REUTERS | Jitendra Prakash

Adjudication, cash flow and insolvency

Cash flow is so often called the “life blood” of the construction industry and we are all familiar with a party’s right to adjudicate “at any time” to keep the cash flowing, or so the theory goes.

As we are in the middle of a recession, the recent Chartered Institute of Arbitrator’s (CIArb) (London branch) event was appropriately titled: “Adjudication in the credit crunch. How to make the pips squeak” (although I’m not sure quite who the pips were supposed to be). Each of the three speakers (Sir Peter Coulson, Kim Franklin and Simon Tolson) talked about adjudication and looked at situations where cash had stopped flowing because of insolvency.

A number of points came out of the evening:

  • It remains the case that it is extremely difficult to persuade a TCC judge not to enforce an adjudicator’s decision. Equally, there is little chance of getting them to grant a stay of execution on enforcement of the adjudicator’s decision. (Kim commented that she was aware of only three cases where a party successfully achieved this.) One wonders if this will change, with more and more companies struggling financially.
  • The financial status of the unpaid party is always relevant:
    • If the unpaid party starts an adjudication and you think they are insolvent, do not simply ignore the Notice. You may think that a stay of execution (at the enforcement stage) will be available, but it may not be as clear cut as that. It would be worse to let the adjudication happen and then find yourself facing payment (or enforcement) of an uncontested adjudicator’s decision.
    • Look carefully at the financial status of the unpaid party. Pay particular attention to its financial status at the time the contract was entered into, as well as at the time of the Notice. Did your failure to pay make it worse, or have neither changed? If you were responsible for a worsening situation, it is unlikely that the court will grant a stay of execution on enforcement.
  • The TCC does not look kindly on parties who make a speculative application for a stay of execution (for example, see Air Design v Deerglen).
  • Consider whether adjudication is the best way to get money from the other party. It may not always be the answer. Alternatives such as a statutory demand or a winding-up petition may be more cost-effective and quicker (which could be a factor if you suspect the financial credentials of the other party). Equally, the threat of one of these processes may be enough to get money from that party.

Finally, we were told that the TCC is getting busier, not only with enforcement applications, but also with “proper” litigation cases. I’m not sure how that is reflected in the paucity of judgments appearing on BAILII at the moment!

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