The ruling has introduced what lawyers describe as a “serious loophole” into adjudication, because it suggests that a losing party may be able to suspend payment to the winner if it can show that the winner may be unable to repay if it lost at subsequent arbitration or litigation proceedings.
This new defence is the outcome of a judgment by Mr Justice Dyson relating to an adjudication between Herschel Engineering and Breen Property at the end of last week.
Herschel was seeking payment of £18 000 from Breen for work it carried out on a scheme in London. Breen suggested during the hearing that Herschel’s financial difficulties may prevent it from repaying.
Although Dyson enforced the adjudication, he said that companies in financial difficulties should not receive adjudication awards if the losing party wishes to move to a resolution in the courts. Dyson said: “If there was a real doubt as to the claimant’s ability to repay if it loses in the county court, I would probably have granted a stay of execution.” He stressed that there was no evidence that Herschel was in financial difficulties.
Simon Tolson, partner at solicitor Fenwick Elliott, who acted for Herschel, said the case could set a dangerous precedent. He said: “It’s potentially disturbing. It could have a stifling effect on small contractors going to adjudication. Main contractors will also try to exploit this new defence.”
It’s potentially disturbing. Main contractors will try to exploit this defence
Simon Tolson, Partner Fenwick Elliott
Tolson said the ruling went against the letter of the law behind the adjudication process. He said: “My understanding is that the court is there to enforce such judgments.”
Tolson’s worries were backed by Specialist Engineering Contractors Group chief executive Rudi Klein. He said: “It gives some hope to those who simply do not want to pay. There is a possibility opening up for them. It’s worrying.”
Tolson said he thought the move could be in response to a case last year between contractor Bouygues and M&E firm Dahl-Jensen.
Bouygues was ordered to pay £207 741 to Dahl-Jensen, which then folded its UK operations. Bouygues is now taking the case to the Court of Appeal because it has no chance of recouping its money.
Tolson said: “Maybe the judges are slightly nervous they will get a rap on the knuckles by the appeal court.”