MEADOWSIDE BUILDING DEVELOPMENTS LTD v 12-18 HILL STREET MANAGEMENT COMPANY
MEADOWSIDE BUILDING DEVELOPMENTS LTD v 12-18 HILL STREET MANAGEMENT COMPANY LTD
Technology and Construction Court
Adam Constable QC
10 October 2019
The adjudicator’s decision in the insolvent contractor’s favour should not be enforced because the funding agreement between the liquidator and its agent was not merely champertous but was also an abuse of process and because the contractor had not offered adequate security for adverse costs orders
Four months after practical completion the contractor was placed into voluntary winding-up. Before then disputes had arisen. The employer declined to take part in the adjudication on the ground that the adjudicator lacked jurisdiction. The adjudicator in awarding the contractor a specified sum took into account the employer’s claims. It was common ground that that the adjudicator attempted to arrive at a net balance of the sums due between the parties. The contractor applied for summary judgment to enforce his decision. Adam Constable QC refused to grant summary judgment.
The first reason for his refusal was the funding agreement between the liquidator and its debt collecting agent being not merely champertous but also an abuse of process. The agreement was one to which the Damages Based Agreements Regulations 2013 applied by reason of the agent providing “claims management services” under it. It was to be inferred that the agreement was unenforceable by reason of the Regulations applying to it. There was a realistic prospect of the employer establishing that the funding agreement was an abuse of process by reason of its champertous nature. The terms of the agreement had not been provided to the court with the result that all the relevant facts were not known so as to be able to determine whether there was an abuse of process in that without knowing what percentage of the sum recovered the agent was entitled to (i) It was impossible to form any sensible view on the true balance of interests between the funder and the funded and (ii) The sum to be repaid and its relationship to the other sums was incapable of determination. There was therefore at least a realistic prospect of the employer establishing abuse.
The second reason was that the contractor failed to provide satisfactory security for any adverse costs orders that might be made against it in the enforcement proceedings and any proceedings the employer might bring to overturn the decision. Enforcement of an adjudication decision will exceptionally be available to a company in liquidation in the light of the Court of Appeal’s decision in Bresco Electrical Services v Michael J Lonsdale (2019) when (i) The adjudication (to be) brought determines the final net position between the parties under the relevant contract (ii) Security is provided for the sum awarded and any adverse costs order against the company in the enforcement proceedings and any (subsequent) court or arbitration proceedings to overturn the decision and (iii) The security is satisfactory in form, duration and amount. The liquidator had offered to ringfence the adjudication award itself and the adjudication could be regarded as having determined the final net position between the parties. However, whilst the form of guarantee offered by the liquidator’s debt collecting agent was satisfactory (i) The agent’s financial standing was not sufficient to give a real degree of certainty that it would be able to pay any adverse costs order and (ii) The guarantee was therefore not adequate, even in conjunction with the liquidator’s undertaking to ringfence the principal sum, in the absence of any payment in, bank guarantee or bond having been offered.
THE FULL TEXT OF THE JUDGMENT OF ADAM CONSTABLE QC
1. This is an application for summary judgment to enforce a decision by an Adjudicator dated 3 April 2018, in the relatively modest sum of £32,629.63 (£26,629.63 plus VAT in respect of the Award and £5,637 plus VAT by way of the Adjudicator's fee and expenses). The party bringing the application is Meadowside Building Developments Ltd ('Meadowside'), a company in liquidation both at the time of the adjudication and now. At the time of the adjudication, in February 2018, the Defendant, 12-18 Hill Street Management Company Limited ('HSMC') did not substantively take part, on the basis that it contended that the Adjudicator lacked jurisdiction and the decision would be unenforceable. The application raises important points of principle which arise out of the Court of Appeal's decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd; Cannon Corporate Ltd v Primus Build Ltd  EWCA Civ 27.
2. This Judgment is in the following parts:
B Background Facts
C Bresco: A Discussion
D Bresco: is there an exception to the rule?
F Application of Principles
B. Background Facts
3. In light of the reliance by HSMC upon its non-participation in the Adjudication as prejudice, it is necessary to recite the background facts in a little detail.
4. Meadowside was appointed by HSMC in September 2014 to carry out certain internal and external repair works pursuant to a JCT Minor Works Building Contract 2011 ('the Contract'). Meadowside carried out the works and practical completion was certified on 20 March 2015. On 25 March 2015, the Contract Administrator under the Contract issued a certificate for payment valuing the Works in the gross sum of £162,531.07.
5. In July 2015, the Claimant was placed into voluntary winding-up. Michael Sanders and Georgina Eason of MHA MacIntyre Hudson were appointed as liquidators ('the Liquidators'). Prior to practical completion and the liquidation, various disputes had arisen, including in relation to interim payments, delay, variations and defects.
6. Under the Contract, liquidation engaged Clauses 6.7.2 to 6.7.4 automatically, by virtue of Clause 6.5.2. Clause 6.7.2 provides that no further sum is due, other than that due under Clause 6.7.4. Clause 6.7.3 states that following the completion of the Works and the making good of defects in them, an account shall be taken within 3 months thereafter set out in a certificate from the Contract Administrator or a statement prepared by the Employer. The statement prepared should identify:
'.1 the amount of expenses properly incurred by the Employer, including those incurred pursuant to clause 6.7.1 and, where applicable, clause 22.214.171.124, and of any direct loss and/or damage caused to the Employer and for which the Contract is liable, whether arising as a result of the termination or otherwise;
.2 the amount of payments made to the Contractor; and
.3 the total amount which would have been payable for the Works in accordance with this Contract.'
7. Pursuant to Clause 6.7.3, if the sum of the amounts under clauses 126.96.36.199 and 188.8.131.52 exceed the amount stated under clause 184.108.40.206, the difference shall be a debt payable by the Contractor to the Employer or, if that sum is less, by the Employer to the Contractor.
8. It was not in dispute that any defects which HSMC regarded as necessary to be remediated following the works had been carried out, and that the time for rendering the account had passed. Mr Fletcher of Russell-Cooke, on behalf of HSMC, states that HSMC had not progressed any claims against Meadowside because doing so would have been pointless in the face of zero recovery.
9. For several years, HSMC engaged in sporadic correspondence with representatives of the Liquidators, Dennington Construction Consultants. There came a point when, as reported in the Liquidators' Report for the period from 23 July 2017 to 22 July 2018, Dennington considered that it had exhausted its efforts in pursuing HSMC.
10. On 27 September 2017, Meadowside's Liquidators appointed Pythagoras Capital Limited ('Pythagoras') to take over the pursuit of the debt, and their letter of appointment instructs Pythagoras to 'act as [the Liquidator's] agents and take all steps to ascertain and recover amounts due to [Meadowside]'. Although a letter of appointment, it did not contain any terms as to the basis of remuneration or other terms. It is assumed, therefore, that some other commercial agreement must sit alongside the letter of appointment.
11. As explained by Mr McMahon, the managing director of Pythagoras, in his witness statement on behalf of Meadowside, Pythagoras is a company which acts on behalf of various administrators and liquidators in relation to construction contracts. Indeed, Pythagoras acted as agents for the liquidators in Bresco. Mr McMahon, an insolvency lawyer by background, explains in summary that when appointed as agent Pythagoras reviews what might be owed by considering the company records and, amongst other things, seeks to ascertain what sums are owed under outstanding final accounts. If Pythagoras establishes that monies are owed to the insolvent company, it takes steps to recover those sums on behalf of the company, and generally does so by funding the pursuit on behalf of the insolvent company because the insolvent companies are usually unable to do so. The availability of adjudication process is part of Pythagoras' business model. Mr McMahon states:
"Clearly the Adjudication procedure is incredibly useful in this regard. The issue of Adjudication proceedings often leads to an amicable settlement (during the Adjudication or after a decision is delivered)). It is also helpful because Pythagoras Capital can use its in-house legal and engineering/building expertise to run the Adjudication (Pythagoras is not a law firm, but Adjudication proceedings are not a reserved legal activity).
If Pythagoras Capital makes a recovery for the insolvent company then it will keep a pre-agreed percentage".
12. Pythagoras has not disclosed what percentage recovery its agency agreement gives rise to, although the Defendant has sought this information. This is said to be relevant to arguments raised by HSMC in relation to champerty.
13. On 30 January 2018, Pythagoras first wrote to HSMC, identifying itself as agent for the liquidator and providing its letter of instruction. In its letter it identified the Contract Administrator's certificates for payment and continued:
"The Contract Administrator has said that you (rather than the Contract Administrator) have raised various counterclaims. We would like to understand whether those counterclaims have any merit, and consequently, request that you send us … copies of all documents on which you rely in asserting that sums should be deducted from those owed by you to the Company and/or that the Company is indebted to you.
For the avoidance of doubt, we make this request pursuant to Section 236 of the Insolvency Act 1986. As you will no doubt be aware you have an obligation to comply with the liquidator's reasonable requests for information and documentation relating to the Company's affairs".
14. On 15 February 2018, Pythagoras wrote indicating various issues that, if not agreed, would lead Pythagoras to assume that a dispute had arisen.
15. A Notice of Adjudication was issued on 29 February 2018 (incorrectly dated but no issue arises in relation to this). Declarations were sought relating to whether the two certificates for payment were the true and correct valuations of the Works, and whether Meadowside was entitled to be paid at least £171,585.49 for works completed under the Contract, or, if not, what sum Meadowside was so entitled to be paid.
16. After the appointment of the Adjudicator, and in response to a request from the Adjudicator, Pythagoras wrote (copied to HSMC) undertaking to discharge any liability on behalf of Meadowside in respect of fees, in respect of which it accepted that Meadowside and HSMC had joint and several responsibility.
17. By letter dated 6 March 2018, Russell-Cooke responded, copied to the liquidators, raising questions about the capacity in which Pythagoras was acting and its interest, concerns about the propriety of the preceding letter citing section 236 of the Insolvency Act 1986, and referring to the decisions in Bouygues (UK) Limited v Dahl Jensen (UK) Limited  EWCA Civ 507;  BLR 522 and Enterprise Managed Services Ltd v McFadden Utilities Ltd  EWHC 3222 (TCC) which provided 'clear and longstanding authority about the incompatibility of adjudication in the context of liquidation'. HSMC reserved the right to seek appropriate declaratory relief from the Technology and Construction Court in respect of, without limitation, the enforceability of any adjudication commenced by Meadowside. Pythagoras was asked to have the Liquidator provide details of the solicitors instructed to accept service of Court proceedings. No proceedings for declaratory or injunctive relief were commenced.
18. In the exchange which followed, Pythagoras argued that the cases relied upon did not deprive an adjudicator of jurisdiction, making clear that although Bouygues demonstrated that the Court had a discretion not to enforce awards, this was a question of discretion rather than jurisdiction.
19. On the same day, Russell-Cooke identified to the Adjudicator its concerns which included, 'the fact that it is being brought by a company in liquidation. Our client is therefore necessarily reserving its position, including in respect of your appointment, terms and jurisdiction, and whether it will participate in this adjudication.'
20. On 14 March 2018, Russell-Cooke provided lengthy submissions by letter to Pythagoras arguing that the Adjudicator had no jurisdiction. In the same letter, it made clear that it considered that there was no net balance due to Meadowside under Insolvency Rule 4.90, and that, indeed, it considered itself to be a creditor of Meadowside on account of its cross-claims under the Contract. These consisted of liquidated damages, the cost of completion, additional costs caused by the termination, and previous claims which had been accepted, it was said, including such things as the cost of inspections and remedial works. Pythagoras was invited to withdraw the adjudication. The reservation in relation to declaratory relief was repeated.
21. Russell-Cooke copied this letter, and the preceding correspondence with Pythagoras, to the Adjudicator. The letter summarised HSMC's concerns and invited the Adjudicator to resign. Stating that HSMC did not accept his jurisdiction, Russell-Cooke indicated that HSMC would not be participating in the adjudication and would not accept liability for his costs. Russell-Cooke also confirmed that 'HSMC does not ask you to give a non-binding (or binding) decision on your jurisdiction'.
22. Notwithstanding the identification of an apparent conflict between the request to resign and the absence of an invitation to investigate (in a non-binding way) his jurisdiction, the Adjudicator went on to consider the matter, and determined that he had jurisdiction in his letter, also on 14 March 2018. The Adjudicator noted that HSMC did not intend to participate, but also noted that Section 3 of the copied letter in which Russell-Cooke had identified the substance of its cross-claims in justification of the position that, pursuant to Clause 4.90, no net balance was due to Meadowside. The Adjudicator then stated that
'…since … it seems reasonable to presume that the Respondent will not be making any further submissions, I propose to treat the content of its letter to [Pythagoras] as its Response in these Proceedings.'
23. By email dated 15 March 2018, Mr McMahon confirmed his understanding that the Contract being the subject of the Adjudication was the only dealing between the parties. HSMC was invited to respond. It did not do so. It has not been suggested in relation to this application that there were any other mutual dealings between the parties other than those arising out of the Contract.
24. The following day, the Adjudicator asked Pythagoras to confirm specifically, via a written statement from the Liquidator, 'whether or not [HSMC] has proven, or has claimed to prove, for a debt in the liquidation'. The Adjudicator also asked for an explanation as to why the time for preparation of the Clause 6.7.3 account had now arisen, and why the account had not been prepared by the Contract Administrator; and to provide 'such detail as was available to support the Contract Administrator's (apparently entirely unsubstantiated) view that the value of the work undertaken by the Referring Party was £171,585.49.'
25. The following day, Russell-Cooke wrote to Pythagoras, copied to the Liquidator but not the Adjudicator, re-asserting its position that it was a creditor to Meadowside, and that it had not, to date, submitted any formal proof of debt in Meadowside's liquidation in light of its client's understanding that there would be insufficient asset realisations to permit any dividend payable. Russell-Cooke concluded by repeating its request that the adjudication be abandoned, and stating that in the event that the Adjudication led to its client defending enforcement proceedings and/or seeking appropriate declaratory relief, it would refer to the correspondence on the issue of costs.
26. On 19 March 2018, Pythagoras provided to the Adjudicator (copied to Russell-Cooke) a letter from the Liquidator confirming that HSMC had not lodged a proof of debt in the liquidation. It did not provide to the Adjudicator a copy of Russell-Cooke's letter of 17 March 2018. Pythagoras also sought to explain that, 'it is clear from our discussions with the Contract Administrator had he did not feel able to issue a clause 6.7.3 certificate because the Responding Party would not accept his opinion (and no doubt kept raising various alleged, but unsubstantiated, contra charges). It should also be noted that the Contract Administrator is still owed outstanding fees by the Responding Party in relation to this project.'
27. HSMC was invited to respond to the further information provided by Pythagoras, but there was no further substantive communication from HSMC in the Adjudication. When Pythagoras indicated it did not intend to serve a Reply 'since there was nothing to respond to', the Adjudicator corrected Pythagoras, repeating his intention to treat the letter of Russell-Cooke setting out the substance of the claims it said justified a net balance under Clause 4.90 being owed to it as the Response.
28. On 3 April 2018, the Adjudicator published his Decision. In it, the Adjudicator determined that he needed to determine the balance payable under each of the elements of Clause 6.7.3, in order to determine what sum was due, if any, under Clause 6.7.4. In doing so, the Adjudicator determined, with a great deal of care, what he considered to be due. He allowed full liquidated damages to HSMC (£19,500), notwithstanding their non-participation, in the absence of any jurisdiction within the Notice of Adjudication to determine an extension of time; he declined to award the costs claimed dealing with defects and other matters in Russell-Cooke's letter of 14 March 2019 because of the absence of substantiation; and he rejected Pythagoras' primary case as to the proper value of the works, deciding instead to take the value as had been certified in Interim Certificate 6 together with the stated value of remaining work (in light of the fact of the practical completion certificate). A net balance to Meadowside of £26,629.63 was found to be due.
29. It is not in dispute in these proceedings that the Adjudication was an attempt to arrive at a net balance of the sums due between the parties.
30. Following the Adjudication, correspondence between Pythagoras and Russell-Cooke ensued in relation to the threat of enforcement by Pythagoras. Before Pythagoras took steps to commence enforcement proceedings, the judgment in Bresco at first instance was handed down ( EWHC 2043 (TCC)). This found that an adjudicator did not have jurisdiction where the referring party was in insolvent liquidation. As Mr Fletcher points out at paragraph 41 of his witness statement, the reasoning of Fraser J in respect of jurisdiction was similar to the arguments which had been deployed by Russell-Cooke in correspondence.
31. On 24 January 2019, the Court of Appeal handed down judgment in the appeal in Bresco. As discussed further below, the argument that an adjudicator had no jurisdiction was overturned, but the decision to grant injunctive relief to prevent the adjudication from continuing was upheld.
32. Arguments then proceeded between the parties on the effect of Bresco. In the context of these discussions, on 4 March 2019, Pythagoras proposed what has become called the 'Pythagoras Capital Guarantee'.
33. This was stated in the following terms:
"To mitigate the above perceived theoretical risk to your Client (that it may consider the insolvency of Meadowside to effectively make enforcement proceedings futile), and as a condition of securing the ability to summarily enforce the Adjudicator's Award, Pythagoras Capital Limited will guarantee any liability (which we see as unlikely) Meadowside might incur to you if unsuccessful in the enforcement proceedings or if you choose to overturn the Adjudicator's decision by issuing proceedings, Pythagoras Capital Limited undertakes to guarantee the Claimant on the basis that: to the extent that your Client issues proceedings within 6 months of Meadowside's successful summary enforcement and, having done so, successfully overturns the Adjudicator's Award, Pythagoras Capital Limited guarantees payment to your Client of such sums as the Court may determine (limited as a maximum to the amount paid by your Client pursuant to the Adjudicator's decision) and will also pay your Client's reasonable and proportionate legal costs of such proceedings (to be assessed if not agreed).
Furthermore, if your Client successfully defends the summary judgment proceedings, we agree to guarantee payment of any adverse costs order made against Meadowside.
We are content to provide the first guarantee now, as a condition of your Client making payment voluntarily within 14 days and that the undertaking will also be given, as above, and effective to the extent that proceedings to overturn the Adjudicator's decision are issued within 6 months of the date of such voluntary payment."
34. By a letter dated 5 August 2019 Pythagoras Capital provided an amended version of the Pythagoras Capital Guarantee, which stated:
"3. … as a condition of securing the ability to summarily enforce the Adjudicator's Decision, Pythagoras Capital Limited hereby guarantees:
a. the payment of any adverse costs order against the Claimant in favour of the Defendant in the event that this application for enforcement of the Adjudication Decision is unsuccessful;
b. the repayment of any sums paid following a successful enforcement of the Adjudication Award should the Defendant issue proceedings within 6 months thereafter and, having done so, overturns the Adjudication Award (to the extent to which the Adjudication Award is overturned); and
c. the payment of any adverse costs order against the Claimant in favour of the Defendant (to the extent that those costs resulted from the Adjudication Decision being overturned).
4. Pythagoras Capital guarantees payment of such adverse legal costs above to the Defendant to be assessed if not agreed."
35. The adequacy and effect of the Pythagoras Capital Guarantee is considered further below. After enforcement proceedings were commenced and HSMC continued to allege that there existed inadequacies in the Pythagoras Capital Guarantee, and in Pythagoras' standing to make it good (which matters are disputed), a separate solution of ringfencing the Adjudication Award coupled with the provision of ATE insurance in respect of an adverse costs order was raised. This was offered in the Second Witness Statement of Mr McMahon in the following terms:
"Should the Court think fit, the Claimant would be agreeable to the Adjudication Decision being enforced on condition that:
a. the liquidators of the Claimant ringfence any sums paid by the Defendant as a result for a period of 6 months and, should the Defendant issue proceedings within those 6 months to overturn the Adjudication Decision, until those proceedings by the Defendant are concluded. Those monies shall be repaid to the extent that the Defendant successfully overturns the Adjudication Decision; and
b. the enforcement is temporarily stayed until such time as the Claimant puts an insurance policy in place as described above."
36. The potential insurance policy was described as operating as follows:
'a. A Claimant (being an insolvent creditor), for whom Pythagoras Capital acts as agent, obtains a successful Adjudication decision and successfully applies for enforcement of that decision;
b. within a certain time frame (say 6 months), the Defendant issues proceedings to overturn the Adjudicator's decision;
c. the Defendant is wholly or partially successful in overturning the Adjudicator's decision.
In those circumstances, the policy will cover any adverse costs order that a Defendant might obtain against the Claimant (to the extent that those costs resulted in the Adjudication decision being overturned).'
37. In oral submissions, the position was developed such that the potential of ringfencing could be adopted as part of a solution either with a guarantee or ATE insurance. There is no formal draft guarantee or prospective insurance policy (or identified insurer) before me.
C. Bresco: A Discussion
38. In Bresco, the Court of Appeal considered conjoined appeals raising important issues as to the interplay between the construction adjudication process, on the one hand, and the insolvency regime, on the other. The tension between the two regimes remains central to the issues in this case. It is said by Mr Graham-Dixon, for HSMC, that Bresco is a complete answer to the present application. By contrast, Ms White for Meadowside contends that in circumstances where the concerns raised by Coulson LJ in Bresco have been effectively met, a party is able to bring itself into an 'exception' from the normal rule that an adjudication award in favour of a party in liquidation will not be enforced and therefore the conclusion that adjudication is futile is no longer appropriate.
39. It is plain that the decision in Bresco settled the argument about whether the fact of insolvency effectively removes the otherwise existing statutory right to adjudicate altogether, by depriving an adjudicator jurisdiction to determine any claim. The Court determined that there is no reason why, purely as a matter of jurisdiction (as opposed to utility), a reference to adjudication should be treated any differently to a reference to arbitration. If the underlying claim exists for the purposes of arbitration, it exists for all purposes. The temporarily binding nature of the decision cannot mean that the underlying claim is extinguished, neither can the choice of forum dictate whether the claim has been extinguished. Thus, the fact that pursuant to Rule 4.90, or what is now Rule 14.25, of the Insolvency Rules the claim under the Contract was replaced with a single right to claim the balance (if any) arising out of the mutual dealing and set-off between the parties did not, of itself, deprive Meadowside from the right to refer a dispute to adjudication pursuant to the contractual regime.
40. Thus, the question of jurisdiction was distinguished from the question of utility. The court concluded in the Bresco appeal, as summarised at paragraph 63:
"In the circumstances of this case, an adjudicator's decision in favour of Bresco, a company in insolvent liquidation facing a separate cross-claim, will not be capable of being enforced. That would make the adjudication an exercise in futility. In accordance with Twintec, an injunction was therefore appropriate. There was no reason why this adjudication should have been permitted to continue; on the contrary, it was just and convenient to grant the injunction. Accordingly, I would uphold the decision of Fraser J, not on the grounds of theoretical jurisdiction, but on the grounds of practical utility."
41. In Primus, the Court at first instance was not dealing with a company in liquidation, but with a company in a CVA, seeking to trade its way back out of difficulties and to avoid liquidation. The decision to grant summary judgment and refuse a stay was upheld by the Court of Appeal.
42. It is necessary, before turning to the facts of this case, to identify the relevant passages of Bresco, which were the subject of helpful written and oral submissions upon this application, in which Coulson LJ set out the reasoning behind his conclusion that, in that case, adjudication was a futile exercise and that it was appropriate to grant an injunction to prevent the adjudication from proceeding. In doing so, it needs to be kept in mind that in Bresco, as in this case, the Court is considering the exercise of a discretion. In Bresco, that related to the granting of injunctive relief to prevent the adjudication from proceeding; in this case it is whether there is a compelling reason not to grant summary judgment or, if there is not, in any event whether to grant a stay of execution. It is no doubt because the exercise of discretion is fact sensitive that the Court of Appeal did not suggest that the extent of incompatibility between insolvency and adjudication – both statutory regimes – was such that there would never be a situation in which an adjudication may be permitted to proceed and/or be enforced. Indeed:
(1) At paragraph 36, and in the following paragraphs, it is clear that the Court was 'focus[ing] on the utility (if any) to be derived from the adjudicator's theoretical jurisdiction, where the claiming company is in insolvent liquidation and the responding party has a cross-claim'. This, indeed, is often the position at the end of a construction contract where both employer and contractor will have claims against each other. However, implicit is the suggestion that if no cross-claim existed (so the only exercise was the valuation of the insolvent contractor's claims), different considerations might well apply to the consideration of the utility of the exercise;
(2) At paragraph 54, the Court acknowledged that Bresco applied in the 'ordinary' case, and that it may be in 'exceptional' circumstances, a company in insolvent liquidation (and facing a cross-claim) could refer a claim to adjudication, succeed in that adjudication, obtain summary judgment and avoid a stay of execution. By definition, therefore, the prohibition is not absolute. The question for this Court is to consider whether exceptional circumstances arise in the circumstances of this case.
43. In paragraph 37 of Bresco, Coulson LJ commences with the observation that:
'I consider that there is a basic incompatibility between adjudication and the regime set out in the Rules. The former is a method of obtaining an improved cashflow quickly and cheaply. The latter is an abstract accounting exercise, principally designed to assist the liquidators in recovering assets in order to pay a dividend to creditors. Rule 14.25 envisages the taking of a detailed account as between the company and the creditor, and the careful calculation of a net balance one way or the other, or quantifying the company's net claim against a creditor. By contrast, adjudication is a rough and ready process which Dyson J (as he then was) said in Macob Civil Engineering Ltd v Morrison Construction Ltd  BLR 93 was "likely to result in injustice". They are therefore very different regimes.'
44. Paragraph 38 then suggests that the incompatibility can be seen in (a) the different processes each regime entails, (b) in a comparison of the results that may be available and (c) in the consideration of the wider issues that could arise if companies in insolvent liquidation regularly sought to refer claims to adjudication. It is thus the detailed reasoning in paragraphs 39 to 60 that supports the broad observation in paragraph 37. I therefore turn to consider each area in which the incompatibility is discussed.
45. At paragraph 39, Coulson LJ observes that the vast majority of claims which are referred to adjudication are not ostensibly claims for a net balance of the sort envisaged by Rule 14.25. The example then given in paragraphs 40 and 41 is of the 'smash and grab' adjudication, based upon an entitlement to payment caused by a technical failure on the part of (generally) an employer to serve a required notice. At the end of such an adjudication, the parties are no more enlightened as to the true value of the account between the parties than they were at the beginning. It is difficult to think of a process less consistent with the net balance assessment under the Rule 14.25 regime in insolvency, and the injustice which would follow if enforcement of such a position became, by reason of the referring party's liquidation, the final position by default is obvious.
46. In Enterprise, quoted at paragraph 21 of Bresco and referred to specifically in this section of Coulson LJ's judgment dealing with process, the adjudicated claim fell somewhere in between a 'smash and grab', and a full determination of mutual dealings. The fact that the claim 'would relate just to an element of the chose in action' was plainly relevant in the determination, in that case, that the adjudication decision was unenforceable. The rationale was that, absent agreement between the parties, it would not be in accordance with the Insolvency Rules for the calculation of the net balance under Rule 4.90, or the 14.25 equivalent, to be performed in what might be a piecemeal or hobbled fashion.
47. Of course, the Contract itself, which permits adjudication on any dispute at any time, might be thought to be such an agreement between the parties, and neither the statutory nor contractual right to adjudicate is expressly curtailed upon liquidation of a party (which could always have been a part of the statutory scheme, but is not). Many JCT forms provide, as did the one in this case as set out above, that no further payment is due to the Contractor following termination for default, other than the 'net balance' following the assessment pursuant to Clause 6.7.3, which is analogous to the Rule 14.25 assessment at least as far as that particular contract is concerned. It could be argued that, in light of this contractual scheme, any piecemeal and hobbled adjudication process following termination for default would be not in accordance with the contractual provisions for determining the account between the parties in these circumstances (quite irrespective of the question of insolvency). But, unless the issue of insolvency is involved, it is improbable that use of piecemeal adjudications to determine that account would be effectively prohibited. This perhaps suggests that the conversion of the parties' entitlement to a single net payment, as happens following termination for default in any event, is not of itself the driving issue.
48. What is plain, however, is that in considering the exercise of discretion, the usefulness of the adjudication itself, following liquidation, will be an important factor; and that the perception of usefulness will be, at the very least, shaped by the fact that the parties' substantive rights have been changed by reference to the Rule 4.90 principles.
49. In the present case, there is no dispute that the adjudication was, in effect, dealing with the substance of full extent of the parties' mutual dealings. It is at the opposite end of the scale to the 'smash and grab' adjudication. It therefore comes as close as it is possible to come to a process which the parties would have to undertake in the liquidation in any event. This is plainly to be distinguished from the type of case considered in Bresco. I note that, in Indigo Projects London Limited v Razin  Bus LR 1957, Sir Antony Edwards-Stuart sitting as a High Court Judge identified the same distinction, and appreciated that the type of adjudication which seeks a determination of the entirety of the account is atypical. Referring to Coulson LJ at paragraphs 43-45 of Bresco, Sir Antony Edwards-Stuart said:
"It is important to appreciate that in these passages Coulson LJ was contemplating a typical adjudication which only involves certain limited issues in dispute between the parties, rather than the (fairly rare) adjudication which deals with a contractor's final account and covers all the matters in issue between the parties. Such a decision would determine, albeit on an interim basis, the entirety of the dispute between the parties".
50. In her written submissions, Ms White suggested that this fact of itself is sufficient to render this claim 'exceptional' and to justify enforcement. I am in no doubt that this puts the case too high, as it deals with only one of the problems that gives rise to incompatibility. However, it is right in my judgment that the closer the adjudication becomes to a process in which the net balance between the parties is determined, the less force the objection raised in paragraphs 39 to 42 of Bresco has, and the more likely it is that (if other objections are addressed successfully), the company in liquidation may take itself out of the ordinary position.
51. Mr Graham-Dixon makes the point that it would be wrong to carve out a final account dispute, as an exception to Bresco position, because, although it is the closest in nature to the type of assessment of the overall net position with which a liquidator would be concerned, it is also the type of adjudication which is, by reason of its all-encompassing nature, particularly susceptible to placing the 28 day adjudication regime under strain; and therefore is where the highest risk of injustice lies. The first difficulty with this submission is that, if correct, it would tend to suggest that – contrary to the position taken by the Court in Bresco – there is in reality no possible exception to the incompatibility between adjudication and insolvency: the subject-matter would be too remote from the Rule 14.25 process; or it would be too similar and therefore too complex. I do not read this into Bresco, which is plainly concerned in this section with a lack of utility derived from the disparity between the subject matter of a particular adjudication and the real issue between the parties following liquidation. The second difficulty is that the particular concern expressed in relation to injustice needs to be seen through the lens of de facto 'finality' of the ordinary case of a company in liquidation. The potential (temporary) injustice occasioned by the difficulty of a complex final account dispute in 28 days applies to any such adjudication; the particular issue where a company is in liquidation is the de facto finality of the decision where no safeguards are in place to maintain the temporarily binding nature of adjudication. If the latter is dealt with sufficiently, the former is no more or less than the potential 'injustice' to any party facing a final account adjudication.
52. In paragraphs 43 to 46, Coulson LJ looks at what might happen if a company in insolvent liquidation was entitled to the sum found due by the adjudicator, but where the responding party has a cross-claim. In short, upon enforcement, the responding party would be left to prove its cross-claim in the liquidation, and would only receive a dividend. The effect is that it would be deprived of the benefit of treating the referring party's claim as security for its own cross-claim. It is for this fundamental reason that, 'ordinarily, summary judgment to enforce the adjudicator's decision would not be available' (para 43), as had been stated by Chadwick LJ in Bouygues.
53. It is within this section that the fundamental thrust of Bresco, which then ripples through the wider considerations, is at its clearest.
(1) A decision will not be enforced because, where there is a cross-claim, it would deprive the responding party of its security and bring finality by default to a temporary decision. This is fundamentally incompatible with the effect of Rule 14.25 which gives the responding party the right to security for its cross-claim and that right should not be removed.
(2) If the decision arising out of the adjudication will not be enforced, the adjudication is an 'exercise in futility'. It is then the fact of futility upon enforcement that colours the wider considerations.
54. In quoting HHJ Purle's observation in Philpott & Another v Lycee Fancais Charles De Gaulle School  EWHC 1065 (Ch) that it was 'inconceivable' that any adjudicator's decision in favour of a company in insolvent liquidation would be enforced, Coulson LJ thought 'this may put it too high'. That is support for the fact that the rule was not absolute, but one of the Court's discretion and that there may be exceptional circumstances. However, it seems to me that the exception is most likely to exist, therefore, where this fundamental difficulty is addressed. Where the basic reason for lack of enforceability is eliminated, the removal of a company's statutory and contractual rights to adjudicate is more difficult to justify.
55. So, in circumstances where there is a satisfactory guarantee in relation to any sum awarded, and/or in circumstances where the sum is temporarily ringfenced pending its becoming finally due in either further proceedings or as a result of the responding party choosing within a period of time not to seek to overturn the adjudicator's decision, the mischief which is at the heart of the justification for not enforcing is eliminated. The responding party retains the security for its cross-claim. Even where there is no cross-claim, it seems to me such security is likely to be needed to permit a company in liquidation to enforce, so as to prevent the usual application of the principles in Wimbledon Construction Company 2000 Limited v Derek Vago  BLR 374 (which do not depend upon the existence of a cross-claim to apply).
56. It is right, of course, that as a consequence of enforcement the onus would be on the responding party to take steps to justify its substantive entitlement to that security, and issues arising out of this were addressed in Bresco under 'Wider Considerations'. I address the Wider Considerations identified by the Court of Appeal below. However, taken in isolation, it seems to me that it is possible by the provision of adequate security to address the fundamental concern that enforcement would, in the ordinary position (without security) automatically deprive the responding party of its entitlement in relation to its cross-claim under the statutory insolvency regime. That is the fundamental incompatibility, and where that incompatibility remains, it is clear that the rights under the insolvency regime prevail. The exercise of discretion is a much more nuanced decision where that principal problem has been addressed by the provision of satisfactory security.
57. In paragraphs 47 to 53, Coulson LJ set out a number of wider considerations. In considering these in Bresco, Coulson LJ was (by definition) doing so in the context of an adjudication decision for which no security had been provided and the company in insolvent liquidation had not sought to deal with the fundamental incompatibility arising out of the deprivation of cross-claim security discussed above. Because it was not necessary to do so, the issues raised in this section of the judgment were not framed as individual reasons which, of themselves, would be sufficient to justify non-enforcement of an adjudication. The question I must address is whether they are concerns which, if and to the extent satisfactory security is provided in relation to the sum awarded, remain sufficient justifications not to enforce an adjudicator's decision in circumstances where, as a matter of policy, (but for its insolvency) this Court ordinarily would do so in order to give effect to Meadowside's statutory and contractual rights and the general policy of enforcing adjudication decisions.
58. At paragraphs 48 and 49, Coulson LJ states:
"48. First, a liquidator has, by definition, limited assets available to him or her with which to pursue the claims of the insolvent company. It would ordinarily be a waste of those limited assets to make a claim which could not be enforced or, at best, could only be enforced in exceptional circumstances."
49. I do not accept the idea that the adjudicator's decision might be of some use to the liquidator because it could somehow stand as a reduced proof amount (under Rule 14.11), or an estimate, or as some sort of assessment of the claim and cross-claim. The result of an adjudication is not the liquidator's best estimate of the value of a claim, but a sum found due by an adjudicator at a particular date, often based on the operation of the contractual payment provisions and the employer's failure to operate those provisions correctly. That may be far removed from the referring party's overall entitlement to recover, and the result would not be any kind of estimate or assessment of the parties' mutual debts."
59. This topic is discussed again at paragraph 59, in which Coulson LJ states:
"59. As to the assessment argument, Mr Arden QC made much of the fact that the result of the adjudication might prove useful to Bresco's liquidator, even without enforcement, because it would (or might) comprise an assessment of the net balance, I have rejected that submission in paragraph 49 above. In any event, this would require the responding party to participate in the adjudication and incur the costs of mounting its own cross-claim, just so that the liquidator can see what a net, non-binding result might look like. In circumstances where the liquidator would be unlikely to use litigation or arbitration for this exercise, because of the costs exposure, and/or in circumstances where the responding party would otherwise let its cross-claim lie because of the claiming party's insolvency, it would be an abuse of the cost-neutral adjudication regime to use it as a cheap assessment service, knowing that enforcement could never happen."
60. It is of course right that where a decision is a futile exercise, given the Court's reasoning under the preceding section 'Result', it would ordinarily be a waste of resources to pursue the limited assets available to the liquidator upon such a course of action. However, that futility results from the lack of enforceability, and so, where the decision is capable of enforcement, the decision may not be a waste of assets. Moreover, in circumstances where the liquidator has appointed agents who bear the financial risk of recovering the net sum due (if any), it does not impact the liquidator's assets at all.
61. At paragraphs 49 and 59, Coulson LJ rejects the suggestion that the adjudication has some use as a 'reduced proof amount' (under Rule 14.11) or as some sort of assessment of the claim and cross-claim. It might be noted, however, that the reasoning identifies that this is so because the award is simply a sum found due by an adjudicator at a particular date, and that (referring back to the 'smash and grab' type adjudication), that may be far removed from the referring parties' overall entitlement to recover; and (in those circumstances) the result would not be any kind of estimate or assessment of the parties' mutual debts. That is obviously so in the context of an adjudication that sought recovery of sums based on contractual notice failures, or one which sought only to resolve one out of a host of issues between the parties. However, that reasoning does not apply to a situation, such as the present one, where it is accepted that the scope of the adjudication was to determine the net balance of all the parties' dealings.
62. At paragraph 59, using the adjudication as a cheap assessment service was described as an 'abuse of the cost-neutral adjudication regime'. However, the context of that observation was expressly in circumstances where the liquidator did so, 'knowing that enforcement could never happen'. It seems to me that the cost-neutral nature of adjudication cannot, of itself, be the problem, because this is the regime that statute has laid down. The point being made, it seems to me, is that adjudication is abusive in circumstances where it will not be enforced and is futile. It does not follow that using adjudication as a tool as part of overall debt recovery by an insolvent company is abusive if steps are put in place – such as security - so that the Court would enforce the decision.
63. Indeed, I do not read Coulson LJ as going so far as suggesting – outside the context where a decision is not enforceable – that using adjudication does not have any utility as an exercise in assessing the account between parties, and one which may, despite its temporary nature, often supplant more expensive and long running litigation as the way to resolve disputes permanently. As Coulson LJ remarks at paragraph 33:
"….the argument overlooks the fact that although the result of an adjudication is not usually final, it may be final, or it may become final. This could happen because both parties agree to treat the decision as final and binding, or because the decision is not challenged by either party."
64. This plainly reflects the reality across the construction industry. Although it may have been a process which had its origins in a desire to maintain cashflow, the lifeblood of the construction industry (and alluded to in paragraph 37 of Bresco, quoted above), it would in my view be wrong to restrict the utility of adjudication, in light of the breadth of the statutory scheme and its practical use within the industry, as being solely about short term cashflow. The scheme is, for example, used to determine final account disputes, and professional negligence claims, neither of which are usually primarily (or at all) about cashflow. Adjudication is often about achieving a quicker and cheaper resolution to the parties' disputes. Where one party regards an adjudicator's decision as a real miscarriage of justice, it has the right to take the dispute to litigation or arbitration to have that decision effectively overturned; where, as is so often the case, the parties regard the decision as a decent attempt to arrive at a fair resolution of the competing positions, the parties generally treat the decision as binding or negotiate a settlement around it. This is good for the overall administration of justice and no doubt many cases which would otherwise end up in the TCC are resolved without burdening public resources as a result of the practical utility of adjudication, notwithstanding its temporary nature.
65. Generally, whilst the question of utility to the liquidator is, following Bresco, a necessary factor in the overall exercise of discretion to consider, I am also persuaded that the Court should as a matter of public policy be slow to hinder the liquidator's efforts to ascertain and recover debts in accordance with its statutory obligations. I take comfort, in this regard, from the judgment of Mr Justice Marcus Smith in Absolute Living Developments Ltd (In liquidation) v DS7 Ltd  EWHC 1432 (Ch), a case concerning security for costs against a party in liquidation. As part of the discussion, Smith J concluded that the provision of security for costs by a liquidator would in effect create a regime where, in advance of an adverse costs order, the liquidator was being obligated to provide security:
'That, as it seems to me, is entirely contrary to the public interest in the insolvency regime that exists in this jurisdiction. It is critical in the public interest that liquidators proceed in a manner that is uninhibited in terms of deciding how to bring actions, including how those actions are framed and funded'.
66. Plainly, Smith J is referring to court litigation, rather than adjudication. It is plain that given the inherent incompatibility of adjudication where a cross-claim exists, and where no security exists preserving the Respondent's rights under Rule 14.25, liquidators will, by the decision in Bresco, be inhibited in deciding how to pursue payment they consider due. This essential hindrance is necessary to preserve the right of a party with mutual dealings with the company in insolvency to security for its cross-claim. However, where those concerns are addressed, the Court should generally not seek to inhibit the manner in which the liquidator seeks to use all contractual or statutory mechanisms available to the company in liquidation to realise its debts.
67. Mr Graham-Dixon argued that, in circumstances where all or part of the 'security' was the offer by the Liquidator to ringfence the money pending determination of finality, the adjudication was by definition deprived wholly or substantially of any 'utility'. This was so, it was contended, because adjudication is all about cashflow and where the sum is ringfenced the purpose of the adjudication can no longer, by definition, be about cashflow. For the reasons set out above, I do not see that the utility of adjudication should be defined so narrowly and do not therefore accept the argument. It is right that many adjudication claims – which are effectively all about cashflow and contractual interim payment obligations - are not the sort, following Bresco, that would bring themselves into an exception from the principle that companies in liquidation cannot enforce adjudication awards. This would likely be the case irrespective of the question of security, because of a broader lack of utility. However, where the adjudicator is in effect deciding the net mutual position between the parties, or at the very least a substantial part of it, the utility to the liquidator of pursing the debt in the first instance in adjudication should not of itself be regarded as a reason to refuse summary judgment or grant a stay of execution.
68. The next consideration is dealt with by Coulson LJ at paragraph 50:
"Secondly, there are the costs incurred by the responding party. Why should a responding party have to incur the costs of defending an adjudication brought by a company in insolvent liquidation, when it knows that, even if it was unsuccessful in the adjudication, it would be able to resist summary judgment or enforcement as of right, although it would have to spend further sums to achieve that result? This would mean that the responding party was obliged to fund its (reluctant) role in a futile process. That must be wrong in principle."
69. The observations of Coulson LJ are predicated on the futility of the process, which itself relates back to the unenforceability of the decision in circumstances, in Bresco, where no security was provided so that the inevitable result of enforcement was the loss by the responding party of its security for the cross-claim to which it is entitled under the Insolvency Rules. If there are circumstances in which a company in liquidation is entitled to enforcement, because it is able to provide adequate security pending any final determination, the objection falls away.
70. The next objection in Bresco is at paragraph 51:
'Thirdly, even if we assume that the company in insolvent liquidation is successful in the adjudication and that, for whatever reason, summary judgment is granted, the responding party would then have to bring its own claim in court to overturn the result of the adjudication. That would require yet more costs to be incurred by the responding party to regularise its position and recover the sums due from a company in insolvent liquidation. The obvious risks would be that any recovery may be rendered difficult or impossible by the liquidation, and that further costs would be lost in any event. Security for costs would not be available (because on this basis the responding party would be the claimant). Again, that seems to me to be wrong as a matter of principle.'
71. Breaking this down, the concern (on the assumption that a decision requiring payment to the company in liquidation has been enforced) expressed by Coulson LJ is that:
(1) Any recovery of the sum paid would be rendered difficult or impossible by the liquidation;
(2) Further costs would be incurred seeking to recover the sum;
(3) Security for costs would not be available, as the responding party would be the claimant.
72. Each of these obviously applies in the ordinary situation of a company in liquidation where no particular offers of security are provided.
73. However, the first concern (difficulty or impossibility of the recovery of the sum) is no longer a concern if there is adequate security for and/or ring fencing of the sum awarded.
74. The second and third concerns relate to costs. In this case, Pythagoras has offered security for costs by way of guarantee, and/or by way of ATE insurance. There is, of course, the question of the adequacy of that guarantee and/or insurance in the particular circumstances of this case, which I consider further in Section E below.
75. However, as a matter of principle, if security for the costs of overturning the Adjudicator's Decision is in place, this objection is also (largely) dealt with. Indeed, on one view, the responding would be in a better position than ordinarily would be the case where the referring party is not in liquidation but otherwise has fairly limited means. Under the principles in Wimbledon v Vago, it would not be open to a defendant against whom there was a valid adjudication award to argue that judgment should be stayed because, although the company was likely to be in a position to repay the sum awarded, they would probably not also be able to pay any adverse costs order in the following litigation. They too would not be able to obtain security for costs, as claimant in any later litigation. The fact that a responding party may be placed in such a situation is merely part and parcel of the operation of the statutory right to adjudicate, and is not of itself regarded as unjust (or so unjust to allow a stay of execution). This may be so, even in circumstances where the award results from a 'smash and grab' adjudication in which the substantive merits of the account between the parties was not considered.
76. On the other hand, I accept one disadvantage the responding party may still find itself, as argued by Mr Graham-Dixon, is that it will incur a proportion of irrecoverable costs in any later litigation and the best it can do from pursuing its cross-claim – by reason of the insolvency of the referring party – is a recovery of the sums paid out upon enforcement. To the extent the responding party demonstrates an entitlement on its cross-claim in excess of the amount awarded in adjudication and enforced, it will have a claim in the liquidation, and this in reality may be worth nothing. Whilst I accept that this is a disadvantage, it is a disadvantage of a very different order to that with which Coulson LJ was expressly dealing in paragraph 51, focused as he was on all the lost costs (both recoverable and irrecoverable) of having even to recover the adjudication award. The question is, whether in the round, the remaining disadvantage is of sufficient weight to justify depriving a company of its statutory right to adjudicate, when the other concerns raised by the Court of Appeal in Bresco have been effectively addressed. I consider this in Section D below.
77. The final concern raised by the Court in Bresco is set out at paragraph 52:
"Finally, there is the question of the court's resources. If Mr Arden QC was right, so that companies in insolvent liquidation could commence and run adjudication proceedings all the way through to enforcement proceedings, to see how things might turn out at that stage, there would be an increase in the number of enforcement applications, and a further strain on the already overburdened resources of the TCC. It would have an adverse effect on other court users, including those companies who have organised their affairs in such a way that they are not in insolvent liquidation."
78. Again, it seems to me, that this comment was principally predicated in the context of the preceding concerns about the general futility of a