Meadowside Building Developments Ltd v 12-18 Hill Street Management Company Ltd

An adjudication decision obtained by a company in insolvent liquidation will ordinarily be unenforceable because adjudication is incompatible with insolvency set-off. Exceptionally, enforcement may be permitted where the adjudication determines the parties’ final net position and satisfactory safeguards preserve the respondent’s cross-claim and protect it against the costs of enforcement and subsequent proceedings.

The safeguards may include ringfencing, a reliable guarantee or bond, and after-the-event insurance. Their adequacy depends on their form, amount and duration. A funding agreement used to obtain exceptional treatment must not constitute an abuse of process. An undisclosed agreement inferred to contravene the Damages Based Agreements Regulations 2013 may create a triable abuse issue, although champerty alone neither defeats the underlying claim nor establishes abuse.

A company in liquidation applied for summary judgment to enforce an adjudicator’s award arising from a construction contract. The adjudication determined the contractual account, including the employer’s cross-claims, and found a net balance payable to the company.

Following Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd; Cannon Corporate Ltd v Primus Build Ltd [2019] EWCA Civ 27, the company contended that ringfencing, a third-party guarantee and proposed after-the-event insurance brought the case within an exception to the ordinary rule against enforcement by an insolvent company. The employer disputed the adequacy of those safeguards and contended that the undisclosed percentage-based funding agreement was unlawful and potentially abusive.

The central questions were when such exceptional enforcement could be permitted, whether the proposed security was satisfactory, and whether the funding arrangement prevented summary judgment.

1. Application refused. An adjudication by a company in insolvent liquidation will ordinarily be futile and unenforceable where insolvency set-off and a cross-claim are engaged. The court may nevertheless permit enforcement in exceptional circumstances because the rule recognised in Bresco [2019] EWCA Civ 27 is not absolute.

2. An exception is likely where the adjudication determines the parties’ final net position under the relevant contract and relevant safeguards address the adjudication’s utility, preserve the respondent’s security for its cross-claim, and reduce or eliminate the costs risk of successfully overturning the decision. An adjudication dealing with only part of the parties’ mutual dealings is less likely to possess the required utility. The present final-account adjudication satisfied the first requirement.

3. Satisfactory security must protect repayment of the enforced award if the decision is later overturned and meet adverse costs arising from unsuccessful enforcement and subsequent litigation or arbitration. Its form, amount and duration depend on the facts. Ringfencing, a bank or equivalent guarantee or bond, and after-the-event insurance may be combined. A reasonable period, ordinarily around six months, may be allowed for proceedings challenging the decision.

4. The proposed Pythagoras guarantee was inadequate. Security replacing the respondent’s cross-claim required a high degree of certainty. Pythagoras’s accounts and bank balances did not establish that it would meet the guarantee when called upon. No adequate bond, payment into court or insurance policy was in place.

5. The funding arrangement provided claims management services and fell within section 58AA of the Courts and Legal Services Act 1990 and the Damages Based Agreements Regulations 2013. The court inferred that the undisclosed recovery exceeded the permitted 50%. The agreement was therefore unenforceable and champertous.

6. Champerty alone is neither a defence to the claim nor necessarily an abuse of process. Abuse depends on all the facts, including the agreement’s terms, the parties’ relationship, repayment arrangements, the relationship between funding and recovery, and the funding’s purpose. Refusal to disclose the agreement left a realistic prospect that the employer could establish abuse. Summary judgment was therefore inappropriate.

7. Had champerty not raised that triable issue, the court would have allowed summary judgment but stayed execution pending satisfactory security. The employer’s earlier decision not to participate in the adjudication would not itself have justified refusing judgment where adequate safeguards existed.

The judgment was given at first instance on an application to enforce an adjudicator’s decision dated 3 April 2018. The adjudicator had determined a net balance of £26,629.63, plus VAT, in favour of the claimant. No appellate history of this judgment is stated.