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Should I stay or should I pay now? Adjudication and insolvency

Before anyone objects, I know that I have lifted this title from a blog that Matt wrote in October 2013 but, quite frankly, when writing about stays can you think of a better title? I certainly can’t, so apologies to Matt (and The Clash) for the plagiarism.

When the party seeking to enforce an adjudicator’s decision is (or is thought to be) in financial difficulties, it is common to see the defendant argue that there should be a stay of execution of the summary judgment. The logic is that it will be unfair for the defendant to pay over money now, only to find that, following a final determination of the parties’ dispute, there is no money left to pay the defendant back. It may sound relatively simple but, as Coulson J says in his book (at paragraph 17.20) “this argument can be far from straightforward”.

However, it was an argument that the defendant raised when the matter came before Stuart-Smith J in LXB RP (Crown Road) Ltd v Squibb Group Ltd, albeit on this occasion the defendant sought an order that the money should be paid into court or into an escrow account.

LXB RP (Crown Road) Ltd v Squibb Group Ltd

The judgment doesn’t tell us what the parties had agreed to do but it does tell us that, in July 2016, the adjudicator decided that Squibb should pay LXB some £295,000, being the balance of liquidated damages. It also tells us that a final account had not been prepared at the date of the hearing (21 September 2016), but that Squibb hoped the balance would be about £540,000 in its favour.

Clearly Squibb did not pay the sums the adjudicator awarded and LXB sought to enforce that decision. It was at this point that Squibb, through its commercial director, Mr Hamilton, raised its fears that LXB would not be in a position to make payment to it. He asserted that:

  • LXB lacked substance. It was a subsidiary of LXB Retail Properties plc, a Jersey-based retail investment fund, and was an SPV with limited assets.
  • There was a concern that LXB would be wound up, rather than paying any money to Squibb. This point arose from a meeting that took place in February 2016 and related to something Mr Heywood of LXB had allegedly said.

Stay of execution

In the context of adjudication enforcement proceedings, a stay of execution will only be ordered in limited circumstances. The principles to apply when considering a stay were set out by HHJ Coulson QC (as he then was) in Wimbledon Construction Company 2000 Ltd v Vago:

  • Adjudication is designed to be a quick and inexpensive method of arriving at a temporary result in a construction dispute.
  • Adjudicators’ decisions are intended to be enforced summarily and the claimant should not generally be kept out of its money.
  • In an application to stay the execution of an adjudicator’s decision, the court must exercise its discretion under RSC Order 47, with the above factors in mind.
  • The probable inability of the contractor to repay the judgment sum may constitute special circumstances within the meaning of RSC Order 47(1)(a), rendering it appropriate to grant a stay.
  • If the contractor is in insolvent liquidation, or it is not disputed that the contractor is insolvent, then a stay of execution will usually be granted.
  • Even if the evidence of the contractor’s present financial position suggests that it would be unable to repay the judgment sum, that would not usually justify a stay if the contractor’s financial position was:
    • the same or similar to the contractor’s financial position at the time when the contract was made; or
    • due, either wholly or significantly in part, to the employer’s failure to pay the sums awarded by the adjudicator.

It was the bullet point concerning the contractor’s financial position being the same as when the contract was made that was relevant in LXB v Squibb. The court said that the decision to enforce or not was a matter of discretion, with it needing to balance the:

“… well known interest in enforcing valid adjudication decisions… against the perceived or actual risk of future injustice in the party subsequently becomes unable to reciprocate in the payment of what it owes under the same contract.”

The judge compared LXB’s financial position in September 2014 (which was two months after the parties entered into the contract), with that in September 2015. While I appreciate that these were clearly the most recent accounts, the hearing was held almost a year later on 21 September 2016, and a lot can happen in a year. LXB said that its financial position had improved but, as the judge noted, while there are:

“… pointers that appear to be in an improving direction… these figures do not tell the full story.”

The judge compared the two sets of accounts, and also considered witness evidence and advice from a firm of solicitors based in Jersey. Overall, the judge was not persuaded that LXB was shown to be in a worse financial position than it was when the parties contracted in July 2014 and, as such, there was no basis for refusing to enforce the payment of the adjudicator’s award.

Although the judge obviously had to rely on the most up to date accounts, it may be that these accounts didn’t actually give a realistic picture. For example, what if, by the time of the hearing in 2016 LXB’s financial position was significantly worse than it was in 2014? Could that not result in the type of “manifest injustice” that resulted in a stay in Galliford Try v Estura?

Take aways

I think that this judgment is a stark reminder that, even if there is evidence that a party might not be able to repay some or all of a sum awarded by an adjudicator, if their financial position is the same or similar to its financial position when the contract was made, then a court will not grant a stay.

This highlights the risks of entering into contracts with SPV’s. As the judge said:

“When all is said and done [LXB] was and is an SPV with limited assets. Whether Squibb appreciated that at the time of contracting is a moot point, but it is not remotely unusual for substantial construction projects to be carried out by SPVs in this way.”

Therefore, it is vital for a party to check the assets and liabilities of an SPV prior to entering into a contract with it and, if possible, to obtain a parent company guarantee. It is also important to carry out some form of due diligence and to check what the SPV’s current financial position is, and not just that at the last set of accounts.

MCMS Ltd Jonathan Cope

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