The relevance of the parties’ finances to enforcing an adjudicator’s decision

The courts are inclined to enforce adjudicators’ decisions if they can.  Good grounds for not ordering enforcement are few and well-defined.  One of these, derived from the fact that the process results in an interim remedy, is that the receiving party’s financial state means that there is a likelihood that they could not find the cash in the event of a final determination that monies should flow back to the paying party.

It is not an easy ground to make and there are several factors to be assessed.  In the recent case of LXB RP (Crown Road) Ltd v Squibb Group Ltd, the Court enforced an adjudicator’s decision, finding no grounds upon which to exercise its discretion and refuse enforcement of the decision on financial grounds.

Background

The judgment is lacking in background detail but it is possible to infer that a building contract over-ran and the employer sought liquidated damages from the Contractor before the contractor had finished preparing the final account. The employer obtained a favourable decision in adjudication and then applied for summary judgment to enforce the decision awarding liquidated and ascertained damages of c. £300,000. The contractor, concerned about the employer’s ability to pay any further debts as they fell due on the final account between the parties, applied to the Court asking for a stay of execution and an order that the money be paid into Court or into an escrow account.

In making this application the contractor sought to rely upon Wimbledon Construction Company 2000 Ltd v Vago (2005) which set out six principles that should govern the exercise of the Court’s discretion when considering a stay of execution in adjudication enforcement proceedings. The six principles are summarised as:

1. Adjudication is designed to be a quick and inexpensive method of arriving at a temporary decision;
2. As a result, decisions are intended to be enforced summarily and the successful party (the claimant) in the adjudication should not be kept out of its money;
3. In an application to stay the execution of summary judgment, the Court must exercise its discretion under CPR 47 with 1 and 2 in mind;
4. The probable inability of the claimant to repay the judgment sum (being the sum awarded by the adjudicator) at the end of the substantive trial may constitute special circumstances within the meaning of CPR 47 rule 1(1)(a) rendering it appropriate to grant a stay;
5. If the claimant is in insolvent liquidation, or there is no dispute that the claimant is insolvent, a stay will usually be granted; and
6. Even if the evidence of the claimant’s financial position suggested that it is probable that it would be unable to repay the judgment sum when it fell due, that would not usually justify the grant of a stay if:

• The claimant’s financial position is the same or similar to its financial position at the time that the relevant contract was made; or
• The claimant’s financial position is due, either wholly, or in significant part, to the defendant’s failure to pay those sums which were awarded by the adjudicator.

Decision

In his judgment, Stuart-Smith J reiterated the principle that the decision as to whether or not to enforce an adjudicator’s decision is an exercise of the Court’s discretion, and that there must be a balance between enforcing valid adjudication decisions and risking future injustice if the party subsequently finds itself unable to pay what is due under the contract.

Having heard both parties’ evidence regarding the financial standing of the employer, the judge was not satisfied that the employer was in a worse financial position than it was when it first contracted with the contractor, nor was he satisfied that there was any significant risk that the employer would be put into liquidation as this would be a breach of the employer’s directors’ obligations to the company.

The Court could not conclude that there was a substantial risk that the employer was unable to pay the contractor any sums due on a final account, and there was no basis on which to refuse to enforce the adjudicator’s decision. The Court’s discretion was therefore exercised in the employer’s favour and the adjudicator’s decision was enforced with no stay of execution and no payment into Court or an escrow account.

This case confirms and reiterates the very limited grounds for resisting enforcement of an adjudicator’s decision. It also serves as a reminder of the importance of carrying out sufficient financial due diligence in respect of potential contract partners. It understandable that contractors, hungry for work, will sometimes take risks in this regard.  It is important to understand the dangers, for instance when dealing with SPVs, and investigate whether it is possible to hedge the risks in some way. As ever, if in doubt early advice could save much trouble later on.

Further reading: LXB RP (Crown Road) Ltd v Squibb Group Ltd [2016] EWHC 2669 (TCC)

Michael Bonning is a Senior Associate in the Construction and Engineering Team at Michelmores LLP.  He specialises in resolving construction disputes.  He can be contacted at michael.bonning@michelmores.com or on 01392 6987586.