The effectiveness of the contract adjudication system depends upon the willingness of judges to enforce awards – but what happens if such enforcement would unfairly undermine an ongoing insolvency process? The High Court considered that issue in a guideline case concerning a domestic building project.
Landowners engaged a building company to construct a four-storey house at a contract price of £2.35 million. After a dispute arose between them, an adjudicator directed the owners to pay the company’s outstanding invoices, a total of £177,662. That was on the basis that the owners had failed to serve a pay less notice in accordance with the contract. The award did not purport to represent a valuation of the firm’s claims after taking into account any cross-claims by the owners.
The owners claimed that the company’s work was defective in a number of respects and that a lengthy delay in completion entitled them to at least £87,000 in liquidated damages. The company, however, entered into a Company Voluntary Arrangement (CVA) after the adjudicator’s decision and launched proceedings to enforce his award.
In rejecting the company’s claim, however, the Court found that to order immediate enforcement of the award would undermine proper operation of the CVA in a manner that could only be detrimental to the owners. The value of any valid cross-claims the owners might have against the company would go into the general fund available to the company’s creditors and would take no priority over other debts.
The Court noted that the adjudicator’s award gave rise to a debt which pre-dated both the CVA and the enforcement proceedings. Enforcement would distort the process of accounting under the CVA in that money paid in satisfaction of the award would not be applied for the sole benefit of the owners but for the benefit of creditors generally. The award was in any event not determinative of all matters in dispute and was, in effect, an order for an interim payment. Upholding the company’s claim would thus be wrong in principle and there were special circumstances justifying a stay on enforcement.