An adjudicator decides who has to pay what to whom - a decision that is binding. But what happens when the payee is insolvent and any money paid may never be seen again?

Tony Bingham

Is there something about these long-term refurb jobs that is the kiss of death? In 2007 Connaught Partnerships Ltd took on the contract to supply, install and refurbish bathrooms in 7,500 houses. By September 2010 Connaught took a cold bath. The company was placed in administration. The cold bath for their supply chain creditors is to the tune of £160m. At best that hapless string of suppliers will get a share of just £600,000. Peanuts. And I bet their customer, Perth & Kinross council, are not best pleased either. The council will have to get someone else to tinker with the stopcocks and faucets and no doubt pay out much more to get the job finished. They were even more aggrieved with Connaught’s administrator who began an adjudication claiming a balance in cash due on the loos and sinks now installed. The adjudicator did her stuff on the closing account and reckoned Perth owed the bust contractor £835,000.

Now, I like these Scottish cases, once I get by such phrases as ‘ope exceptionis’ and ‘decrees de plano’, they really are hellish good guidance

Doubtless Perth will march up and down the office repeating umpteen curses on the wrong-headed, half-baked adjudicator. But, once a loser calms down, it has to make an election - two elections. First, shall I pay up and look big or do I pay up and fight the case all over again in a court or arbitration? Perth focused on a different strategy. It went to the court to argue that it did indeed intend to fight again, but would not do what the adjudicator ordered.

Now, I like these Scottish cases, once I get by such phrases as “ope exceptionis” and “decrees de plano”, they really are hellish good guidance. The Scottish judge here rehearsed all over again what are the true intentions of what we call the Construction Act. He did that to help him decide whether, in circumstances where money is ordered by the adjudicator to be paid to an insolvent payee, the ordinary rule of “pay up” is discarded. The intention is straight forward: the parties will obey the adjudicator’s decision whether right or wrong. It is a swift mechanism by which a dispute as to who has to pay what to whom can be resolved on a binding but interim basis, leaving the final resolution of disputes, if that proves to be necessary, to follow at leisure without disrupting the cash flow of the project. But, said the judge, the 1996 Construction Act has no intention of transferring the risk of insolvency to one of the parties. Adjudication, he reminded himself, is merely to decide which party is to hold the fund of money pending a final resolution of the dispute, “all on the footing that both parties are solvent”.

There is one more reason why the decision is not to be enforced. The adjudicator made a mistake. A key issue was put before the adjudicator but was not dealt with

And now comes the crunch. If there is credible evidence that the person to receive the cash is insolvent, that is a highly material matter for the court to consider in relation to any application for a stay of execution of the judgment in favour of the payee. And these principles are applied not only in Scotland but England and Wales, too. So the money will not go into the hands pointed to by the adjudicator in those circumstances - save and except that if the potential payee was in poor financial shape at the outset of the contract or if the poor financial state is caused by depriving the payee of that cash, then the money will indeed be paid, says the court. And since neither of those circumstances appears to be shown, the court torpedoed the adjudicator’s order for Perth to pay up. Perth hasn’t got away with it - presumably they convinced the court that they intend to come to litigation or arbitration with the final account.

There is one more reason why the decision is not to be enforced. The adjudicator made a mistake. A key issue was put before the adjudicator but was not dealt with. That is known as a failure to exhaust the scope of jurisdiction. In insolvency matters there is a process of “balancing of accounts”. In that exercise, all of the claims and counterclaims are to be taken into consideration. It is so that no money is paid over to the insolvent party when counterclaim issues are yet to be dealt with. It’s easy to see that once the cash disappears down an insolvent rabbit hole, that’s that. It’s not at all clear why the highly respected and competent adjudicator in this case left all that out.

Just let me come back to these long-term utility contracts because they seem to harbour disputes and misfortune. Perhaps the enthusiasm to win a contract for 7,500 house refurbs overwhelms the sharp pencil of the contractor’s estimator.

Go careful with that pencil.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple