Ruling clarifies when insolvent firms can enforce construction adjudicator awards

Andrew Robertson of Pinsent Masons said the judgment in the dispute between J A Ball and St Philips Homes “makes it clear that where a company is in administration, and seeks to recover sums from solvent counterparties under a construction contract, via an adjudication, the courts will not enforce an adjudicator’s award against a solvent counterparty where there are genuine cross-claims which may exceed the sum claimed by the insolvent party.”

The ruling came after J A Ball went into administration in September 2020 while working on a project for St Philips Homes to convert a commercial property in Coventry into apartments. The initial contract value was roughly £4.6 million plus VAT. When J A Ball told St Philips that it would not complete the project, St Philips had already paid J A Ball roughly £4.3m of the contract sum, excluding VAT.

St Philips then hired third-party contractors to complete the work, but J A Ball claimed that this constituted an unlawful termination of the contract between the two companies. J A Ball said the breach of contract meant St Philips had to pay it the roughly £300,000 of contract sum that remained unpaid. But St Philips refused to pay, claiming instead that J A Ball was required to pay damages under the contract, and the matter was referred to adjudication.

The adjudicator determined that the contract had not been terminated by St Philips’ decision to hire third party firms to complete the conversion work, but insisted that St Philips did owe J A Ball the £300,000 contract sum that remained unpaid. When St Philips refused to comply with the decision, arguing that the adjudicator had breached the rules of natural justice and “gone off on a frolic of his own”, J A Ball began adjudication enforcement proceedings. It entered into a damages-based agreement (DBA) provided by Pythagoras Capital Limited, which meant Pythagoras would receive more than half of any sum paid by St Philips as a result of the court’s ruling.

At a hearing of the Technology and Construction Court, St Philips argued, among other things, that J A Ball’s position in administration meant it should be unable to enforce the adjudicator’s decision, in the same way that a company in insolvent liquidation cannot. Companies in insolvent liquidation that face cross-claims are usually not able to enforce adjudicators’ decisions because all claims and cross-claims generally have to be resolved in the liquidation in line with the 2016 Insolvency Rules.

Equivalent rules do not apply to a company in administration unless it declares payment of a distribution or dividend to its creditors. While J A Ball had not declared such a payment, St Philips said its inability to do so proved that J A Ball was insolvent, and argued that the company should be treated by the court as a company in insolvent liquidation. St Philips also claimed that J A Ball’s funding arrangement with Pythagoras was ‘champertous’ – meaning that the claim was no longer under J A Ball’s control, and was being pursued for the financial benefit of Pythagoras instead.

The court found that the adjudicator had breached the rules of natural justice because he had reached his conclusion using a rationale that neither St Philips or J A Ball had put forward during their submissions. The court ruled that the adjudicator’s decision was unenforceable and dismissed J A Ball’s claim for the £300,000 balance payment.

The court agreed with St Philips that J A Ball should be treated as a company in insolvent liquidation, and confirmed that a similar decision in a previous case was sound because it was “consistent with the underlying principle of preferring the insolvency regime to that of adjudication”. HHJ Kramer added, however, that companies in insolvent liquidation can still be entitled to enforce adjudicators’ decisions in certain narrow circumstances.

The judge also agreed with St Philips that the DBA between J A Ball and Pythagoras was champertous and breached the 2013 Damages-Based Agreements Regulations, because Pythagoras was set to receive more than half of any sum recovered from St Philips.

Robertson said: “The recent line of cases in this area had largely focused on companies in liquidation bringing such claims. This case now makes it clear that companies in administration will be treated the same way by the courts, unless it can be shown that the purpose of the administration is to rescue the company as a going concern – to return it to solvency, for example – which is very uncommon in administrations.”

He added: “The judgment is also another example of the courts criticising damages-based arrangements entered into by insolvency practitioners with third parties who pursue these claims on a ‘no-win-no-fee’ type basis. As with previous cases on this subject, arrangements which provide that a third-party funder may receive more of the fruits of litigation than the creditors is likely to be champertous.”