Written by the construction team at Freeths LLP
In the case of Meadowside Building Developments Ltd (in Liquidation) v 12-18 Hill Street Management Company Ltd, the court has given some helpful guidance on circumstances where a company in liquidation may be able to enforce an adjudicator’s decision, which is an exception to the general rule already established. Ultimately, the exception will apply in cases where (1) the adjudication determines the final net position between the parties under the relevant contract and (2) satisfactory security is provided in respect of (i) the sum awarded in the adjudication and successfully enforced (ii) any adverse cost order made against the company in liquidation.
Another important lesson to come out of this case is that claims consultants may be caught under the Damages-Based Regulations 2013, and therefore must check that the terms of any agreements are compliant. This case also acts as a stark reminder of the negative inferences that can be made when a party refuses to disclose documentation when requested.
Meadowside Building Developments Ltd (‘Meadowside’), a company in liquidation, made an application against 12-18 Hill Street Management Company Limited (‘HSMC’) to enforce an adjudicator’s decision.
In September 2014, Meadowside was appointed by HSMC to carry out internal and external repair works under a JCT Minor Works Building Contract 2011 (the ‘Contract’). Following practical completion, the Contract Administrator issued a certificate for payment. Later that year, in July 2015, Meadowside was placed into voluntary winding-up. Under the Contract, and under insolvency rules, this meant that a final account had to be drawn up. Meadowside’s position was that they were owed money by HSMC, whereas HSMC’s position was that it was due money from Meadowside and was therefore one of Meadowside’s creditors.
Meadowside appointed Pythagoras Capital Limited (‘Pythagoras’) to pursue the claim. The agreement between Meadowside and Pythagoras was not disclosed to the court, but it was understood that Pythagoras would be paid a percentage of any award given by the adjudicator.
Pythagoras began adjudication proceedings on behalf of Meadowside. HSMC argued that adjudication is incompatible in the context of liquidation and did not participate in the adjudication. Despite this, the adjudicator determined the net balance due as per the value of Interim Certificate and a net balance of £26,629.63 was due to Meadowside. Meadowside then applied to court for summary judgment to enforce the adjudicator’s decision. Summary judgment was refused by the court for reasons set out below.
Liquidation and Adjudication - The “Bresco Rule”
In the first instance, the court held in Bresco that an adjudicator does not have jurisdiction where the referring party was in insolvent liquidation. However, this finding was overturned by the Court of Appeal, and the position is that Rule 14.25 of the Insolvency Rules does not, in itself, deprive a company from referring a dispute to adjudication. However, the Court of Appeal held in Bresco that:
- In a claim where the responding party has a cross-claim (which is often the case in construction contracts), an adjudicator’s decision in favour of a company in liquidation will not be capable of being enforced. This is because it takes away the responding party’s right to security for its cross-claim, which is given in Rule 14.25 of the Insolvency Rules.
- Therefore, adjudication is an “exercise in futility”.
- An injunction was granted (and the adjudicators decision not enforced) on the grounds of “practical utility”.
- There may be exceptions to this general rule.
Exceptions to the Bresco Rule
In Meadowside, it was stated that there is a “fundamental incompatibility” between the adjudication process and the insolvency regime and therefore, ordinarily, a company in liquidation cannot pursue an adjudication and successfully enforce the decision. However, as per Bresco, the court accepts that there may be exceptions to that rule.
In assessing whether a case is an “exception”, the court will consider how useful the adjudication process is in the case at hand.
A case is likely to be an exception to the Rule where:
- The adjudication determines the final net position between the parties under the relevant contract;
- Satisfactory security is provided in respect of (i) the sum awarded in the adjudication and successfully enforced (ii) any adverse cost order made against the company in liquidation.
Satisfactory security may be provided by a combination of the liquidator undertaking to the court to ring-fence funds, third party bond or guarantee and ATE insurance.
It was agreed in Meadowside that Pythagoras was “providing advocacy services, litigation services or claims management services” and therefore the Damages-Based Regulations 2013 (‘DBAR’) applied. The Regulations are not limited to court proceedings, but also extend to adjudication. Claims consultants can fall within DBAR and therefore should ensure that any agreement they enter into is compliant with DBAR.
Meadowside’s agreement with Pythagoras was not disclosed throughout the proceedings, despite numerous requests, which left an inference that it is likely that Pythagoras would claim over 50% of the sums ultimately recovered by Meadowside – in which case, the agreement between them would be unenforceable. The court found that it was also champertous (illegal) as a result of its non-compliance with DBAR. This highlights the negative effect that withholding documents can have. Again, claims consultants must be aware of the Regulations and the effects of non-compliance.
The fact that Meadowside refused to disclose the terms of its funding agreement with Pythagoras also led the court to find that an abuse of process could not be disposed of and that the inference that the agreement fell short of DBAR compliance constituted “at least a realistic prospect” that the agreement is not merely champertous but also an abuse of process.