Pick your battles: Adjudication when a party is in administration

Responding to an adjudication is costly and time-consuming for any business. Incurring these costs is of particular concern when the referring party is in administration. If the adjudicator finds in favour of a party in administration, there are significant hurdles for that party to overcome in order to enforce the adjudicator’s decision. This is frustrating for the responding party because, even though the decision may not be enforced, significant time and costs can be spent defending the adjudication. The responding party will have incurred legal (and possibly expert costs) in participating in the adjudication and risks being jointly and severally liable for the adjudicator’s fees. The costs of participating in the adjudication will not be recoverable and, if the referring party cannot pay, the responding party may be stuck with a bill for the adjudicator’s fees. 

Despite the difficulties faced at enforcement, adjudications are still being commenced by parties in administration. If a party in administration is successful in an adjudication but the responding party fails to comply with the decision, the responding party may ask the court to enforce the decision. There is an expedited process for parties to enforce the decision of an adjudicator against another party who has failed to comply with that decision. Although courts will usually strive to uphold a decision of an adjudicator, there are a number of exceptions where the court will refuse summary judgment or grant a stay of execution.

If a party is in administration, another party cannot commence a legal process against that party in administration without the permission of the administrator or the court.

Although courts will usually strive to uphold a decision there are a number of exceptions

Therefore, in the context of an adjudication, if a party is in administration this affects the right of the other party to “pay now, argue later”. Permission may not be given to a party dissatisfied with a decision of an adjudicator to have a judge or arbitrator decide the dispute. In recognition of this, if a party in administration attempts to enforce the decision of an adjudicator, the court will deal with the matter as follows:

• If a party is in administration and a notice of distribution has been given, then the decision of an adjudicator will not be enforced by summary judgment. The decision will not be enforced where no notice of distribution has been given and the decision has not become final. If the adjudicator’s decision has become final, the decision may be enforced (subject to the imposition of a stay).
• Therefore, if faced with an adjudication commenced by a party in administration, consideration should be given to not taking part in the adjudication. This will avoid incurring the costs of defending an adjudication where any decision is unlikely to be enforced by the court.

However, this strategy is not without risk including the possibility that the referring party may come out of the administrative process and become an active company. If this happens, the referring party may be able to enforce an adjudicator’s decision at court and the responding party would then have to pay the amount awarded on an adjudication it did not defend. The only option then will be to refer the dispute to litigation or arbitration if dissatisfied with the decision.

It is also important to note that, even if you do not take part in the adjudication, costs will still be incurred during the enforcement proceedings. A party who successfully defends its position in the enforcement proceedings may receive an order from the court that the other side pay its costs.

However, this is unlikely to cover all the costs that were incurred and there may be difficulty recovering any costs that are awarded against a party in financial difficulty.

A party considering not taking part in an adjudication should carefully consider the risks. The reasons for not participating in the adjudication should be clearly stated at the outset and that no liability is accepted for the adjudicator’s fees. Insolvency practitioners should take note as significant costs can be incurred pursuing an adjudication, including the entirety of the adjudicator’s fees, as well as legal costs of the adjudication and enforcement proceedings with little to no prospect of recovering the sums sought in the adjudication.

Andrew Jones is a partner in the construction and engineering group at Dentons