REUTERS | Yuriko Nakao

Winning a battle but losing the war

Adjudication is generally a non-binding interim process which leaves the door open to finally deciding the dispute by litigation or arbitration. Effectively then, a party can lose a battle but ultimately win the war.

What if, however, the battle is lost and the loser has to pay over a large amount of money to the winner. In principle, they could litigate or arbitrate and get their money back and, maybe, more. But what if the winner happens to be in serious financial difficulties?

The problem could be that the money is paid out with no possibility of getting it back due to the other side going under. Unfortunately, this is a serious risk in these credit crunch times.

One option for the loser is to not pay and to wait for the winner to enforce the decision in the courts. Then, at the enforcement hearing, the loser can seek to have the application refused or alternatively seek a “stay of execution” under RSC Order 47.

In the recent case of Mead General Building Ltd v Dartmoor Properties Ltd [2009] EWHC 200 (TCC), Coulson J considered whether a stay of execution should be granted if the party seeking enforcement of the adjudicator’s decision had entered into a CVA.

On the one hand, Coulson J made it clear that the enforcement of adjudicators’ decisions should not generally be thwarted, but this had to be balanced with the court’s discretion to grant a defendant a stay of execution pursuant to RSC Order 47. Coulson J referred to the authorities and formed the view that there are no authorities dealing with a claimant who is subject to a CVA. He then went on to formulate several principles which will be an important checklist for parties finding themselves in this position:

  • Whether a party is subject to a CVA is relevant to whether the court will decide to order a stay of execution.
  • But a CVA will not oblige the court to infer the party will be unable to pay, making a stay of execution automatic.
  • When deciding whether to grant the stay or not, the court will look at both the CVA and the claimant’s current trading position.
  • In particular, the court will look at what effect the defendant’s failure to pay has had and whether it was a significant factor in the claimant’s CVA or its current financial position.

Coulson J then applied these principles to this case, finding that:

  • Mead’s financial woes, including the CVA arose as a direct result of Dartmoor’s failure to pay sums due.
  • The opinion of the supervisor of the CVA was that Mead was a viable ongoing concern.
  • Mead was currently trading successfully and there was no reason to believe that it would not be able to pay back any part of the judgment sum if it lost a future arbitration (which Dartmoor was threatening to start).

After weighing up these findings, Coulson J declined to grant the stay of execution and ordered Dartmoor to pay up.

This judgment not only brings needed clarity to the particular circumstances of a CVA, it also helpfully summarises the existing law and what factors the court will look at when deciding whether to grant a stay of execution where there are serious questions over the claimant’s solvency.

As more and more adjudications are brought by and against parties who have been driven close to the edge by cashflow problems, this case should be essential reading for all industry players and their advisers. In addition, parties will be well advised to take heed of the judge’s comments on the quality of the evidence presented by Mead, which he was impressed by.

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