Adjudication Matters – August 2019

12th August 2019

CVA adjudication enforcement dilemmas…

In the recent judgment of Indigo Projects London Limited v Razin and another [2019] EWHC 1205 (TCC), the Technology & Construction Court refused to enforce an adjudicator’s decision where the claimant had entered into a Company Voluntary Arrangement (“CVA”) following the adjudication.

Background

In April 2017, Razin and another (the “Defendants”) engaged Indigo Projects London Limited (the “Claimant”) to construct a four storey detached house in Kingston-upon-Thames for the sum of £2,350,000 and the parties entered into a contract (in the form of JCT Standard Building Contract with Quantities 2011 Edition) in respect of the works (the “Contract”).

On 20 June 2018, the Claimant issued an interim payment notice in the sum of £202,036.05 (the “Application”). In accordance with the Contract, the Defendants were required to issue a Pay Less Notice by 24 June 2018, should they disagree with the sum notified in the Application.

The Defendants failed to issue a Pay Less Notice by the required date, however they did make payment of £30,000.00 to the Claimant in September 2018. Throughout this period, the Defendants argued that the works carried out by the Claimant were defective, and that the Claimant was responsible for project delays.

In November 2018, the Claimant referred to adjudication the dispute regarding the non-payment of the balance of the sums due to it under the Application.

On 10 January 2019, the adjudicator decided in favour of the Claimant. The Defendants subsequently paid the adjudicator’s fees, but did not make any further payment to the Claimant as required by the adjudicator’s decision.

The Adjudication Enforcement Proceedings

On 24 January 2019, the Claimant sought summary judgment via adjudication enforcement proceedings to enforce the sum due to it in respect of the adjudicator’s decision.

However, the Claimant was experiencing financial difficulties, and formally entered into a CVA on 28 February 2019.

The Claimant argued that as the adjudication concluded prior to the Claimant entering into the CVA, the Defendants should be ordered to comply with the adjudicator’s decision.

The Defendants argued that enforcement of the adjudicator’s decision would be unjust, as any funds paid by the Defendants to the Claimant would form part of the general funds available to the Claimant’s creditors under the CVA. Furthermore, the Defendants believed they had substantial counterclaims in respect of the Claimant’s allegedly defective work, and the project delays. In the event of the Defendants raising successful cross claims against the Claimant in the future, the Defendants would only stand to receive a few pence in the pound from the CVA.

Decision

The distinctive feature of this case was that the Claimant’s CVA was entered into after both the adjudicator’s decision, and the Claimant’s application for summary judgment.

The court attached weight to the fact that the adjudicator’s decision was made on the basis of the Defendants’ failure to comply with a notice requirement, rather than on the wider merits of either side’s case regarding the work carried out under the Contract.

Accordingly, the court decided that the adjudicator’s decision was in effect an order for a payment on account, rather than a valuation of the work carried out by the Claimant, or of the underlying dispute between the parties. Rather, the adjudication simply referred to a payment which had become payable to the Claimant by default. If the adjudicator had decided upon all the claims and cross claims between the parties, the court might have reached a different decision.

The court noted that if the adjudicator’s decision was enforced, the sum paid by the Defendants would form part of the general funds available for subsequent distribution amongst the Claimant’s creditors. The Defendant would therefore be highly unlikely to recover any sum paid to the Claimant. The court agreed with the Defendants’ submissions that enforcing the adjudicator’s decision would be unjust and detrimental to the Defendants.

Consequently, the court refused to enforce the adjudicator’s decision.

Summary

This case provides a rare illustration of circumstances under which a court will decline to enforce an adjudicator’s decision. The judgment additionally provides further clarification as to the interaction between construction and insolvency law.

In practical terms the case provides a warning to companies considering entering into a CVA. If a company has the benefit of an adjudicator’s decision which has not yet been enforced, the right to enforce the decision may be lost if that company enters into a CVA. A company may therefore seek to delay entering into a CVA until any adjudication decisions in its favour have been enforced.

Alternatively, a company may look to ensure that the subject matter of any adjudication includes all claims and counterclaims between the parties. This will increase the likelihood of a company being able to enforce an adjudication decision reached prior to the company entering into a CVA.