| Date | 14 February 2001 |
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| Judgment | Rainford House Limited -v- Cadogan Limited TCC 13 February 2001 |
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| The Issue | Whether an adjudicator's decision will be enforced in circumstances where the successful party is insolvent. |
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| Implication |
Credible evidence as to the insolvency of a successful party in adjudication will be sufficient for enforcement of the decision to be refused or for a stay of that enforcement to be granted, pending resolution of any counterclaim. |
printThe decided cases have made it clear that an adjudicator's decision will be enforced by the courts, whether that decision is right or wrong, unless it can be shown either that the adjudicator lacked the necessary jurisdiction to make the decision he has made, or there has been some failure by the adjudicator to follow the rules of natural justice. To those two exceptions there must now be added a third. Enforcement will not be given, or it will only be given with a stay of execution, (in other words held in abeyance until a later defined event), in circumstances where it can be shown that the successful party is insolvent. The case of Rainford House Ltd -v- Cadogan Ltd carefully analysed this issue. Rainford were main contractors for Cadogan under a JCT Design & Build Contract for the construction of a house in St George's Hill, Weybridge. Disputes arose, and in due course an adjudicator was appointed who ordered Cadogan to pay Rainford the sum of approximately £77,000. Cadogan refused to pay and the matter came before the court for enforcement. Cadogan accepted that Rainford was entitled to the judgment which it sought for the enforcement of the adjudicator's decision, subject to one point. That was that Rainford had been placed in administrative receivership some two weeks prior to the adjudicator's decision. In addition to evidence of the administrative receivership, Cadogan brought further evidence concerning the solvency of Rainford, which was neither contradicted nor explained by Rainford. They explained that the contract had been terminated because of the lack of due diligence by Rainford. Moreover, a number of sub-contractors had pulled off-site as they had not received payment from Rainford, even though the relevant monies had been paid by Cadogan to Rainford in earlier interim payments. Cadogan drew the court's attention to the decision of the Court of Appeal in the case of Bouygues v Dahl-Jensen. In that case, the Court of Appeal had considered whether it was appropriate to give summary judgment in relation to the award of the adjudicator, in circumstances where the claimant, Dahl-Jensen, was in liquidation. Rule 4.90 of the Insolvency Rules 1986 was analysed, with the following effect. "In circumstances such as the present, where there are latent claims and cross-claims between the parties, one of which is in liquidation, it seems to me that there is a compelling reason to refuse summary judgment on a claim arising out of an adjudication which is, necessarily, provisional. All claims and cross-claims should be resolved in the liquidation in which full account can be taken and a balance struck". Cadogan argued that for the purposes of enforcement of an adjudicator's decision, there was no difference between a case in which the claimant is in liquidation and a case in which the claimant, as here, is in administrative receivership. The critical factor, Cadogan argued, was whether there was a risk of injustice to the paying party under the adjudicator's award, because it was exposed to the real possibility that it would be called upon to pay the claimant whilst being denied the opportunity in due course to redress the balance by pursuing its own claims. Counsel for Rainford argued that there was a critical distinction between a claimant in liquidation and circumstances where the claimant was, or might be, insolvent. Crucially the statutory scheme under the insolvency rules applied only to a company in liquidation. Rainford further argued that the effect of refusing judgment, or granting a stay of execution of the judgment, would be to deprive Rainford of the benefit which the Construction Act intended. In effect, in circumstances where Cadogan had failed to give the proper withholding notice under Section 111 of the Act, Cadogan would achieve the same result by being granted a stay of execution for enforcement of the adjudicator's decision. His Honour Judge Richard Seymour QC carefully considered the arguments. Basing his opinion on what may be regarded as a slightly distorted view of the effects of the paid when paid provisions of the 1996 Act, Judge Seymour concluded that if there is credible evidence that the claimant is insolvent, that would be a highly material matter for the court to consider in granting a stay of execution of a judgment for enforcement of an adjudicator's decision. In the present case, Judge Seymour was satisfied that the evidence put before him on behalf of Cadogan raised a strong case that Rainford was currently insolvent. This would lead him to conclude that Rainford would be unable to repay the amount for which it would be appropriate to give judgment, in the event that it was later found that the adjudicator's decision was wrong. Accordingly, judgment would be given, but with a stay of execution pending the trial of the counterclaim. That stay was conditional upon Cadogan paying the judgment sum into court. In other words, no-one gets the money until both claims and counter-claims are sorted out. Bad news indeed for Administrative Receivers and unsecured creditors of insolvent construction companies.
CJ-0110
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