In 1987, the then Scottish Examination Board rated my understanding of economics sufficient to justify an A grade in the Scottish Higher. I have always been concerned that they were being generous, and any understanding I might have had of economics has long-since disappeared.
I suspect the fact that there have been a number of recent reported cases on the interaction between adjudication under the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) and the insolvency regime might suggest that the UK construction industry is headed for stormy (or stormier) waters. The interaction is becoming increasingly both complicated and important. So, what is the current state of play?
The key decision was Coulson LJ’s analysis of two appeals in Bresco Electrical Services Ltd (in liquidation) v Michael J Lonsdale (Electrical) Ltd; Cannon Corporate Ltd v Primus Build Ltd [2019] EWCA Civ 27; [2019] PLSCS 20 (see www.egi.co.uk/legal/construction-adjudication-vs-insolvency). It established that:
- insolvency did not remove the parties’ rights to refer a dispute to adjudication; but
- the unfairness of enforcing an adjudication award in full in favour of an insolvent company (as required by the Construction Act) where the other party had a cross-claim for damages which would only be an unsecured claim in the insolvency (and therefore unlikely to be paid in full if at all) meant that, as a matter of “practical utility”, it was likely that the courts would refuse to uphold an adjudicator’s award and would be willing to grant an injunction stopping the insolvent company from even commencing an adjudication save in exceptional circumstances.
Deputy judge Adam Constable QC’s judgment in Meadowside Building Developments Ltd (in liquidation) v 12-18 Hill Street Management Company Ltd [2019] EWHC 2651 (TCC); [2019] PLSCS 197 was the first High Court consideration of the issue following Bresco, and centred around the fact that Coulson LJ acknowledged that there could be exceptional circumstances which change the courts’ approach.
The facts
The dispute related to internal and external repair work done between September 2014 and March 2015 by Meadowside for HSMC under a JCT 2011 minor works contract. In July 2015, Meadowside entered voluntary liquidation. Over the next three years, there was “sporadic correspondence” between Meadowside’s liquidators and HSMC, which failed to resolve the question of how much was due to Meadowside.
In September 2017, the liquidators appointed Pythagoras Capital Ltd to recover money from HSMC. Pythagoras (which had also been involved in Bresco) was providing its services in relation to an undisclosed share of any adjudicator’s award. In 2018, an adjudicator awarded Meadowside just over £32,000 following an adjudication in which HSMC refused to take part arguing that the adjudicator lacked jurisdiction. HSMC did not pay and Meadowside applied to enforce the award.
The decision
To succeed, Meadowside had to overcome the practical utility problem posed by Bresco. It had a novel solution: Pythagoras offered security for HSMC’s claim. If HSMC paid the award but overturned that decision in subsequent litigation, Pythagoras (on Meadowside’s behalf) would pay HSMC the adjudicator’s award and its costs. During the submissions, a range of options were raised, including ring fencing an award or an after-the-event insurance policy.
The deputy judge accepted that offering security could work in certain circumstances. The liquidators need to provide adequate security (for both the amount in dispute and costs) and the adjudication had to resolve all matters (claims and cross-claims) in issue between the parties under the contract in question. He suggested that adequate security might involve a combination of a payment into court, a guarantee or bond from a third party or after-the-event insurance. The reason why the adjudication had to resolve all matters between the parties was that it needed to mirror the insolvency set-off which happens automatically under the insolvency rules when one party becomes insolvent.
The guarantee offered by Pythagoras failed to meet the deputy judge’s test. Pythagoras was not an independent bank and there was no evidence to show it could meet HSMC’s likely claim if the guarantee was called. To make matters worse for Meadowside, the judge held that Pythagoras was caught by the provisions of section 58AA of the Courts and Legal Services Act 1990 and regulation 4 of the Damages-Based Agreement Regulations 2013. Under those provisions, any agreement to provide for a payment of over 50% of the sums ultimately recovered by Meadowside would be unenforceable.
In part because Meadowside did not provide evidence of the amount of the payment due to Pythagoras, the judge inferred (and this seemed to be conceded by Meadowside’s counsel) that the figure was over 50%. As such, the agreement was unenforceable. The judge also applied held that it was champertous. Champerty is the common law offence based on the principle that the courts should not enforce agreements where a stranger to a dispute funds litigation in return for a share of the proceeds. The 1990 Act and the 2013 Regulations established what was acceptable as a matter of public policy. Agreements outside those parameters, such as the one between Meadowside and Pythagoras, were champertous and unenforceable.
Major ramifications
The decision is important. The deputy judge provides helpful guidance on the possible exceptions to Bresco, so that liquidators can enforce adjudicators’ awards. Parties (not just those in liquidation) looking to use third party funders to help fund disputes (including adjudications) will need to read his interpretation of the statutory provisions – and what is and is not champertous – with care.
Key points
- The High Court has clarified the rare exceptions when a liquidator might be able to enforce an adjudicator’s award
- Third party funding may breach statutory rules and be champertous
A reflection: Professor James Driscoll
Regular readers of this column will recognise the invaluable contribution made to it by Professor James Driscoll – its residential editor for many years – who passed away in December. James, who was well known for his residential expertise, had an amazing ability to make often complex areas of law accessible. His Legal Notes co-editors, remember him:
“James shared his knowledge and expertise generously. His passing leaves the residential property sector a poorer place,” said Allyson Colby.
“James was a source of great support and wise counsel. I will miss his kindness and humour,” said Stuart Pemble.
Anyone wishing to make a donation in his memory can do so at: www.justgiving.com/fundraising/professorjamesdriscoll
Stuart Pemble is a partner at Mills & Reeve
