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  • 8 Mar 2017
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Why court rejected firm's insolvency 'double play'

Theresa Mohammed and Obaid Bin-Nasir describe a case in which a company tried to use insolvency to stop adjudication proceedings... and received short shrift from the judge.

Theresa Mohammed

Adjudication is a fast and furious process that was introduced to resolve disputes on construction projects quickly and to maintain cash flow. If you are the losing party to an adjudication, it can mean that you will be directed by the adjudicator to make a substantial payment within a very short period of time.

Payment can often be ordered immediately or, for example, within seven or 14 days. If you fail to make the payment, the winning party can apply to the court for the enforcement of the adjudicator’s decision – a quick process that will not consider the merits.

The court will just consider whether the adjudicator had jurisdiction to make the decision they made or whether there is a breach of the rules of natural justice. The court will not be concerned with mistakes as to the facts or law.

For that reason, parties that believe the adjudicator has got it wrong have deployed a variety of legal arguments to avoid payment. The courts have shown great reluctance towards this tactic as it is considered to be a means of frustrating the very purpose of adjudication.

One way to avoid payment, which usually brings proceedings to a halt, is insolvency. If a formal insolvency event occurs there can be a moratorium on all legal proceedings imposed or, more commonly, unsecured creditors just give up because the chances of recovering anything will be negligible.

As such, it is always important to keep a close eye on the financial circumstances of any party you are seeking payment from as there is no point incurring legal costs and wasting time if recovery will be near impossible due to insolvency.

This issue of insolvency preventing enforcement arose in the case of South Coast Construction Ltd v Iverson Road Ltd.

Iverson had engaged South Coast to carry out building works at a site at Iverson Road under a contract incorporating the JCT Intermediate Form.

Whilst the works were being carried out there were issues with the supply of the design information to South Coast by the contract administrator, which was notably a subsidiary of Iverson. Matters came to a head in June 2016 when the South Coast suspended all work due to non-payment of sums due to it.

On 1 July 2016 Iverson issued an instruction omitting the remainder of the works under the contract and also issued a payless notice deducting liquidated damages in the sum of £844,330.60 that would otherwise have been due to South Coast.

In response, South Coast issued a payment application in the sum of £1,003,479.21 based on the value of the works. South Coast later submitted a final account for the slightly lesser sum of £996,418.01.

In September 2016 South Coast started an adjudication and in November 2016 the adjudicator gave a decision in its favour, ruling that Iverson’s actions in omitting the remainder of the works constituted a repudiatory breach of contract and that South Coast was entitled to the majority of its final account as well as loss of profits for the remainder of the works, awarding the sum of £868,728.47.

In making his decision, the adjudicator took the position that South Coast could not have completed the works any earlier than it did due to the failure of the contract administrator to provide the design information in a timely manner, and therefore was entitled to a full extension of time, meaning that Iverson was not entitled to deduct any liquidated damages.

"In the end, the issue of the jurisdiction of the adjudicator was not the main focus of this case and Iverson lost that challenge. Instead, key points considered were that Iverson had behaved in a way that should not be rewarded by the court."

The sums awarded to South Coast by the adjudicator were not paid by Iverson so South Coast issued enforcement proceedings. A hearing was fixed for 18 January 2017 but less than two days before the hearing Iverson wrote to the court enclosing a notice of intention to appoint an administrator dated 4 January 2017.

Following this, it then came to light that this was in fact the third notice of intention that Iverson had failed to bring to the attention of South Coast and the court. In response, South Coast made an application for permission to continue the proceedings.

Iverson argued that the enforcement hearing should not proceed on the basis that if South Coast was successful, it would gain an unfair advantage over other creditors. Mr Justice Coulson rejected this on the basis that even if South Coast won it would still just be an unsecured creditor. Further, on the day of the hearing it was accepted that while Iverson was now in liquidation, the liquidator had not sought a stay of proceedings.

Moreover, it would be inequitable to not allow the hearing to continue as both parties had incurred costs and Iverson had, during the course of the proceedings, challenged the adjudicator’s jurisdiction and the court should decide upon this contention.

In the end, the issue of the jurisdiction of the adjudicator was not the main focus of this case and Iverson lost that challenge. Instead, key points considered were that Iverson had behaved in a way that should not be rewarded by the court. For example, it issued serial notices of intention to appoint an administrator without underlying evidence of its financial position.

Also, Iverson issued them without informing South Coast despite the knowledge it owed almost £1m pursuant to the adjudicator’s decision. Worse, it engaged and purported to defend the enforcement proceedings without referring to the notices and potential moratorium on legal proceedings until it was in breach of the court’s directions just before the enforcement hearing.

These facts are quite unusual, and it is not entirely clear what Iverson’s motives were other than avoiding payment, but if a company was in administration and hoped to recover from it, it makes sense that it would not wish for an adjudicator’s decision to be enforced requiring a substantial payment. Particularly in circumstances where it may believe the adjudicator had made the wrong decision.

However, to effectively use your own financial circumstances to achieve this, a different approach to the one taken by Iverson would need to be adopted.

What the court described as Iverson’s “double play” was wholly rejected. Mr Justice Coulson offered clear guidance to parties that if an insolvency event has occurred, full disclosure with supporting evidence must be supplied as soon as possible – preferably with a request for a stay on all legal proceedings by the administrator or liquidator.

This level of open communication is an absolute minimum if you genuinely seek to stop enforcement proceedings, avoiding the enforcement of an adverse award.

Theresa Mohammed is a partner and Obaid Bin-Nasir is a paralegal in contentious construction at Trowers & Hamlins

Image: Phartisan/Dreamstime.com

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