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Holding on
An adjudicator has told you to pay money to a firm
veering towards insolvency, against which you have a counterclaim
outstanding. Must you pay?
"An observer might justifiably speculate that if the
£75,000 wasn’t paid, Rainford probably would go bust"
Rainford House was the builder on a scheme in posh Weybridge,
but soon fell into a quarrel with its customer, Cadogan. Rainford
called for the adjudicator, and Mark Pontin was appointed. He
decided that Cadogan should pay Rainford £75,000. Cadogan was
ready to stump up the cheque. It didn't necessarily agree with the
result, but its lawyers explained the binding effect of the
decision and that there wasn't a snowball's chance in hell of
resisting enforcement.
By now the works were said by Cadogan to be running late. Then
the pool contractor pulled off site, and the plasterer, and the
roofer. These chaps told Cadogan that they had stopped because
they hadn't been paid. Mind you, that might have been because
Rainford hadn't been paid – who knows? Cadogan began to fret
about paying over the £75,000 to then find that Rainford was
bust, and the vicious circle was complete. An observer might
justifiably speculate that if the £75,000 wasn't paid, Rainford
probably would go bust.
Cadogan made up its mind about two things. The first was quite
right: it is that adjudication is not a highfalutin' trial in wigs
and gowns. It is simply an inquiry on limited evidence at an
instant in time about the rights of the parties, which results in
an interim ruling and decides who should hold the money until the
dispute is resolved. Adjudication is getting deeper into a
legalistic, rule-dogged drama and losing its way.
Cadogan's second decision was that it would not pay. So
Rainford had to begin enforcement proceedings, going to the High
Court for instant judgment to order Cadogan to comply (Rainford
House Ltd vs Cadogan Ltd [February 2001]). Cadogan's barrister did
not try to say that Pontin's decision was not binding. Instead he
said that since Rainford had just gone into administrative
receivership and since Cadogan had a claim pending against
Rainford, the court should not give summary judgment. It should
let Cadogan hold on to the money.
Put it this way: since adjudication is merely a temporary
decision, it is open to Cadogan to bring the dispute to a
traditional forum such as a court or arbitration for a final
decision. That final leg would be hopeless if Rainford had
received the £75,000 but was in receivership, because the money
would be allocated to all the creditors. Cadogan might win in
court but just be a creditor hoping for a pay-out.
In Bouygues vs Dahl Jensen, the Court of Appeal explained what
might apply to adjudication moneys when the payee was in
liquidation. Insolvency rules stepped into the relationship and
would not order money to be paid over until the net position
between the parties' claims and counterclaims was ascertained. But
insolvency rules applied to a company in liquidation rather than
receivership.
Cadogan's barrister tried again. He pointed to the Rules of the
Supreme Court (Order 47) which empower the court to give
enforcement but to order a stay of execution if special
circumstances render it expedient. The snag with this is that the
judge cannot ignore what parliament says about adjudication. The
court must obey parliament's intention, and so adjudication is
binding on the court. The judge explained that the Construction
Act is all about the contractual rights of parties that are
solvent. The adjudicator decides who should hold the disputed
money, pending resolution of the dispute. It is not a final
process. It is merely provisional, and capable of being reversed
once finally examined. Nothing in the act reallocates the risk of
having to endure the consequences of a trading partner becoming
insolvent.
In other words, the context in which the act is set does not
expressly explain what shall happen to moneys said to be payable
to an insolvent party. In this case, the court can exercise its
discretion to stay enforcement of an adjudicator's decision once
credible, uncontradicted evidence shows the court that the party
due the money is by then insolvent. Since Rainford was by that
time in administrative receivership, there was a strong prima
facie case that it was insolvent. The judge gave summary judgment
for Rainford but ordered the £75,000 to be paid into court
pending trial of Cadogan's counterclaims against Rainford.
Readers are invited to forward recent judgments for reporting
in this column (with full acknowledgement) to: Tony Bingham,
3 Paper Buildings, Temple, London EC4Y 7EU.
DX:007I LDE
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