This article was first published in the LexisNexis Corporate Rescue and Insolvency Journal (2017) 2 CRI 45.

Key Issues

  • Adjudication is a unique form of resolution for disputes arising out of construction contracts.
  • The Technology and Construction Court has consistently emphasised the importance of enforcing adjudicator’s decisions and an insolvency event does not militate against this approach.
  • The procedure to enforce an adjudicator’s decision by entry of a judgment is without any real parallel, such that it is “exceptional” for the purpose of deciding whether to permit enforcement proceedings to continue even when a statutory moratorium is in place.

The Housing Grants, Construction and Regeneration Act 1996 (as amended)(“the Construction Act”) implies terms concerning payment and the right to adjudicate in construction contracts. Despite this Act being primarily concerned with construction contract issues, insolvency practitioners are becoming increasingly familiar with its provisions because of the rights to payment the Act creates. These rights are increasingly being used as a basis to commence insolvency proceedings.

The payment provisions in the Construction Act provide a statutory scheme designed to ensure that contractors receive interim payment for the works as they progress and a final payment when the works are completed. The purpose of the provisions was to improve cash flow. The ingenuity of lawyers has meant that, despite the provisions being in existence in some form for over 20 years, their scope and effect continue to be litigated. In short summary, the Construction Act provides that a contractor must be paid the “notified sum” by a specified date unless the employer serves a notice stating he intends to pay less than the notified sum in accordance with section 111 of the Construction Act. The “notified sum” is the sum stated by either the contractor or employer in a payment notice. The payment notice therefore give rise to an entitlement to payment, subject to the service of a pay less notice.

HGCRA 1996 also provides parties to a construction contract with a statutory right to adjudicate a dispute arising out of the contract at any time. A decision must be issued by the appointed adjudicator within a maximum of 42 days of receipt of the Referral Notice, unless both parties consent to a longer period. It was envisaged that this right to adjudicate would ensure payment disputes arising from the payment provisions were resolved quickly and cheaply, although again the ingenuity of lawyers has meant that adjudication has been used for a much wider range of disputes.

The Technology and Construction Court (“TCC”) has consistently held that where an adjudicator had jurisdiction and did not breach the rules of natural justice, his decision should be enforced. The TCC has fashioned a specific procedure for this purpose, which allows for the enforcement of a decision by way of an application for summary judgment. The combined effect of the adjudication provisions and the TCC’s enforcement procedure is that it is possible for a payment dispute to be adjudicated upon and the decision enforced by way of a judgment within approximately three months. The terminology use by construction lawyers for such a process is “enforcement of the decision”. However, all this means is the entering of judgment in the sum awarded by the adjudicator; it does not mean taking steps to enforce that judgment against the payer’s assets, although ordinarily the judgment could be used for such purposes (if its enforcement is not stayed).

As the payment provisions give rise to a right to payment by a specified date and the adjudication provisions lead to a decision awarding payment which is enforceable by way of an application for summary judgment, the provisions have led to payees using insolvency procedures to obtain payment. The circumstances in which a creditor may use a payment notice or adjudicator’s decision to commence insolvency proceedings have now been considered in a number of cases (see, for example, R&S Fire and Security Services Ltd v Fire Defence Plc [2013] EWHC 4222 (Ch) and COD Hyde Ltd v Space Change Management Ltd [2016] EWHC 820 (Ch)).

However, the interplay between HGCRA 1996 and the Insolvency Act 1986 continues to arise in relation to other issues. In a recent case, Coulson J, the judge in charge of the TCC, had to decide whether to permit proceedings seeking to enforce an adjudicator’s decision to continue after an interim moratorium was imposed pursuant to Sch B1 of the Insolvency Act 1986 (IA 1986).

The outcome may surprise some insolvency practitioners, since enforcement of an adjudicator’s decision is essentially a monetary claim, for which permission to continue after the imposition of a moratorium would only usually be granted in exceptional circumstances (see AES Barry Limited v TXU Europe Energy Trading [2004] EWHC 1757 (Ch)). Whilst Coulson J. acknowledged this principle, he held that he would in any event have granted the contractor permission to continue the proceedings, due to the unique nature of adjudication. This is, therefore, a further example of the Court’s desire to enforce adjudicator’s decisions as far as possible, even in the event of a statutory moratorium.

This article considers the recent case of South Coast Construction Ltd v Iverson Road Ltd [2017] EWHC 61 (TCC), and analyses the potential consequences of the judgment for future matters, where the interplay of the IA 1986 and HGCRA 1996 are in issue.

The facts

In South Coast Construction Ltd v Iverson Road Ltd [2017] EWHC 61 (TCC), South Coast Construction Limited (“the Contractor”) was engaged by Iverson Road Limited (“the Employer”) to carry out the construction of 33 apartments and 3 houses at a site at Iverson Road pursuant to a JCT Intermediate Building Contract with Contractor's Design. Throughout the project, there were ongoing issues relating to the inadequate provision of design information to the Contractor, which caused delay to the works. These issues came to a head in June 2016 when the Contractor suspended work for non-payment of sums due. In response, the Employer issued an instruction purporting to omit the remainder of the works, along with a non-completion certificate and a letter confirming its intention to deduct liquidated damages.

The Contractor subsequently submitted a final account claim identifying a net sum due of £996,418.01. The Employer refused to pay and, consequently, the Contractor commenced an adjudication. The adjudicator found largely in the Contractor’s favour and issued a decision awarding the Contractor £868,728.47. When the Employer refused to pay, the Contractor commenced enforcement proceedings in the TCC seeking summary judgment of the sums due.

The hearing was fixed for 18 January 2017, but late on 16 January the solicitor for the Employer sent a peremptory letter to the court enclosing a Notice of Intention to Appoint an Administrator (“NOI”) dated 4 January 2017. The NOI had the effect of imposing an interim moratorium for 10 business days that expired on the day of the hearing. Consequently, the Contractor was forced to make an application pursuant to Rule 43(6)(b) of Schedule B1 of the Insolvency Act 1986 for permission to proceed with the enforcement hearing. This application was heard on 18 January 2017, along with the Contractor’s application for summary judgment. Coulson J. did not hand down judgment until 19 January 2017, by which time, the interim moratorium had expired. The court was not, therefore, required to determine the application, but did so partly in recognition of the importance the outcome had to future cases and, reading between the lines, because of the dim view the court took of the Employer’s conduct. The result is that the court’s findings are obiter, but they will undoubtedly be of persuasive value to future cases.

The Decision

Coulson J. considered the applicable principles established in the authorities which ordinarily apply to determining whether permission should be granted, starting with In Re Atlantic Computer Systems [1992] CH 505 and the well-known guidance provided by Nicholls LJ. Coulson J. also recognised that in AES Barry Limited v TXU Europe Energy Trading [2004] EWHC 1757 (Ch) Patten J held that it would only be in exceptional cases that the court would give a creditor, whose claim is a monetary one, a right by the taking of proceedings to override and pre-empt the statutory machinery. Finally, Coulson J. identified that the state of proceedings and consideration of conduct were relevant matters to be considered when deciding whether the court should exercise its discretion to grant permission for proceedings to be initiated or continued.

Applying those principles, Coulson J. determined that, had it been necessary, he would have granted the Contractor permission to proceed with the enforcement proceedings. There were a number of factors unique to this case that militated towards this finding:

  • There was no evidence that the purpose of the moratorium would have been jeopardised by a court decision on the adjudicator’s jurisdiction.

  • Even with a judgment in its favour, the Contractor would still only rank as an unsecured creditor and so the enforcement application ran no risk of preferring the Contractor over the other creditors. As explained above, “enforcement” of an adjudicator’s award only means entering judgment and, without more, does not include using that judgment to enforce against the debtor’s assets.

  • The Contractor had acted entirely appropriately and incurred considerable expense in obtaining an adjudicator’s decision almost entirely in its favour.

  • Conversely, the Employer’s conduct in issuing serial NOIs that contained no evidence of its underlying financial position and then failing to inform either the Contractor or the Court until a day before the enforcement hearing of the NOI led to the conclusion that the defendant had been playing “something of a deliberate double game”.

Although these factors were sufficient to persuade Coulson J. to exercise his discretion to allow the enforcement proceedings to continue, he determined in any event that the adjudication enforcement procedure itself constituted sufficient reason to allow the action to continue.

Coulson J. explained the nature and purpose of adjudication introduced by the Construction Act by reference to Chadwick LJ’s judgment in Carillion Construction Ltd v Royal Devonport Dockyard Ltd [2005] EWCA Civ. 1358 at [85], in which he stated:

“The objective which underlies the Act and the statutory scheme requires the courts to respect and enforce the adjudicator's decision unless it is plain that the question which he has decided was not the question referred to him or the manner in which he has gone about his task is obviously unfair. It should be only in rare circumstances that the courts will interfere with the decision of an adjudicator.”

Chadwicke LJ concluded that, in the overwhelming majority of cases, the proper course for the party who is unsuccessful in an adjudication under the scheme was to pay the amount that he has been ordered to pay by the adjudicator.

In reliance on this judgment, Coulson J. stated:

“Proceedings issued to enforce the decision of a construction adjudicator therefore differ in significant respects from other kinds of commercial proceedings or monetary claims. I venture to suggest that the regime described by Chadwick LJ is unique, without any real parallel in other parts of the High Court. Adjudication enforcement proceedings such as these presuppose that there has already been a decision, on the merits, by an adjudicator, that there is a sum of money which, prima facie, is due and owing under the contract or pursuant to statute. Indeed, such enforcement proceedings presuppose that the defendant is in breach of contract or in breach of statute for not paying the sum found due by the adjudicator. Accordingly, proceedings such as these, where all that remains is an enforcement hearing (which itself turns on just one point) more than meets Norris J's test in Ronelf. In addition, I would conclude that such a situation is, in the overall run of commercial litigation, "exceptional" for the purposes of the test set out by Patten J in AES Barry.”

The Employer argued that the Contractor’s claim for money was simply a monetary claim and, therefore, permission should not be granted pursuant to AES Barry. Coulson J. rejected this submission, holding that the Construction Act, and the standard forms of construction contract which reflect the provisions of the Construction Act, make the adjudicator’s decision one that is binding on the parties and it must, therefore be honoured.

Consequences of the Judgment

This case sets out clearly the established principles which will apply when a court is asked to exercise its discretion to permit proceedings to be issued or continued when a statutory moratorium is in place. There is nothing particularly new or ground breaking, certainly to insolvency practitioners.

However, Coulson J. also found that adjudication enforcement proceedings were “exceptional” as a result of the unique nature of adjudication, without any real parallel in other parts of the High Court. This conclusion may be surprising to insolvency practitioners, given that a claim in enforcement proceedings is invariably a simple monetary one, of the very kind identified in AES Barry.

Coulson J.’s emphasis on the exceptional nature of adjudication enforcement proceedings leads one to question whether, if this issue arises again, the Court need even undertake the balancing exercise identified In Re Atlantic Computer Systems which would ordinarily be carried out or whether the fact that the proceedings concern enforcement of an adjudicator’s award will be sufficient reason in and of itself for the court to grant permission.

It is also not clear to what extent Coulson J. was influenced by the Employer’s seemingly underhand tactics and behaviour in failing to comply with Court orders and serving NOIs, all of which appeared to be aimed at avoiding paying the Contractor the sum awarded by the Adjudicator and led Coulson J. to conclude that the Employer was playing a “double game”. It may be that a different outcome would have been achieved if the Employer had been more open about its financial position and not issued a series of NOIs, but only one prior to the commencement of the enforcement proceedings. In those circumstances, the Employer would unlikely have given the impression that the NOI was being used to avoid paying a genuine sum due pursuant to an adjudicator’s decision or as an underhand tactic. In those circumstances, it is not clear why the enforcement of an adjudicator’s decision should be treated any differently to another monetary claim.

However such a scenario might be treated in the future by the Courts, it is difficult to see what benefit a creditor may obtain from seeking permission to issue or continue enforcement proceedings once it becomes apparent that the debtor is, or is about to be, insolvent. The creditor will remain an unsecured creditor who would have to prove its debt in the administration in the usual way, whether or not judgment is entered ordering payment of the adjudicator’s award. Since the adjudicator’s decision is generally only temporary binding, the appointed administrator would have grounds to refuse payment if there was any possibility of a substantial cross claim; the fact that the decision was enforced by the courts would not alter this it would only resolve any jurisdictional challenges or allegations concerning breaches of natural justice by the adjudicator. Indeed, the application for permission to commence or continue with the enforcement proceedings will likely only add to the costs a creditor will incur in seeking to recover the sums due, in circumstances where there may have been little prospect of those costs being paid in full or at all.

The application in South Coast Construction was necessary because of the late stage at which the third NOI was disclosed, when both the Contractor and the Employer had already incurred substantial costs and the hearing was imminent. Given Coulson J.’s criticisms of the Employer’s conduct, it is unlikely that a debtor will find favour with the Court if it brought about a moratorium in order to prevent or halt proceedings seeking to an enforce an adjudicator’s decision. For this reason and for those identified above, it may be some time before the Court is tasked with considering this issue again. However, in so far as an application for permission is made, the clear message from the TCC is that adjudicator’s decisions ought to be enforced and tactics which seek to avoid this consequence will be closely scrutinised and resisted as far as possible.

This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.