An adjudication judge has come down wisely against those who may use the other side’s poor state of financial health as a reason for not paying, says Sarah Shemmings
The construction industry generally likes the adjudication process because it provides a relatively quick dispute resolution, even if it is only temporarily binding. But even still there are occasions when the system can be held up over an issue.
One such issue surrounds a losing party being reluctant to pay on receipt of enforcement proceedings from an adjudication because it says that should it later transpire that this money needs to be repaid (not an uncommon occurrence) then the winning party may not be able to repay that money because of its current poor financial status.
Such a scenario is not as unusual or as unlikely as it may seem. The Technology and Construction Court (TCC) has had to consider the situation, which becomes even more complex if the winning party finds itself in an insolvency situation either during or shortly after an adjudication.
The TCC has also recognised the validity of the argument for not paying in such circumstances.
But In recent it has laid down the following guidelines:
1. If at the date of the enforcement hearing the winning party is in liquidation or in administration, then the decision will not be enforced.
2. But if it can be shown that the poor state of the winning party’s finances is due to non-payment by the losing party, then the courts will grant payment.
Last month, in Alexander & Law Limited -v- Coveside (21 BPR) Limited, the TCC was faced with yet another scenario. How should an adjudicator’s decision be enforced when there is an ongoing but unresolved winding up petition which has been issued against the winning party?
In this case, the claimant was seeking to enforce an adjudicator’s decision, but the defendant was arguing that the court should not grant enforcement and payment as the claimant was also the subject of a winding up petition. This petition was supported by other creditors of the claimant, although some of those debts were disputed. The claimant was banking on getting the money from the defendant to settle its debts.
The judge decided that, based on the information before him relating to the debts and assets of the claimant, he was being asked to make a decision in advance of the hearing of the winding up petition as to whether or not that petition would be successful.
The TCC could not make such a judgment, as it had no evidence as to whether these were rightful debts of the company. On that basis the Judge decided that the TCC could not preempt the decision of the judge in the Insolvency Court, and therefore while evidence had been given that there was a winding up petition against the company, there was no evidence as to whether it would be successful.
So the TCC judge granted summary judgment for the amount claimed, but ordered that there be a stay of enforcement of that judgment until after the resolution of all of the disputes between the parties.
That is, of course, not an entirely satisfactory solution from either party’s point of view. But it is one that is eminently sensible, as a party cannot now argue that a winding up petition is an automatic and good defence in proceedings to enforce an adjudicator’s decision.
The rules relating to insolvency are complex and are not easy to reconcile with the principle of adjudication, which is a temporarily binding decision. But the message from the TCC is clear – it will order payment save for a few exceptional circumstances, and a winding up petition is not one of them.
Sarah Shemmings is a partner at Silver Shemmings