Insolvent Building Contractors continue to face huge difficulties in enforcing an Adjudicator’s decision in the Technology and Construction Court (TCC). If they have an Arbitration clause in their building contact, would they be better off commencing an Arbitration to pursue monies owed to them, rather than to follow the tried and trusted method of Adjudication?
Insolvent Building Contractors could ask the Arbitrator to “open up, review and revise” the matters in dispute in a final determination. They would not be faced with the insurmountable hurdle of having to “ringfence” and safeguard the sum awarded, unlike in the enforcement of an Adjudicator’s decision made in favour of the insolvent contractor in the TCC.
Obstacles to enforcement for insolvent Contractors in the TCC
Insolvent Contractors who begin and win an Adjudication must “ringfence” the amount awarded to protect it against being swallowed up and distributed in the administration of the Claimant insolvent company. This is following the decision of the Court of Appeal in John Doyle Construction Limited (In Liquidation) -v- Erith Contractors Limited [2021] EWCA Civ 1452
The reason for this is the obligation of the Employer to “pay now and argue later” so that when the Employer pays the sum awarded by the Adjudicator, they have the right to issue their own claim in the TCC, to ask the court to finally determine the sums owed in the overall dispute with the Contractor. This could lead to a final decision of the court that the insolvent Contractor must repay to the Employer the sum awarded by the Adjudicator because they have been overpaid. The “ringfencing” of the sum awarded by the Adjudicator is to ensure that the Insolvent Building Contractor can repay to the Employer the sum finally determined by the court, if they decide that the Building Contractor has been overpaid.
SECURITY FOR COSTS IN ARBITRATION
If instead of Adjudication the insolvent Contractor commences Arbitration there is no requirement for a “ringfencing” of the Arbitrator’s award because it will not be made until the Arbitration is concluded. There is no requirement to hand back the award to Employer at the end of the Arbitration and nor can there be. Therefore, the question of the adequate security of the award simply does not arise.
The question of Security for Costs does not arise in Adjudication because unless otherwise agreed by the parties, both sides pay their own costs in the Adjudication. This contrasts with Arbitration where the general principle is that “costs follow the event”, so that the winner of the Arbitration recovers their costs against the loser. A Security for Costs application can be made by the debtor Employer where they fear that if they win the Arbitration, they will not be able to recover their costs of the Arbitration against the insolvent Contractor.
Application for security for costs
Section 38 of the Act provides that Arbitrators are to have the power to award Security for Costs “wherever the court will have the power” and the power will be exercised on the same principles as the court.
The criteria for the Arbitrator to consider in deciding whether or not to order security for cots is set out in the Sir Lindsay Parkinson & Co v Triplan Limited [1973] QB 609 at 626, as follows:-
- Whether the claim is bona fide and not a “sham”
- Whether the claim has a reasonably good prospect of success
- Whether there is an admission by the Respondent on the pleadings or elsewhere that money is due
- Whether there was a payment into court of a substantial sum of money
- Whether the application for security was being used oppressively so as to stifle a genuine claim
- Whether the Claimant’s want of means was brought about by any conduct by the Respondents
The Arbitrator must balance the injustice of the Claimant not being able to pursue their claim against the injustice of the Respondent not being able to recover their costs if they succeed.
Stifling a genuine claim
The application for Security for Costs must not be used by the Employer to stifle the Claimant’s genuine claim.
The Arbitrator’s award is final and conclusive.
Section 61 (2) of the Arbitration Act 1996 requires the Arbitrator to allocate costs of the Arbitration on the general principle that costs should follow the event, on the basis that the unsuccessful party pays the costs of the successful party.
The insolvent Contractor would consider the prospects of success before embarking on an Arbitration, the likely costs of the dispute and whether they will be able to comply with a Security for Costs application.
The insolvent Contractor would weigh up whether they could persuade the Arbitrator not to award Security for Costs in an Arbitration because to do so would be to “stifle a genuine claim”. If they persuade the Arbitrator that they can give adequate security for the Employer’s costs and if they go on to win the Arbitration, they will have a final and binding Arbitrator’s decision, and they would avoid hitting a brick wall by trying unsuccessfully to enforce an Adjudicator’s decision in the TCC.
