will not proceed in defending the claim any further.

Imagine the following scenario. An insolvent party starts an adjudication against a solvent party (the responding party). The insolvent party is unsuccessful and it is ordered to pay the adjudicator’s fees. Two issues arise:

• How can the adjudicator ensure payment of his fees?
• How can the solvent responding party avoid liability for the adjudicator’s fees in the event that the insolvent party is unable (or unwilling) to pay?

From the adjudicator’s perspective

The adjudicator will usually ask the parties to sign an adjudication agreement stating that the parties are “jointly and severally liable” for his fees. Assuming the parties sign this, in our scenario, if the insolvent party cannot pay, the adjudicator can seek payment from the solvent party. In turn, the solvent party could then try to recover the fees from the insolvent party by starting a contribution claim. That may not be a good situation for the solvent party (not least because of the issues that may arise in any moratorium), who would simply rank as an unsecured creditor, but it is sufficient protection for the adjudicator.

What if the parties do not sign the adjudication agreement? How does the adjudicator recover his fees when faced with an insolvent party who cannot (or will not) pay?

Following Linnett v Halliwells, even if neither party signs the adjudication agreement, a contract could emerge by conduct. There would then be an implied term that the parties are jointly and severally liable for the adjudicator’s fees. Again, in our scenario, the solvent party loses out if the insolvent party cannot pay the adjudicator’s fees. It seems that the adjudicator will only miss out on his fees in the unusual circumstance that the solvent party also becomes insolvent during the course of the adjudication.

From the solvent party’s perspective: it’s a lose lose situation

Assuming that the parties are jointly and severally liable for the adjudicator’s fees, the solvent party could find itself in a rather unfortunate situation, footing its own legal bill for defending the adjudication and liable to pay all of the adjudicator’s fees. It may suffer the financial consequences of an adjudication that was started by the insolvent party simply as a means of trying to scrape together as much cash as possible.

There isn’t much that the solvent party can do to protect itself. I have come across a situation where the insolvent party deposited the funds for the adjudicator’s fees into a designated solicitor’s account. However, I’m not sure this is a viable option in reality. If the insolvent party is in administration, there may not be enough money and little incentive to do so. If the insolvent party is in liquidation, then it will not have these funds at its disposal. At the end of the day, the insolvent party is entitled to pursue its claim without any obligation to deposit funds into an account.

From the insolvent party’s perspective: it’s a win win situation, or is it?

Even if, in our scenario, the insolvent party’s adjudication was successful, there could be reasons why it would be ordered to pay a proportion of the adjudicator’s fees. It is arguable that it could simply turn a blind eye to payment of those fees, knowing that the adjudicator has recourse against the solvent party, and that the solvent party is unlikely to incur the costs of contribution proceedings against a party who won’t be able to pay anyway.

This also overlooks one important issue. Even if the insolvent party is successful, the solvent party still has to honour the adjudicator’s decision. In practice, that may not be likely and in enforcement proceedings, the court will normally order a stay of execution. This means the insolvent party is still out of pocket! (A future blog will look at ways in which an insolvent party can try to resist a stay of execution in enforcement proceedings.)

However, an insolvent party can use the threat of an adjudication to apply commercial pressure on the solvent party to pay up. The rationale for that is that it would be easier for the solvent party to simply pay up and avoid the process altogether.