Resisting enforcement of an adjudicator’s award: how insolvent does the payee need to be?

A closer look at the circumstances in which the courts might decide to stay the enforcement of an adjudicator's award on grounds of payee insolvency, with reference to recent case law in both England and Scotland.

6th January 2020

It is well established that the courts will only refuse to enforce an adjudicator’s award in fairly limited circumstances. One such set of circumstances is where the party to be paid under the adjudicator’s award (the payee) would be unable to repay the award should it subsequently be determined in litigation or arbitration that the sums awarded in the adjudication were not due. While the principle is well understood, its practical application in both England and Scotland is less clear.

In the English courts, a party ordered to make payment (the payer) can seek a stay of execution under CPR 83.7(4) of any enforcement proceedings if it can satisfy the court that there are special circumstances that render it inexpedient to enforce the judgement.

In the case of Wimbledon Construction Co 2000 Ltd v Vago [2005] EWHC 1086 (TCC), HHJ Coulson QC (as he then was), held that if it was probable that a payee would be unable to repay the amount paid pursuant to an adjudicator’s decision then this could constitute “special circumstances” for not enforcing the award. In particular he held that:

  1. if the payee is in insolvent liquidation, or it is otherwise not disputed that it is insolvent, then a stay will usually be granted; and
  2. even if the evidence suggests the payee would be unable to pay the sum awarded, that will not usually justify a stay if the payee’s financial position was the same or similar to that when the payee and payer entered into the construction contract, or the payee’s financial position was due in whole, or significantly in part, to the payer’s failure to make payment of the adjudication award.

In the recent case of Granada Architectural Glazing Ltd v RGB P&C Ltd [2019] EWHC 3296 (TCC) the TCC considered what is relevant in determining whether either of the above tests have been met. In that case, the adjudicator’s decision was that the payer was liable to pay £85,089 plus interest (together with the majority of the adjudicator’s costs). When enforcement proceedings were raised by the payee, the payer sought a stay of execution on the basis that there were special circumstances (the payee’s insolvency) that would render it inexpedient to enforce the judgement.

The evidence before the court indicated that the payee’s debts exceeded its assets both at the time the construction contract was executed and after. However, the payee’s financial statements as filed at Companies House showed that its financial position after entering into the construction contract (based on a comparison between its accounts as at 31 March 2018 and 31 March 2019) had arguably worsened to the extent that it had £112,000 less cash in the bank and the amounts due to creditors had increased by £1,002,000. The ‘balance sheet’ showed that as at the month prior to the hearing, the payee had a deficit of £940,000.

Nevertheless, evidence was led on behalf of the payee demonstrating that, despite having insufficient assets to meet its debts, it had paid its debts as they fell due with the support of its parent company. Indeed, at the time of entering into the construction contract, it was also paying debts as they fell due, again with the support of its parent company.

In refusing the payer’s application for a stay of execution, the court held “there is a reasonable likelihood that Granada will be unable to repay if and when required to do so, but on the basis of all the available evidence I do not consider that a future inability to repay is more likely than not”. In addition, the court found that the payee’s financial position was similar to that when the parties had entered into the construction contract because both at that time and at the time of the hearing the payee’s parent company was supporting it and there was no evidence that that parental support would change. Therefore, although the payee’s balance sheet appeared to show that it was insolvent that was not enough in the circumstances of that case to avoid enforcement.

The position in Scotland

While there is no equivalent rule to CPR 83.7(4) in the Rules of the Court of Session, a payer may still have a basis for resisting the enforcement of an adjudicator’s award if it can persuade the court that the equitable principle of balancing of accounts in insolvency applies.

For the principle to operate, the payee must be ‘insolvent’ or on the verge of insolvency and the payer must have asserted that it would seek to set off its claim, although the value of that claim need not be known, agreed or determined at the time of any enforcement proceedings.

In Integrated Building Services Engineering Consultants Limited Trading as Operon v Pihl UK Limited [2010] CSOH 80, Lord Hodge found the principle could be pled as a basis for resisting enforcement of an adjudicator’s award. He noted at paragraphs 29-30 of his decision that the application of the principle would be policed by the courts but that:“The ability to plead the balancing of accounts in bankruptcy does not give an obligant under an adjudicator's decision a licence to withhold funds. On obtaining a decision from an adjudicator, the claimant can seek its enforcement in the court on a shortened period of notice. It is the practice in our commercial court to seek to conjoin any challenge to the decision with the action for its enforcement and to determine both in the context of a summary decree motion in the latter. This supports the prompt enforcement of adjudicators' decisions.”

However, as in England and Wales, what a payer requires to do to establish the payee’s ‘insolvency’ (if the payee is not in a formal insolvency procedure) is not entirely clear. At paragraph 21 of his decision in Integrated Building Services Lord Hodge accepted that “mere averments of a claimants' insolvency… should not provide a basis for the court delaying the enforcement of an adjudicator's decision.”

He then went on to hold at paragraph 34 of his decision that: “It may be that it is very difficult or almost impossible to operate the principle when a person's insolvency is not demonstrated by a formal legal act and that the plea, having been stated, would be worked out in practice by achieving a sell off in a subsequent formal insolvency. But the older authorities to which I have referred suggest that it can be pleaded before formal insolvency.

In the subsequent case of J&A Construction (Scotland) Limited v Windex Limited [2013] CSOH 170 the Lord Ordinary held: “If a balance sheet deficiency could, in itself, prevent or delay enforcement, this would have serious ramifications for the operation of the adjudication regime, which was intended to provide a speedy and reasonably certain, albeit provisional, resolution of construction contract disputes. Even in the context of winding up petitions, a balance sheet deficiency does not necessarily mean that an order will be granted.” In the circumstances of that case, the court found that “much more” evidence of the payee’s insolvency was required and the adjudicator’s award was enforced.

Therefore, it appears that while the Scottish Courts do not require the payee to be formally insolvent they do require more than a simple reference to the poor state of a payee’s balance sheet. It follows that while the approach in Scotland is different to that in England, it is likely that the Scottish courts would come to a similar conclusion as the TCC did in Granada Architectural Glazing Ltd v RGB P&C Ltd, if a case with similar facts came before them.

What is clear is that, when considering whether or not to allow enforcement of an adjudicator’s award, when the financial position of the payee is poor, the courts in both England and Scotland will not confine themselves to a narrow assessment of the payee’s balance sheet but will consider all relevant financial circumstances. It is, perhaps, unlikely that a payer will have a detailed knowledge of a payee’s financial position and therefore, if the payee is not already in a formal insolvency procedure, careful consideration ought to be given to what information is available to demonstrate the poor financial position of the payee.