Background
J A Ball Limited (“JAB”) was a sub-contractor appointed by St Philips Homes (Courthaulds) Ltd (“SPC”) for works involving the conversion of a commercial property into residential apartments. The contract was a JCT contract with bespoke amendments. JAB entered administration and did not complete the works. SPC completed the works, which JAB considered an unlawful termination of the contract. JAB sought payment of the remainder of the contract value from SPC.
JAB referred the dispute to adjudication. The adjudicator determined that SPC was liable to pay JAB a “balancing figure” which fell short of the sum sought. However, the decision was not based on the arguments made by either party. JAB initiated enforcement proceedings in the TCC, which SPC defended. JAB was able to pursue the claim thanks to a DBA with a third-party litigation funder, Pythagoras Capital Limited (“Pythagoras”). A DBA can enable an insolvent party to cover litigation costs.
Breach of Natural Justice
SPC defended the enforcement of the adjudicator’s decision. It argued there was a breach of natural justice because the adjudicator (i) based the decision on his own reasoning, without reference to the parties’ arguments; and (ii) failed to provide parties with an opportunity to comment.
JAB sought enforcement of the adjudicator’s award, insisting that the adjudicator had not breached natural justice.
The TCC refused to enforce the award. The TCC agreed the adjudicator had breached natural justice because (i) the decision was reached on a “novel” basis, of which neither party had notice; (ii) the parties were not provided with an opportunity to respond to the adjudicator’s “novel” reasoning; and (iii) this concerned a “determinative” part of the dispute.
JAB’s Administration
SPC also argued that JAB was insolvent and facing a cross-claim, so that JAB should be treated like companies in liquidation which, due to their liquidation status, are often unable to enforce adjudication awards. JAB disagreed on the basis that it not yet issued a notice of distribution as part of the administration process, such that JAB should not be treated as a company in liquidation.
The TCC agreed with SPC that JAB’s administration status meant it should be treated as a company in liquidation. The TCC held, therefore, that had it found the adjudicator’s decision to be enforceable in principle, it would, as a result of JAB’s administration, nevertheless have delayed enforcement for six months to allow SPC to pursue its cross-claim against JAB.
The TCC noted that whilst insolvent companies will often struggle to enforce adjudication awards, “there is no hard and fast rule” preventing parties in liquidation or administration from doing so and that each case will depend on the particular circumstances.
Adequacy of JAB’s security proposals
JAB argued that its administration should not constrain its ability to enforce the adjudication award because it had “adequately secured” SPC’s cross-claim by (i) undertaking to ring-fence the adjudication award proceeds and (ii) offering to guarantee the costs incurred by SPC in overturning the adjudication award if successful.
SPC argued that there was “no justifiable purpose” in ordering a payment which would be ring-fenced. SPC explained that the ring-fenced sums would deprive SPC of funds and, equally, be of no use to JAB’s creditors. In this context, SPC argued that ring-fencing undermines the purpose of adjudication. SPC also argued that the guarantee was inadequate because it was limited to the cost of overturning the adjudicator’s award and did not cover the costs of SPC’s cross-claim.
The TCC agreed that ring-fencing, in this case, undermined the “underlying philosophy” of adjudication. The TCC also agreed found JAB’s guarantee was inadequate because it would not have covered the costs incurred by SPC in pursuing its cross-claim.
The DBA
The TCC also considered the issue of the DBA and whether or not it was champertous. A champertous DBA is one in which the funder receives 50% or more of the sums recovered by the client. SPC argued that JAB’s DBA did not comply with the Damages-Based Agreements Regulations 2013 (“2013 Regulations”), making the DBA champertous and an abuse of process. The TCC agreed with SPC to the extent that it was not satisfied that Pythagoras would receive less than 50% of any sums recovered from SPC, but the TCC did not agree that the DBA was thereby an abuse of process.
Take Home Points
- An adjudicator’s decision will breach natural justice if it: (i) is reached based on the adjudicator’s own reasoning, without reference to the parties’ arguments; (ii) does not provide the parties with an opportunity to comment; and (iii) where the point considered is determinative.
- It is difficult for an insolvent company to enforce an adjudicator’s award, particularly where the insolvent company is facing a cross-claim.
- There is no “hard and fast rule” that an award will not be enforced in favour of a company in liquidation or administration; each case will be decided according to the particular facts.
- An insolvent company will need to offer clear and substantial security for principal sums and costs to persuade a court to enforce an adjudicator’s decision in its favour.
- The courts are unlikely to favour arguments made in enforcement proceedings that are contrary to the “underlying philosophy” of adjudication.
- Parties relying on DBAs must ensure they comply with the 2013 Regulations.
This article was co-authored by, Alejandro Coghill, Trainee, Construction, Engineering and Infrastructure Disputes.