REUTERS | John Kolesidis

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

I may have tweaked a line from The Clash’s, “Should I stay or should I go now“, but applying for a stay of execution in adjudication enforcement proceedings seems to be on the increase, at least so far as reported judgments are concerned. I can think of at least four cases since May, and my take is that it is a reflection of the difficult economic circumstances that many construction (and other) companies find themselves in, combined with the impact of the payment provisions brought in by the amendments to the Construction Act 1996.

Stay of execution

The principles were set out by Coulson J in Wimbledon v Vago back in 2005. They include:

  • Adjudicators’ decisions are intended to be enforced summarily and the contractor should not generally be kept out of its money.
  • 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 in significant part, to the employer’s failure to pay the sums awarded by the adjudicator.

These principles haven’t changed in the intervening years and the courts still rarely order a stay, as was demonstrated in the four cases I am thinking of, where:

  • In Farrelly v Byrne Brothers, Ramsey J held that there was no evidence of the sub-contractor’s insolvency, or that its financial position was worse than when it entered into the sub-contract, therefore he refused to grant a stay. (I discussed the natural justice points at the time.)
  • In Westshield v Buckingham, Akenhead J held that the main contractor knew, when it entered into the sub-contract, that it was dealing with companies “which at least had some financial question marks hanging over them”. Westshield’s position had improved and the evidence suggested that it was “emerging from its CVA”. The court refused to grant a stay. (I looked at some of the issues at the time.)
  • In FG Skerritt Ltd v Caledonian, Ramsey J declined to order a stay of execution provided FG Skerritt’s parent company gave a guarantee relating to the sums due following the adjudicator’s decision. (Jonathan considered this judgment at the time.)
  • In True Fix v Apollo, Ramsey J considered the contractor’s financial position both at the time of the original contract and when additional works were agreed with Apollo. He concluded that Apollo had instructed the additional works knowing True Fix was in financial difficulties, therefore he refused to grant a stay.

That is four nil to the enforcement boys!

Increase in counter adjudications

I suspect part of the reason for the increase in these applications is because paying parties want to hold off paying what the adjudicator has awarded pending the outcome of a counter adjudication. (Counter adjudications are often started to ascertain the true valuation of the work done following an adjudication that decides that the sum due was the amount claimed in the absence of a payment or payless notice.) If the enforcement proceedings take place between adjudications and before the counter adjudication decision, if the paying party pays, and the receiving party goes bust, then the paying party will think the money has gone forever (which it probably has).

In True Fix, Ramsey J recognised this issue of counter adjudications. While he sympathised with Apollo when it said that there was another adjudication “coming in the near future” that may award sums in its favour or reduce the sum due to True Fix, he stated that the court cannot speculate on the outcome of another adjudication. Instead, he looked at the overall situation and concluded that maintaining cashflow was the important issue: it was “the essence of adjudication”.

Ramsey J had also recognised the use of counter adjudications earlier in the year, in Farrelly, when he stated that the possibility of an adjudicator’s decision “at a future date” could not affect the court’s approach to enforcing an adjudicator’s decision. Again he talked about cashflow being the “essence of adjudication”.

I often see parties starting a second (or even third) adjudication as a counter adjudication to the first adjudication. If they do, their objective is to get the subsequent adjudication resolved as soon as possible, to lessen the impact of the first adjudicator’s decision.

Post script

Farrelly’s administration was announced a few weeks after Ramsey J’s judgment was handed down. I wonder if it was paid by Byrne Brothers before then. As both Westshield and FG Skerritt were already in some form of insolvency procedure, that just leaves doubt over what happened to True Fix.

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